BRF S.A. (NYSE:BRFS) Q4 2022 Earnings Call Transcript

BRF S.A. (NYSE:BRFS) Q4 2022 Earnings Call Transcript March 1, 2023 Operator: Good morning, ladies and gentlemen. Welcome to the web conference of BRF to discuss the results related to the fourth quarter of 2022. This web conference is being recorded and the replay may be accessed at the company's website. The presentation is also available for download at ir.brf-global.com. . Before proceeding, I would like to point out that forward-looking statements are based on BRF's beliefs and assumptions and on information currently available to the company. Forward-looking statements may involve risks and uncertainties since they refer to future events and therefore, depend on circumstances that may or not occur. Here with us in the web conference are Mr. Gularte, Global CEO; and Mr. Fabio Mariano, CFO. I would now like to turn the call over to Mr. Miguel Gularte, who will begin the presentation. You may proceed, sir. Miguel Gularte: Good morning. I would like to thank you all for attending on our fourth quarter 2022 earnings conference call. During this period, we have already begun to reap the benefit of executing the plan drawn up in September of last year with a focus on improving our operating performance. We made progress in virtually all operating indicators with emphasis on feed conversion, manufacturing, productivity, and logistics in addition to expanding the occupation of our industrial assets, providing greater production and sales volume. To present the results for the quarter, I call our CFO Fabio Mariano, I will return shortly to detail our advances and make the final remarks on the release. Fabio Mariano: Good morning, everyone, attending this event. I point out on the initial page, the main financial indicators for our fourth quarter and full year of 2022, starting with net revenue, an emulation of 8% compared to the same period of the previous year, reaching more than BRL 14 billion in the fourth quarter and BRL 53.8 million in the year, more than 11% growth versus 2021. Just below, I mentioned the performance of adjusted EBITDA amount close to BRL 1 billion in the quarter, reaching BRL 3.9 billion in the year, which results in an EBITDA margin of approximately 7%. The net result for the period was a loss of BRL 601 million when excluding the impact of Leniency agreement and the hyperinflation in Turkey. Next, we report an operating cash flow of more than BRL 1.3 billion is, 16% higher than the cash generation in the same period of the previous year, which once again put a sequential upward trend since the beginning of 2022. As to working capital, we made the substantial advances in inventories with a reduction of 11 days compared to the last quarter or 25 days versus the same period of 2021. Major reduction is concentrated in finished products. which allow the cash conversion cycle to reach 9 days in the period, one of the lowest financial cycles historically, thus, boosting cash generation. Ending the slide with net leverage, we reached 3.75x the EBITDA of the last 12 months, still driven by the non-ordinary performance of the first quarter. We remain committed to expanding cash generation as a driver for reducing net debt and consequently, interest-related charges so that net leverage can return to input levels as quickly as possible. On the next slide, on the left, we show the historic evolution of gross profit. We maintained a profitability of around 80%. We disclosed a gross profit of approximately BRL 2.5 billion. On the right, we also noticed the evolution of adjusted EBITDA, a performance already highlighted previously. On the next slide, we present the performance by market and business segment. Starting with Brazil. We noticed a progressive evolution of EBITDA margins quarter-on-quarter in 2022, but still below historical performance and consistent with the company's potential. I would like to highlight new advances in the business fundamentals in the Brazilian market, which will allow us to become ever more competitive. Among the advances, I mentioned the improvement in the commercial execution, ensuring greater adherence with retail prices and greater performance of the shelf strategy, such as in mission space, trade material and by-brand planogram. The best execution allowed us in another 2 months, important market share gains in practically all categories, particularly in spreads, 3.6 percentage points; franks and sausages, 1 point; and cold cuts, 0.7 points. I also highlight the good commemorative campaign and the new round of portfolio simplification related to the reduction of low representative as the use with a focus on value creation, growth and profitability. On the next slide, we discuss Halal. On the chart on the left, we see EBITDA and margins below historical levels as a result of the oversupply of chicken in the region, especially griller in cuts, putting pressure on sales prices. Turkey continues to close challenges in the face of the current macroeconomic scenario. We increased the offer of value-added products in the Turkish market and balanced production as a way to reverse the price trends locally. We expect a reaction at the beginning of the year. On the chart to the right, we can see the retraction of prices in the region. I also mentioned the increase in the share of export to the Gulf, a gain of 6 points according to FX data. I conclude the segment highlighting the advance of more than 2 points in the