BRF S.A. (NYSE:BRFS) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: Good morning, ladies and gentlemen. Welcome to BRF’s conference call to discuss results regarding the First Quarter of 2023. This conference is being recorded, and the replay can be accessed on the company’s IR website at ir.brf-global.com. The presentation is also available for download. At this morning all participants are connected in listen-only mode. [Operator Instructions] Before proceeding, we would like to clarify that any forward-looking statements are based on the beliefs and assumptions of BRF’s management and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur.

Investors, analysts and journalists must understand that events related to the macroeconomic environment, industry and other factors could cause results to differ materially from those expressed in the respective forward-looking statements. Here with us today in this conference call are Mr. Miguel Gularte, CEO; and Fábio Mariano, CFO. I would now like to turn the floor over to Mr. Gularte, who will start the presentation. Mr. Gularte, you may proceed.

Miguel Gularte: Good morning. I would like to thank everyone for attending our first quarter 2023 earnings conference call. During this period, we remain focused on executing our efficiency plan, which advanced consistently showing progress on all our work fronts. We have evolved our operational indicators with emphasis on food conversion, mortality, yield, daily costs and level of logistics service. We also advanced in commercial execution and in the share of higher added value items in our portfolio. I now invite our CFO, Fábio Mariano, to present the results for the quarter and then return afterwards to provide more detail of our progress and make the final remarks on this call.

Fábio Mariano: Good morning to everyone joining us. In the opening slide, I’d like to highlight our main financial indicators for the first quarter, starting with net revenue, which increased by nearly 10% over the same period of last year and coming to BRL13.2 billion. As for EBITDA, we reported BRL607 million in the quarter, and EBITDA margin of 4.6%. Our operating cash flow was BRL872 million, far outperforming our cash generation one year ago. In working capital, we continue to make substantial headway, reducing the financial cycle to 7.6 days, one of our shortest financial cycles on record. Inventory turnover reached 88 days, 14 days less than in 2022. Ending the slide with leverage, we reached 3.35 times our EBITDA for the last 12 months.

Our focus is to strengthen our capital structure, promote the reduction of our net debt and consequently, our interest charges so that leverage reduces as quickly as possible to adequate levels. In the next slide, on the left-hand side, we show you the historical evolution of our gross profit with profitability of close to 13% in the period. We’re reporting gross profit of BRL1.7 billion. To the left, we also noticed the performance of our EBITDA, as we highlighted earlier. In the next slides, we present the performance per market and business segment. Starting with Brazil on Slide 5. We noticed progressive development in our EBITDA margins, especially when we disregard seasonal sales of commemorative products. This performance is even more significant when we look only at the portfolio for processed products.

I’d like to highlight for the Brazilian market, new progress we’ve made in business fundamentals, which have allowed us to gain competitiveness. Within this progress, I’d like to mention the improvement in our commercial execution, ensuring greater capability with an increased number of active customers and greater adoption of the prices suggested for the retail market. This improved execution also allowed us to make progress in our service level metrics, growing up by more than 10 percentage points. I’d also like to underscore the launch of Sadia’s Hot Bowls line, the result of our prioritization project with greater commercial impact. The market share of processed food and spreads end of the period unchanged at 40%. On the next slide, we see slightly more promising macroeconomic scenario, and we see progress in indicators such as consumer confidence and income levels, which are closely related to sales of processed foods in Brazil, which account for 75% of our sales volume.

On the next slide, we bring you the international market outlook. In the chart, on the left, we see an EBITDA that’s been heavily impacted by the adverse scenario for protein exports. Our EBITDA margin was negative by 1.7%, mirroring the persistent chicken oversupply, pressuring our sales prices. However, we can already see significant price recovery early in the second quarter. We continue to expand our market alternatives with three new licenses, 13 suspended reversions and – reversed suspensions, I’m sorry, and many renewals for markets such as China, Malaysia, Chile, Mexico, Peru and others. On the following slide, on qualitatively terms, we highlight the Halal market with the rebound in results for Turkey, mirroring the increased supply of high value-added products in the Turkish market and a production that’s balanced as a way to reverse the price trend locally.

We reached and allow about 26% share in value-added products, seeing the regions turn over. We maintained our market share leadership with Sadia and Banvit with 37% and 22% market share rates in the respective markets. We also saw higher than 50% share in resilient exports to the GCC area. Next, I’ll show you the highlights of our direct experts on the left-hand side, which benefited from greater product availability, given the increased productivity and efficacy gains, especially in yield, which we will detail further. Our direct exports from our plants have grown, reducing logistics costs and unsold inventories, which have declined, improving business execution and relieving the amount of capital we’ve employed. We’ve seen gains in participation in chicken exports to the Americas, Africa, Japan and South Korea.

And I’d like to end by talking about the more favorable scenario in Asia, given the higher chicken sales in China. In pork, we continue to gain market share in Brazilian exports to the Chinese market. And I’d like to conclude the presentation on business segments, talking about our performance in Ingredients and Pet. The industry reported a 19% EBITDA margin or BRL118 million in the quarter. We continue to realize synergies in Pet, expanding our storage capacity, improving our level of service and increasing our presence in the direct-to-consumer channel. We’ve also started operations of a new product line in Bastos, focused on the food channel. In Ingredients, we may progress into new markets, broadening our business alternatives and increasing our line of hydrolysis for the domestic market and exports.

