Marfrig Glbl Foods S/Adr

Welcome to Q1 results of Marfregi. This has been recorded and is made available in both languages. Click on the interpretation button and choose English. Mute original audio if you so wish. The following executives are attending the meeting today. Mr. Marcos Molina, founder and chairman. Mr. Tim Klein, CEO, North America. Mr. Rui Mendoza, CEO, South America. Mr. Tang David, CFO, VP and IR. Mr. Jonas Jose Ignacio Scorseria, Corporate Financial Director. Paulo Pianis, Sustainability Director. And finally, investors, relations director, Mr. Eduardo Puzziello. All participants will be in a listen-only mode. We will then have a Q&A session. Further instructions will be given then. Before proceeding, we would like to state that Any statements made during this earnings call are related to business perspectives of Marfrig Global Foods projections, operation, and financial targets that constitute beliefs and assumptions on the part of the company, as well as information currently available to Marfrig Global Foods SA. future considerations are no performance guarantees because they involve risks, uncertainties, and assumptions because they refer to future events and therefore depend on circumstances that may or may not occur. Analysts should understand that market conditions, economic conditions, may impact Marfrig's results and will make them different than those projections. Mr. Eduardo Poziello, you have the floor. Thank you for attending Mark Frigg's earnings call. Before starting, I would like to emphasize that starting this quarter, We are showing consolidated Marfrig results considering North America, BRF, and South America segments only with the managerial results of continued operations. This change aims to demonstrate Marfrig's operations with its new business model in South America. Moving on to the key operational highlights of this Q1. Let me start with consolidated net revenue, 30.4 billion reals. That is 3.8% above the net revenue year on year. Regarding revenue diversification by geography, North America accounted for 46% of consolidated revenue in this quarter. South America, considering only the managerial result of continued operations, accounted for 10%. And BRF's results accounted for 44%. Regarding revenues by operation, our continued operations in South America had net revenue of 3 billion reals, and the adjusted EBITDA margin was 9.6%. BRF's net revenue was 13.3 billion rials and the adjusted EBITDA margin was 15.9%. Finally, North America operation presented in the quarter net revenue of $2.8 billion and an adjusted EBITDA margin of 2.1%. The consolidated adjusted EBITDA was 2.6 billion rials 94.8% above the EBITDA of Q1 of 2023. As a consequence, the consolidated adjusted EBITDA reached 8.7%, 407 BIPs above the margin year on year. When we analyzed the adjusted EBITDA by the consolidated quarter by geography, North America accounted for 10% of the total. South America also contributed with 10%. BRF's EBITDA accounted for 80% of the total. Moving on to the key financial highlights, I would like to highlight that operational cash flow was positive at 1.5 billion reals and net income in Q1 2024 was 62.6 million reals a reversal from the loss of over 600 million reals year on year the dollar continues to be the main currency representing 73 percent of the consolidated revenue in q124 Regarding Marfrig's leverage, we have been in the process of deleveraging over the past few quarters. By the end of the first quarter of this year, our consolidated leverage was 3.4 times net debt to adjusted EBITDA for the last 12 months, compared to 3.71 times at the end of Q4 of last year. Moving on to sustainability, I would like to remind you that MyFrig has recently anticipated its target of full traceability of its direct and indirect suppliers to 2025. And finally, in March 24, Marfrig rectified its control in BRF by electing its full slate for a new two-year term. I'll now hand over to Tim Klein, North America's CEO. Tim.

Thank you, Eduardo. Let's begin on slide 4, where I will talk about the first quarter of 2024. Starting on the left, sales volume was 2.4% higher than last year. It is important to highlight that the first quarter of 2024 included 13 weeks of activity, while the first quarter of 2023 included 12 weeks. Net revenue was 9.6% higher than the same period of last year. coming in at $2.8 billion. On the chart to the right, adjusted EBITDA was $58 million, down 42.6% compared to the first quarter of last year. Please move now to slide five, where I will talk about U.S. market data. USDA reported Kansas live cattle prices averaged $180.12 per hundredweight, up 12% versus last year. The USDA comprehensive cutout averaged 297.69, up 7%, while the drop credit declined 12.7% to an average of $11.70 per hundredweight. The cutout ratio dropped to 1.66 versus 1.74 last year. The retail beef demand index was 5% higher than last year and versus the prior quarter. As we look forward to the rest of 2024, lower fed cattle supplies will result in reduced capacity utilization across the industry. We do expect continued strong beef demand will result in some margin improvement as we move into the barbecue season. Now I'll pass to Rui.

Thank you, Tim.

Before I start, Let me just say that. In order to show more freaks results, we are going to show the results of continued operations only moving on to slide six i'll explain the performance of Q1 of this year. On your left, the total sales volume of continued operations reached 165,000 tons of the quarter. Up 13% when compared year on year. I would like to highlight the increased volume in the domestic market driven by strong local demand despite the seasonal nature of the period. Moving on to the central chart, the net revenue. We have reached 3 billion reals in that period. 11% above the revenue from the same period of 2023. That is explained by the combination of consolidated volume growth and the average selling price in the domestic market, which was 4% higher than that of the same period of last year. The average price in exports was 5% below the average price of the first quarter of last year. Finally, on the right chart, the adjusted EBITDA The amount was 290 million rials, up 7.4% over the EBITDA of 2023. We then achieved an EBITDA margin of 9.6%, practically in line with the margin of the first quarter of last year. The good performance in this result is mainly based on the increased participation of value-added products, as I will show later, and the combination of the continuous operational efficiency program and pricing analysis. Moving on to the next slide, this is the performance of the continued operation. In the segment revenue table, we can observe the performance of the value-added segment, which rose from about 34% of the total revenue in 2022 to close to 39% of the operations revenue in Q1 of this year. This five percentage point increase indicates the company's strategy to increase the share of industrialized products and brands in South America. On your bottom left corner, That's the performance of exports and the results of Q1 results. We have observed that exports to China have had lower weight in the quarter when compared to that importance in 2023, in the same period. And it now accounts for 61% of exports from the continued operations in South America. I would like to remind you that despite the fact that Asia remains the largest importer of beef, Marfreak has been using its sales channels in the foreign markets, focusing on value-added products and dedicating itself to increasing the certifications of its units to other markets. Our goal is to capture all the best commercial opportunities available. I highlight the exports to North America and Middle East. These are the main alternative markets. This concludes the South America operation. I'll turn it over to Paulo Pianes for the highlights of the sustainability area.