share of value-added products in the volumes sold in the GCC. In direct exports in the graph on the left, we see a material reduction in profitability due to the global imbalance in supply and demand of proteins, especially chicken with implications on prices, as we can see on the right with information released by census. We continue to expand market alternatives with new qualifications for Japan, Mexico, Canada, and Singapore. On the next slide, we show the performance of Asia. As in the other export markets, we observed a decrease in margin in comparison to the previous quarter due to the slowdown in the local demand in markets such as Japan and Korea, which have higher levels of inventories. We reported 4.7% of EBITDA margin in the quarter. We highlight on the right gains amid market share in chicken exports to Japan and China and for exports to Southeast Asia and Singapore. I finished the presentation on business segments on the next slide with the performance of Ingredients NPAT. The segment reported 18% of EBITDA margin, BRL 131 million. We continue advancing and capturing synergies in path, expanding our presence in direct channels in new regions. We promoted efficiencies in logistics and also invested in production flexibility at the company's various. As the ingredients, we advanced into new markets by expanding business alternatives, and we remain committed to adding value to our co-products in order to maximize business integration. In the quarter, we also had highlights in sustainability. We see on the next slide, achievements such as the mapping of crops using satellite technology, reaching 100% in traceability of direct brand suppliers in the Amazon and Terranova and 45% of indirect suppliers. We maintain our presence in easy portfolio in B3, reinforcing our evolution of our corporate governance and sustainability standards. We signed a Lens agreement with CTU and AG and that reinforces the collaboration, transparency and improvement of the company's processes and internal controls. Closing the year of 2022, we reduced our absolute emissions of the can and to greenhouse passes by 20%. We fulfilled our animal welfare commitment to put an end to the surgical castration in the swine herd and completed 10 years of the BRF Institute, benefiting communities through initiatives in education, food security and reduction of feed waste. We now present the information related to the company's capital structure. The chart on the left shows the evolution of net debt and leverage indicators that were already mentioned in the beginning of the conference. On the right, we highlight the debt profile, which remains diversified and extended with no concentration of short-term amortizations and a liquidity position of more than BRL 12 billion. In 2022, we carried out operations of liability management, which allowed us to capture BRL 276 million in financial results with buyback of international bonds. On the next slide, we show the free cash flow. The bridge shows an operating cash generation of BRL 1.3 billion. investment flow of almost BRL 900 million and BRL 515 million in financial flow without FX effect, thus resulting in free cash consumption of BRL 16 million. Cash flow has been sequentially recovering each quarter as shown in the chart on the right. On the finance side, we can analyze the evolution of the net debt. We reduced the net debt by BRL 232 million when compared to the previous quarter. Thank you for attending our conference. And I will now hand over to CEO, for him to make his final remarks. Miguel Gularte: Thank you, Fabio. I would like to point out that you saw throughout the presentation that the new management model focused on operational efficiency and profitability started in September is already bringing positive results in the amount of BRL 20 million. We captured approximately BRL 130 million with incremental operational indicators such as mortality, feed conversion and productivity. We reduced idle costs by BRL 50 million and carried out a review of logistics efficiency in transport, distribution and energy. In Brazil, we made progress in simplifying our portfolio and optimizing our innovations, which enabled us to capture BRL 30 million. We improved our commercial execution, pricing model and actions at the point of sale with a greater mix of products in stores and increasing the exposure of the brand portfolio. We also expanded our active customer base by 3.7%, adding more than 9,000 active customers. As a result, we evolved in market care in all categories. We have grown 2.2 percentage points since the third quarter in process 2 and spreads, which are categories of extreme importance for us. Our commemorative campaign at the end of last year was a success and maintain Sadia and Perdigão brands as leaders in the Christmas segment with 64% market share in special poultry and 72% in turkey. On the international front, we continue to advance in our strategy of market and product diversification. We achieved new qualifications for Canada, Japan, Mexico, Singapore and the United States, capitalizing on the fact that we are recognized worldwide as a company committed to safety or DM integrity. We increased our chicken meat export share by 2.5 percentage points and continue to advance in market share in the Halal market, reinforcing our leadership in the region. Sadia achieved 38.1% market share in the Gulf and Banvit brand reached 21.8% in the Turkish market. In the Gulf, we also