BRF S.A.

Good morning, ladies and gentlemen. Welcome to BRF's Q2 2023 Earnings Conference. This conference is being recorded and will be available for download at the company's website ir.brf-global.com, where the presentation slide deck can also be downloaded. All attendees are now connected in listen-only mode. Later, the call will be open for questions and further instructions will be provided. Before we move on, I'd like to stress that forward-looking statements are based on BRF's management's beliefs and assumptions, as well as currently available information. These statements may involve risks and uncertainties seeing as they relate to future events and therefore rely on circumstances that may or may not materialize. Investors, analysts, and journalists must take into account that events relating to the macroeconomic environment, the industry, and other factors may lead to materially different results than those expressed in sad forward-looking statements. Joining our conference today are CEO Mr. Miguel Gularte and CFO Mr. Fabio Mariano. I will now turn over to Mr. Gularte who will begin the presentation. Please, Mr. Gularte, you may proceed. Good morning. I'd like to thank everyone for joining our Q2 2023 earnings conference. During this period, we remain focused on executing our efficiency plan, BRF Plus, which turns one year old this September. We've made significant headway across all our work fronts. We're seeing our gains materialize faster than expected, exceeding the target we set for the first half of the year. The impacts of our strong performance can already be seen in the company's balance sheet. This quarter, we're reporting recovering margins, a result of our improved operating indicators, the high-performing processed goods category in Brazil, and the gradually increasing prices in U.S. dollar. Now, I'd like to invite our CFO, Fabio Mariano, to present our results in further detail. I'll be back later to bring you my additional thoughts and final remarks. Good morning to everyone joining us. I'd like to point out in the opening slide our most important financial indicators for the second quarter, starting with net revenue following the management reporting standard, which exceeded 13 billion reais in keeping with the same period of last year. As for EBITDA, we reported over 1 billion BRL for the quarter, which led to an 8.2% EBITDA margin. Our operating cash flow came to 1 billion BRL, 166 million more than our cash generation in the same period of 2022, despite the lower nominal EBITDA. In terms of working capital, we continue to make significant headway, shortening our financial cycle to 5.5 days, the lowest on record. Inventory turnover came to 81 days, 14 days less than 2022. Concluding this slide with leverage, we came to 3.75 times our EBITDA for the last 12 months. We also reported pro-formal leverage of 2.42 times, including the funds that we raised in our capital increase last July. Our focus is still to strengthen our capital structure, lowering our net debt, and consequently the interest payments by allocating our follow-on inputs or resources the best way possible. On the following slide, to the right, we see the gross profit over time with profitability of about 16%, also gross profit of 2 billion reais. To the right, we also see the EBITDA over time, as we said before. In the next slides, we will show you the performance by market or in-business segment. Starting with Brazil, we see progressive evolution in EBITDA and margins. This development is even more substantial when we look at the portfolio of processed goods that's performed in line with its historical record despite the lower consumer spending in the country. In the next slide, we make it evident how the decrease in prices of the unprocessed goods in Brazil has stopped better performance in the region. We can see the chart on the lower left hand side on the base 100 are profitability for processed goods over the last quarters that's already showing gains in efficiency from the BRF Plus program, in addition to better commercial execution and price positioning. To the right, we see soybean oil prices, which has already fostered better margins for the margarines category, and corn prices and soybean bran prices that will give great benefits to our costs starting in Q3. In the following slide, we see a slightly more attractive microeconomic scenario when we notice the progress in indicators such as consumer confidence, income, and employment, which are closely correlated with the spending on processed goods in Brazil, down for about 75% of our sales volume. On slide 8, I'd like to point out the market in Brazil with new breakthroughs in commercial execution that have allowed us great gains in competitiveness. I would like to point out among those the increase in active customers, the larger coverage of store promoters, and better adoption of suggested prices in retail. Lastly, the share for processed goods and spreads ended the period at 39%. In the next slide, we talk a little bit about the international market. We've seen a still very impacted EBITDA by the adverse scenario for protein exports despite greater profitability. EBITDA margin came to 4%, up over 5 percentage points versus the previous quarter as a result of the gradual recovery in USD prices and the materialization of efficiency gains within our BRF Plus program.