We continue to add value to our byproducts in order to maximize business integration. Moving on to the following slide, I’d like to draw your attention to our business outlook for the company with highlights on the first chart on the left. The sharp price recovery for most chicken cuts in April compared to the average prices during the first quarter of 2023. We’ve seen double-digit increases for high-volume cuts, the data source or the prices charged by BRF itself. We also show you a price reference in the Brazilian market in the second chart. Lastly, we’d like to reinforce that we are experiencing the materialization of a scenario of decreasing grain prices, which we had already anticipated to some extent. Substantial drops have begun in March with results in our COGS expected to become more visible starting in the second half of the year.

Next, I will share some progress in our efficiency program, which will be quantified in numbers by Miguel later on. I’d like to show you the comparison with the same period last year, even though the basis for comparison can be seen in our material. We noted a decrease in fee conversion for poultry and pigs by 4.3% and 1.8%, respectively, and the chicken mortality rate, which decreased by 1.4 percentage points. In manufacturing, we’ve increased our yields by 1.6 percentage points and halved process losses. In logistics, we reduced our per diem costs by more than a third and increased our service levels in Brazil by more than 10 points, as we mentioned before. Over the quarter, we also saw highlights in sustainability with achievements such as reduced water consumption by 4% per ton compared to the base year of 2020.

We expect to deliver on our commitment to ensure 100% cage-free birds in our integration system. We have made progress in the traceability and indirect grain suppliers in the Amazon and Cerrado biomes from 45% to 75%, reinforcing our commitment to a deforestation free chain. And lastly, we’ve advanced in mapping and mitigating the reduction of Scope 3 greenhouse gas emissions, moving forward with 20% reductions as we discussed for Scope 1 and Scope 2 in terms of absolute emissions. Now I’d like to show you some information about the company’s capital structure. The chart on the left show you the development of our net debt and leverage levels indicators we have already underscored early in this conference. On the right, I’d like to point out the debt profile, which is still diversified and elongated with no concentration of repayments in the short-term and a liquidity position that’s still higher than – but still over BRL12 billion.

There is cash available to face amortizations until 2027. The next slide, we show you our free cash flow and operating cash generation of BRL872 million, an investment cash flow of BRL824 million and BRL958 million in free cash flow without exchange rate effects, leading to a free cash consumption of BRL910 million. On Slide 13, the final slide, we can see the development of our net debt between these quarters. We report a net debt of BRL15.3 billion. The execution of our demobilization plan is going forward as planned in a timely manner to reduce our indebtedness and interest charges. I’d like to thank the audience and turn back to Mr. Miguel Gularte for his final remarks.

Miguel Gularte: Thank you, Fábio. To end our presentation, I would like to highlight, as previously mentioned here that throughout this quarter, we made consistent progress on all fronts of our efficiency plan, the BRF plus capturing BRL418 million. We improved our key operating indicators compared to the first quarter of 2022. We advanced 4.3% in food conversion and reduced animal mortality by 1.4 percentage points. In industry, we advanced 1.6 percentage points in yield and also cut production waste by half. In Brazil, we continue to make progress in terms of commercial execution, increasing customer base and at the same time, increasing the number of items sold. The level of logistics service has also improved significantly, as already pointed out.

Our demand and production planning, pricing strategy and more disciplined inventory management boosted the process category profitability gains in yet another quarter. In the international market, we also advanced in our strategy of diversification for exports with the achievement of the three new qualifications and three reversal of suspensions, one of which was for China. We increased by 1.7 percentage points, the share of higher value-added items in Gulf countries and Turkey, where we reached to 45.9% of share of this type of products in sales. Our liquidity position remains comfortable, and our debt is extended and diversified. We are carrying out the divestment plan announced in the last quarter at the planned base and with all fronts underway.

Looking at the market in other variables that are not directly under our control, we can observe a recovery trend in chicken export price compared to those in the beginning of the year. We are also experiencing a scenario of sharp drop in the cost of rent, which will boost together with gains from efficiency plans the company’s profitability gains over the coming quarters. Last but not least, our leaders remain committed to boosting high performance management. We are dedicated to the search for greater efficiency, simplicity and agility to attain increasingly consistent results without neglecting our known negotiable commitment of safety, quality and integrity. We are all working hard and focused to face the challenges and capture the opportunities that the coming quarters will bring.

Thank you.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Mr. Gustavo Troyano from Itaú BBA.

Operator: Our next question comes from Isabella Simonato with Bank of America. You may proceed ma’am.

Operator: Your next question comes from Thiago Bortoluci with Goldman Sachs. Thiago, you can now use the microphone.

Operator: Your next question comes from Thiago Duarte with BTG Pactual. Thiago, your line is open. You may proceed.

Operator: Your next question comes from Leonardo Alencar with XP. Leonardo, please unmute your microphone.

Operator: Your next question comes from Lucas Ferreira with JPMorgan. You may proceed sir.

Operator: This concludes the question-and-answer session and BRF’s conference. We’d like to thank everyone for joining and wish you a great day.