increased the share of value-added products in the portfolio by 2 percentage points, which reached 23% of our sales volume in the region. In the financial aspect, as already mentioned by Fabio, we maintain a diversified and extended debt profile with adequate liquidity for the current scenario. We reduced working capital and improve the occupation of our assets. We have made important investments in expanding our production capacity in recent years, and we will dedicate it to organic growth. We will remain ambitious and disciplined in future decisions regarding the allocation of our financial capital. We have been working simply in an edge way in business decisions to capture greater competitiveness and opportunities, always committed to consistently maximizing results throughout the year. We remain very confident to continue improving our efficiency and productivity. The advances we present here are just the beginning. I conclude by thanking the entire BRF team for their contribution to these deliveries, which allow the company to be ready for the advantages and take the best opportunities in all the more stable and macroeconomic scenario as from the coming quarters.

Q&A Session

Operator: . Our first question comes from Gustavo Troyano from Itau BBA. Gustavo Troyano: So, Fabio, you mentioned net leverage. Could you provide more color on that? When you talk about accelerating the location for the company, is there any purpose internal purpose for 2023 or even looking forward, do you think that could be applied. We are thinking about 3.75. So we are talking about a quarter that was out of the ordinary. So if you could disclose your objectives and considering all those divestments, where can we get? And how soon can we get to this level? Fabio Mariano: Well, I mean, basically, everything that we mentioned so far is related to net leverage, right? At first, this discussion of recovering the operating result that was mentioned in the medium and long term. We made some comments on the working capital. We have also talked about investments. So when you ask about where we're going, we have the financial policy published on the website where we declare it, we intend to manage this company with a net leverage of about 2x. Obviously, this process does not take place overnight. What I can sink to us that the major effect of their ovation is to accelerate this reversal of business leverage trend. And all of those initiatives that we have mentioned so far will contribute to this objective. Operator: Our next question comes from Henrique Brustolin with BTG Pactual. Henrique Brustolin: I would like to discuss some points related to Brazil, starting with volume, where we see a drop of 1% year-on-year in spite all of the gains in market share that we see in all categories of processed food. So I would like you to help us understand this performance, how this place when we think about Natura and processed foods. What have you seen in terms of processed foods as to demand, and what are the expectations for the year? And this would be my first question. The second question is related to Brazil. When we look at the profitability in the third quarter, not considering the commemorative portfolio, have you seen any expansion of margins for the quarter? Or is the stronger recovery likely to take place along 2022? So these are the 2 questions. Fabio Mariano: Good morning, thank you for the questions. As regards Brazil, what I can say is that the comparison you made has to take into consideration the reduction of volumes because we wanted to know if you're including the portfolio of Natura. So I can say that in this quarter that you made when it's excluded in Natura portfolio. The process that was going to grow. So I'm comparing year-on-year. If you compare the full year '22 and '21, you will see the volume of processed food showing some civility that will justify the conversation we had about market share. And as we mentioned in the final remarks, provided by Miguel during the presentation, we have the third reading of Nielsen 3 times in a row, that's showing a very important trend in terms of gaining market share in all categories in which we operate. This is based on our commercial execution. We have been mentioning this quite repeatedly because this is essential since this is what would allow us to gain market share without affecting the pricing as long as you work well in the point of sales as long as the store owners comply with the suggested prices and use the shelf strategies, and this all reflects in the gain in market share. In relation to the consumption environment in Brazil. We understand that there has been an improvement, not a significant improved loan because consumer had some facility considering the purchasing power, which is still degenerated optimization pressures, but we understand that there are clear signs that this can be reverted in the short and medium terms. We had a very good campaign related to the commemorative items and that helped a lot. And moving on to your concessions, this helped us grove profitability quarter-on-quarter. So we got this result even considering this extraordinary portfolio, which is associated with the sales of the fourth quarter. We can see all this being materialized. And along 2023, we are going to see according to our projections and being favorable in terms of costs, something that we haven't seen for some years. This is a result of the taxi form. And so we are likely to see