The next slide, we can see the highlights of the halal market. On the left-hand side, we can see the recovery in Turkey as a result of the increased supply of value-added products in the Turkish market and production rebalancing as a way to reverse the local price trends. We have maintained our market share leadership with the Sadiya and Banvit brands, which have 37% and 20% market share in their respective markets. We also achieved more than 50% share of Brazilian poultry exports to the GCC region. On the right-hand side, you can see the highlights of the direct export segment. We continue to expand business alternatives with 15 new licenses for markets such as China, Japan, South Africa, and Argentina. Direct exports from plants, Through reducing logistical costs and unsold inventories continued to decline, improving commercial execution and alleviating the use of capital. We achieved gains in the share of poultry and pork exports to different destinations. I will wrap up the presentation on the different business segments on the next slide with the performance of ingredients and pet food. The segment reported an EBITDA margin of 16%, 101 million BRLs in the quarter. It's worth mentioning that the improved industrial yield has reduced the supply of raw materials for ingredients, while strengthening the volume of products in the company's core portfolio, maximizing total profitability. We continued to make progress in capturing synergies in pet foods, and we improved our service level and increased our presence in the direct sales channel, now also in the south of the country. In ingredients, we make progress in new markets, expanding our presence in the Southeast Asia markets and expanding the range of value-added items produced. We continue to add value to our byproducts in order to maximize business integration. Now, I will share the advances of our efficiency program that will be detailed by Miguel shortly. I will present the comparisons with the same period of the previous year. bars colored in light gray other comparison bases can also be seen in our release materials in agriculture and livestock there was a 2.3 and 1.3 percent drop in food conversion of poultry and pork respectively Chicken mortality rates decreased by 1.8 percentage points, and outbreak rates increased by 3.6 percentage points. Industrial yield increased by 2.5 percentage points, while processed waste was reduced by 36%. In logistics, we reduced returns and raised service levels in Brazil by 8 points. On page 14, we share our sustainability data. We can see highlights such as the launch of three zero-carbon products as part of Sudea's portfolio. We started adopting the cage-free model for gestating salts in all new projects. We also carried out for the first time the double materiality process for the publication of an integrated report that takes into account the view of CAPTO providers in a complementary manner. We advanced in the MSCISG rating category, and finally, through the BRF Institute, we continue to support initiatives that foster entrepreneurship and social inclusion. Now, on page 16, we share information related to the company's CAPTO structure. The chart on the left shows the evolution of net debt and leverage, also illustrating the impact of our stock offer. Such indicators were highlighted at the beginning of the conference. On the right, we can see our debt profile, which remains diversified and elongated with a comfortable liquidity position. On the next slide, you can see our free cash flow. The bridge shows an operating cash generation of approximately 1 billion BRLs, an investment flow of 707 million BRLs and 885 million BRLs in financial flow without foreign exchange effect. resulting in a free cash burn of 425 million BRLs. There has been quarter-on-quarter and year-over-year progress, as we can see on the chart on the top right. On the final slide, we can see the quarterly evolution of our net debt. Our net debt is stable at 15.3 billion BRLs despite the cash burn of the quarter. The allocation of the follow-on proceeds will contribute in a timely manner to a relevant lowering of our debt level and interest payments in the coming quarters. I would like to thank you all for your attention and now I'll turn the floor over to our CEO, Miguel Goularty, for his final remarks. Thank you, Fabio. To wrap up our presentation, I would like to highlight, as we mentioned earlier, that throughout the quarter we evolved on all fronts of our efficiency plan, capturing 540 million BRLs, an amount that adds up to 1.2 billion BRLs since the beginning of its implementation. Our leaders remain dedicated to a high-performance culture focused on efficiency, simplicity, and agility. The results of everyone's engagement have already started to show this order. The achievements to date added to the team's engagement reassures that we can, we must, and we will continue to evolve. In Brazil, we advanced in our commercial execution. In the quarter, we added more than 4,500 new customers, maintaining high levels of logistics services and enhancing our retail footprint with laser focus on consumer experience, shelf space with renewed packaging, high-quality products, and innovations. Our EBITDA margins in Brazil increased by 1.6 percentage points, boosted by the trend of growing profitability in the processed goods portfolio. Our adjusted EBITDA was 1 billion BRLs, reaching margins of 8.2%, up 3.6 percentage points quarter-on-quarter. In international operations, our market diversification strategy remains consistent in exports, We got 15 new licenses to export to Asia, South Africa, and Argentina. Another important point is the continuous drop in grain prices, which will have a more significant impact on costs in the coming quarters. It's worth mentioning that we took action early on and prepared for this movement, and we already see improvements as a result of this. Our employees continue to be a priority. More than 1,000 leaders of our company who are crucial for bringing results have already participated in professional development programs these years. In terms of safety, we are at the best historical levels. Our brands are consumer-preferred brands. Sadia continues as the most valuable brand in the food sector, Vertigal is the most frequently chosen and sold brand, and Quali and Eleni are the top-selling margarines in the country. URF was again listed by the Valor Innovation ranking among the top five most innovative companies in the food service. And we continue making the most of opportunities to reinforce strategic partnerships with relevant clients. I cannot fail to highlight that the stock offering contributed to raising 5.4 billion BRLs in liquidity, reinforced our capital structure, and boosted the reduction of the company's final expenses. This was the largest follow-on offer held in Latin America this year. Finally, I would like to thank our more than 100,000 employees and the effective support of our chairman, Marcos Molina, as well as our board of directors, shareholders, producers, customers, suppliers, and communities where we operate. We all continue to work in synergy, committed to recovering the company's profitability and looking out for the opportunities that will certainly arise in the coming quarters. We'll now start the Q&A session for investors and analysts. Should you wish to pose a question, please press the Raise Your Hand button. If at any point your question is answered, you can remove yourself from the queue by clicking on the same button. Please wait while we pull for questions.

Our first question comes from Gustavo Troiano with Itaú BBA. Please, Gustavo, you can open your microphone now. Good morning, Miguel and Fabio. Thank you for the opportunity. Miguel, I'd like to pick on your final remarks in the presentation to go a little bit deeper in the science program. You mentioned 540 million gains in the quarter and 1.3 billion since the program began. And to my understanding, these are all measured by KPIs that go from the field to the final sales. So the first thing I'd like to go into is how much of those gains that we can already see in your balance sheet And how much can we expect to see in the next few quarters? According to what you mentioned in your release, the sequence of decreases is not connected to a more benign grain price dynamic. So I wanted to understand how much... We could see in COGS per kilo comes from BRF training, and how much would that come from grains? And along the same lines, it would be interesting to see an update about the gains in efficiency in Q3. Is that already slowing down, or can we expect the program to continue moving forward? As for tax reform, I just wanted to understand whether the company has any study, internal study that you could share with us, even if in broad strokes. What could we expect from you in that sense? Thank you. good morning gustavo thank you for your questions uh we'll put the efficiency program in context for a little bit because this as everyone knows is a program we started running in q4 of 2022 and we've moved forward with it across or throughout the year 2023 This involves all our processes on the field, manufacturing, marketing, also quality assurance, people, as well as our international markets, both halal and the national market and direct exports, as well as our finances. Every factor impacting our company have been involved or encompassed by this program. We also had great involvement by our controlling shareholder, Mr. Marcos Molina, and their board of directors that provided everything that we needed to introduce BRF+. and this program touched all our 96 million collaborators who were very much engaged and I would say that this was a recovery of that high performance culture that PRF has always adopted. By December, we expect it right now, after six months, to have about 41% or 42% better, and we are now at over 50% of the program, meaning we are ahead of schedule. within this operational efficiency improvements program, we see indicators already exceeding those levels that we had set as basic KPIs, which are the metrics from 2019. So, indexes such as mortality, logistics, And other metrics, if we go to manufacturing, for example, yields and productivity, if we look at our commercial execution, the index per client, or if we go to marketing, we were able to grant new packages, we strengthened the brand, continued with our... innovations if we go to brain to grain for example we were able to better position our prices with intelligence to capture those efficiencies as fast as possible inventory management in the halal management at a perfect timing to make the most of the circumstances in the market in agro quality we also saw improvements We've also been working on the regulatory side to seize best efficiencies, the program called 15 Best Destinations, which excites us very much. And I usually say that the best choice is to have multiple choices. When it comes to people, we are proud to say that our safety levels are at the best points on record, lowering also absenteeism, and we're also preparing our people better. When it comes to training, that is the equivalent to more motivation. So we're very happy about that. On the legal side, we're also working on every indicator. And last but not least, our entire finance and IR department, we had the greatest follow-on offering in Latin America, which will provide a very solid financial foundation for the company to deleverage, which is now enjoying the best leverage after this largest follow-on offering in Latin America. All are the liability program that Fabio and his team will be developing, supported by our board of directors and finance team. All of that being said, I would say that looking ahead, we see the PRF Plus program as a very clear possibility for delivery opportunities. later in 2023, and starting in 2023 we expect to make even more headway into 2025, and we're very excited about that. Now Fabio, adding to my answer, will be able to quantify these gains in the different stages of the program, what we have already captured and what we still have to capture moving forward. Fabio, take it away. Good morning, Gustavo. So of the 540 million reais that we reported as what we captured via the program, we could say that 211 million are connected with agribusiness in the feed conversion and... other indicators. And when it comes to yields, we are talking about 189 million of that. In logistics, 25 million. And lastly, we have a decrease in downtimes and losses, which add up to the remaining 115 million. When we combine everything that we've already quantifying since Q4 of last year, Q1 of this year, and now, the sum of those 540 million would come to 2.1 billion. And we could say that 70% of that has already been recognized in our P&L, both in cost items and also in expenses, most importantly. Now, to your question about the decrease in costs that was very substantial in Q2 when compared with Q1, and also compared to one year earlier, is very much connected with the efficiency program and very it has very little to do with the overall grain scenario as we said before we plan to lower our cogs level starting in q3 now with regard to the tax reform Our early analysis is very much positive about a few points. First of all, with regard to what we call text residue, so we do not have that many text credits in store. We know that it doesn't work when it comes to export, so we are not exporting as many text costs as well. We are also struggling to interpret what we can take in terms of credit and not, so the reform would eliminate that legal uncertainty, and there's also a decrease in uncertainty, so that also