a downturn the cost of the fleet, and this is going to increase the profitability in Brazil. But also, we are going to see this favorable result in the exports market. This is going to be more visible in the transition from the first to the second half of the year that is going to favor our profitability as we move along the fiscal year of 2023. Operator: Our next question comes from Lucas Ferreira with JPMorgan. Lucas Ferreira: I have two questions. The first one may be addressed to Fabio. You implemented this divestment agenda and with those 4 billion -- what is going to be the priority when you allocate this capital? I imagine that you have some bilateral debt with some banks. So what would be the priority when you allocate this capital? And to which degree you can decrease your indebtedness costs after this possible divestment? And the other question is probably addressed to Miguel. And there's an external factor that we have seen and that is making investors concerned is that avian flu reached the South America in some scattered plans -- how would the BRF be favored if does not reach Brazil? Are you looking at markets where it can break into as a result of the situation? And if you consider the scenario where the avian flu will reach Brazil, how will the company be prepared in terms of viral security Considering this other scenario? Fabio Mariano: Thank you, Lucas. I'm going to start answering the question, and then I'll turn the call over to Miguel in relation to the use of proceeds, demobilization plan. So from the mathematical viewpoint, this is very simple. The priority is to reduce the gross in debt. And we see a great opportunity in the market because we have a portfolio in secondary wages also applied to the international bonds. And we understand that we can have a very good discount with those bonds. So the priority would be to address every liquidity level of the company in order to reduce the gross debt. And we're going to remove this high cost of opportunity, which is part of the 13% mentioned. So as soon as we start, it will be better to reduce that service. Miguel Gularte: Thank you for the question. I went for my veterinary diploma that's why I took a bit to answer this. It's important before I answer the question is that BA was superseded by another organization is the international organization of animal health. And there's an article which establishes the aspect and the consequences related to the avian flu will only have an effect on the market closing if they are industrial animal production. If they are wild animals or in most for other purposes, they are not going to be applied for the closing of the market. This is what the 10.4 article mentions. Having said that, it's important to understand that Brazil has a very strong history of prevention and security in the sanitary area. Brazil has a very active program called MAPA MADA that has contingency plans that are used. And Brazil has been doing this effectively in order to eliminate all this problem respond quickly and will limit all the images and consequences related to this scenario. So this is according to the MAPA and all those terms are implemented. As to Brazil, let's talk from the BRF viewpoint. Our company has access to more than 150 markets. And obviously, it's not likely that we are going to have general closing of the market, even at the temporary basis this is not likely. If we consider this to be likely. So if you consider that the market will be closed and then the authorities will control the problem. And as the time goes by, the information would come up and the contingency plans will be implemented. So BRF has 150 markets as options. And BRF is a company that has a very strong position in Brazil. We have the domestic market in Brazil. We have the market of processed food and the risk will be mitigated for the company. On our side, we are doing everything we can, not only for our company, but also including the integrated growers, and we are taking all the possible proportions. We have all the contingency plans designed, all the alternatives have been considered, and we have been working day in day out so that this possibility that we expect not to happen because we understand that this might not happen. But if it does happen, we are very well prepared. Operator: Our next question comes from Ricardo Boiati. Ricardo Boiati: Miguel Gularte: I'm going to continue answering the question related to the position of grain. During their sensitive topic for the company going to give an answer which would not disclose so much. Otherwise, I'm going to expose our hedge strategy. But what I can say to you is that, first, we are going to ensure can prioritize the supply. So we are at a very comfortable position so far. And with our supply any at any risk. So this is the first aspect, and this is something that cannot be questioned. The second aspect doing that, we see a downturn in terms of volumes because of the cost. So we are not going to adopt a very extended attitude. And this is what we have been doing so that we can capture the best benefits related to the prices of the grain. So this is what I can say to you about the topic. And I hope that I provided you with enough clarification. Operator: Our next question comes from Lucas Mussi with Morgan Stanley. Lucas Mussi: I have two quick questions. The first is, again, related to halal market. I would like to understand the share of benefit brand in Turkey. How do you see