reduces our litigation in that sense as well. From the quantitative standpoint, We also don't know what the rate would be both in CVS and RBS. They're talking about something between 25% and 30%. But what I can tell you is that the tax reform may be representative, especially when we look into the reduced taxes on the basic staples basket and the lower rate that could also apply to food sales. And there's also the wider basis when it comes to obtaining credit. We haven't been able to recognize the tax credits that we're using when it comes to improductive area and our own consumption. So we could have a better rate for loans when it comes to everything, even for credit, even when it comes to tax on services. So we could see significant impact when we look at those aspects I just mentioned. Thank you, Fabio and Miguel. Those answers are very clear. Our next question comes from Lucas Ferreira with JP Morgan. Please, Mr. Ferreira, you can open your microphone now. Good morning, everyone. I have two questions. The first one is about this oversupply of poultry in the international market, particularly the halal market, which is a very significant one for you, especially part of Southeast Asia. How do you see that supply moving forward in the second half of the year? Do you see improvements in supply? Do you see prices getting better in the international market? If you could paint a picture of what you're seeing for the next few quarters, do you already see marginal improvements? And my other question is about processed goods in Brazil. I know that you no longer break down your price definition, but if you could give us some broad strokes about how the company has performed and if you have been able to hold back on that price increase that we saw in April. And what does the market look like in terms of competition? What do you see for the second half of the year? Do we also see balance? How will the processed goods market move forward in the next few quarters? Lucas, I will take the first part of the question and then turn over to Fabio and talk more to your second question. About supply, we ended the year seeing supply going up, but if we look at the last few weeks, especially the last month, we see more of a controlled warehousing market. If we look at the outlook for the entire world, in Europe, Reducers are holding back a little bit more in their supply and the same thing can be said of the United States. It's very important for us regardless of any mismatch and one-off mismatch, we have to understand that we're still in a market where supply exceeds demand. And these eventual imbalances that we're seeing tend to shift back into place over time as circumstances both in terms of the economy and also the benefits for producers and our growth also move to normality. In the case of BRF, we have worked very closely to have these new licenses. With new licenses, you also adjust your destinations according to the licenses you have. So with more destinations, there are more opportunities for you to distribute your production. And BRF also enjoys the advantage with brands such as Saadia and Perdigal, to play from a very advantageous place that adds efficiency and allows you to better execute your logistics plan so every product that you deliver and you're delivering 9.3 to 9.4 when you have this level of logistics efficiency with a motivated sales team you can also perform better and that allows you to face up to any distinguished competition that you may be up against. If we look at the data for July, for example, you'll see that the halal market is made up of 35% of Brazilian exports, for the first time exceeding the Asian market, which places BRF at a very advantageous position and with very favorable trends. which also helps to explain the results that we saw in the exports segment. Also, in terms of price, what we have seen is in the first quarter, we saw a lot of pressure from the excess supply. We also saw feed conversion in May and June in a process that has now stabilized significantly. Given the possibility of bird flu, clients have shown more caution and proved warier. And now that the bird flu is no longer a novelty and that Brazil... has gone into international relations agreements to allow for that situation, re-establishing its exports in the Espírito Santo, and the exclusion of Japan which in case of that happened would suspend the country or would ban the country BRF has alternative destinations that we have explored in a very good way but I'd like to turn over to Fabio to add to the other question that you had Yeah, I think that your answer was very well-rounded to his first question. So I'll start by talking about the processed foods segment in Brazil. Of course, when we report to the Brazilian market, we combine processed goods and unprocessed goods. But if we could split the two, I think we could say that on the processed goods side, we are gradually increasing our profitability, coming very close to the ideal standards. This has to do with a positive price influence in a few categories, and truth be told, this is still a very fierce market, especially in items that are more affordable, which is the case of packaged goods and also cold cuts to some degree. In margarines, we already have a very favorable situation, which is the decrease in oil, which is the most significant raw material for this category. So we understood that it wouldn't be necessary for us to pass prices through. And we also understand the scenario is favorable when it comes to demand. there's room for higher consumer spending and as we tried to show in a demonstration in our presentation consumer confidence which went from which exceeded 92 employment which is still very resilient at 8% so a very strong figure and we're now navigating a deflationary scenario so we understand that there will be this opportunity on the demand side and We should also remember that the Brazilian geography is also affected by BRF+. And we will also see a positive scenario as grain prices go down. This really makes the protein more affordable, which is a feedstock for most of our processed goods.