the sequential performance of this division. I understand that you were delivering negative EBITDA margins. And you had already made some changes in terms of volumes on the domestic project product. So what do you expect in the future down the road? How do you see the low demand considering and all those events? Was there any significant change in the mix because we saw a lot of change quarter-on-quarter. And the second question related to direct exports. We saw a sequential margin drop, which was very steep. So what was the outliers in terms of the mix of destinations? What was the country, was there any other country where the mix was much worse when we compared to Asia and all segmented that pressured the margins down. Fabio Mariano: For the question so I'm going to start. From what we have already mentioned, so we go back to Turkey and try to provide you with some more color. What I can say is that we have already been working on the performance in a positive olein 2023 has a lot to do with the actions that have been previously taken as mentioned in the previous question. And this is to just directing part of the portfolio to exports that we want to increase the share of added value products. And this is something for which we have been preparing, and it has to do with adopting a more flexible approach with our volumes. We have capacity to be very agile in Turkey to control the fixed cost with more or less volume and also the effects related to variable costs. So this is something that we have been doing, and we have seen a good level of recovery in the short term, as I mentioned previously. Now when we think about environment and down the road, we are going to have an election period, so there is a level of instability in the year. So we intend not to offer any expectation because I think it's way too early, but we are very happy with the actions that we have implemented so far, and we have seen the results -- positive results at least so far. As to the earthquake, I could say that we have not had -- we did not have any serious implications. The affected area is not the area where we have the most of our production footprint. Therefore, we do not have any side effect as to consumption and demand impact. There's not any significance that we could point out right now as related to what assets -- and also related to your question about the direct exports, I'm going to turn to Miguel for him to discuss this topic. Miguel Gularte: Look, as we have seen as to direct exports that this generalized offer considering different geographies because I'm not going to specify them because this affected all the geographies. It's important to mention that in the past 4, 5 or 6 days, BRF has more than 9 qualifications. Mexico, Canada, qualification in China. Considering this new diversification considering the new qualifications, we opened the breadth of possibilities and we increase all those possibilities. I tend to say that the best option is to have many options, and BRF has been working on this aspect of increasing the number of plants that have been qualified. We have more than 150 qualifications for the plants in 2023. So this is a very daring pipeline, and we are doing our part. We are visiting the plants. We are preparing all the plans from the viewpoint of the facilities and also from the viewpoint of certifications and permit so that we can cater to those markets. And therefore, we increase the capillarity and we mitigate the risks. So we are working hard on this. And because there was a drop in the general market is to be expected that this is related to circumstances related to timing. So there's no way we could provide a guidance because that wouldn't be prudent. But we are we see that this process is starting to materialize because of the 2 factors, among others, One would be that one that I mentioned that happened in the last 60 days, the new Chinese year. Since this is an important market, and in January, we saw a record consumption level with the decrease in the strategic inventories in China and demand from China is much more aggressive now. We also see that prices have recovered. Of course, it's still in the beginning, but we see this increase in China, in Korea and Japan. And we expect that as the relationship of offering demand will come to a more stable level, a more reasonable level. And we understand that trend will reverse. So this is why I always mention this. Sometimes, we look at the plan to improve the operational efficiency, and we do not consider the commercial aspect, but our plan will consider the commercial aspect. We are building a company that has agility to identify the opportunities and very quickly will make all the necessary changes and go in the direction where it would make sense in the market. We had a problem in Turkey, for example, which was very complex, and we had the Halal team involved in this issue. So we looked at value-added products, and we also incurred exports. And we saw immediate impact. I'm sorry, I'd like to insist on this, but I would like to draw your attention to a peer characteristics and qualified information would allow us to make quick and assertive decisions. We have all the team involved working so that this information could be converted into action and in the correct timing. Operator: This Q&A session and the conference of BRF has come to an end. We would like to thank everyone for having attended the conference, and have a great day, everyone.