Thank you. Thank you, Roy. Our journey achieved relevant results this quarter, showing that the Marfrig Verde Plus program in the past three years brought the necessary means to implement a strategy geared towards transforming Brazilian cattle production aligned to climate change and conservation challenges. On the traceability front, besides 100% of direct suppliers already monitored via satellite, in Q1 2024, We achieved control of 85% of indirect supply in the Amazon and 71% in the Cerrados. On support and regularization of farmers, 300 farms were re-included in our base. These are suppliers that once again operate according to our commitments, showing compliance to the principle of inclusion in our program. About 4,000 farms had already been included since the beginning of the Marfrig Verde Plus program in 2021 until this quarter. In terms of international recognition, Marfrig, as a reference in sustainability, CDB disclosure inside action, reached the highest score, A, in climate change and maintained A- in water and forest. On the Forest 500 ranking that assesses the most relevant companies and global banks, related to commodity production, Marfrig stood out as the best assessed company in the sector. We believe that the most effective way to transform the cattle production sector is to be close to suppliers. In that regard, more than 1,000 new suppliers joined our program that disseminates good sustainability practices being profitable. Meanwhile, Marfrig, along with Several partners in the Brazilian Amazon region promoted workshops to present the criteria of the low carbon beef program to cattle ranchers, along with a practical guide explaining step by step the implementation of the program to produce a new line of product to be launched this year, the low carbon beef with a certification. Another very relevant point was the publication of the voluntary protocol for the Cerrado. We are a member of the board. The protocol is a joint effort among the different links in the beef supply chain, civil society organizations, meatpackers, and buyers to strengthen the social and environmental commitments in that biome, totally in line with the Morphic VertiPlus program. The consistency of their company in social and environmental areas are proven by the results we obtained this quarter and also by international assessments. Morphic is consolidated as a reference in this area while contributing for the development of a low carbon economy and the maintenance and recovery of biodiversity in the areas where we operate. I now turn it over to Tang that will present our financial results.

Thank you, Paulo. I'll show you the consolidated financial results for Marfrig in Q1 of 2024. Let me highlight that these audited consolidated financial statements of Marfrig Global Foods are prepared and presented in accordance with accounting practices adopted in Brazil, corporate legislation, NBC and CVM, as well as international standards. IFRS issued by the IASB. Thus, the consolidation in this financial statement includes business segments, Beef North America, Beef South America, and BRF. As per explanatory note 34. And to better understand this new portfolio, I will show operational results that are consolidated by adding these segments, Beef America, North America, BRF, Beef South America, and Managerial Continued Operations. On slide 11, on your left, we can see consolidated net revenue of 30.4 billion reals, up by 3.8% year on year. Out of this revenue, 44% generated by BRF, 46% in North America, 10% in South America, continued managerial operations. In terms of currency, this quarter, 75% of net revenue was spanked to the dollar and other strong currencies, 25% in reals. On your right, we have 2.6 billion reals of adjusted consolidated EBITDA. Margin was 8.7%. It is 94% above year-on-year with a strong contribution of BRF, 80% in the adjusted consolidated EBITDA for this first quarter. Q1 2024 stood out for confirming our strategic decision of diversification and greater exposure to value-added products. Our platform with BRF and a new, more optimized profile for the South American operations through continued operations offset the more challenging scenario in North America. On slide 12, this is the free cash flow generation. In Q124, the consolidated operating cash flow was positive at 1.5 billion reals. Investments made in capex in the period amounted to 855 million reals, and the amount spent on financial expenses was 1.2 billion reals. As a result, the free cash flow for the quarter was negative at 558 million reals, more than 200% better than Q1 23. Slide 13, net debt and leverage. The consolidated net debt was 7.2 billion US dollars at the end of Q1. In turn, the leverage ratio measured by the ratio of net debt and adjusted EBITDA in the last 12 months dropped from 3.87 times to 3.39 times in dollars. When measured in reals, the ratio dropped from 3.71 times to 3.43 times, showing once again the decline of leverage through strong operational results, mainly from BRF. Finally, on slide 14, let me point out that we're going back to profitability in our operations. For the second quarter in a row, we presented a net profit of 63 million compared to a loss of 634 million in Q1 23. This profitability is the result of operational efficiency in our segments. with emphasis on BRF, which presented the best Q1 in record with robust results in all lines. It confirms our successful strategy of growth, higher added value, rents, and strong presence in industrialized products. We'll continue to focus on improving our operational efficiency, cost control, and reducing leverage resulting in value generation and maximizing return for all our shareholders. I'll turn it over back to Rui.

Thank you. As for the floods in Rio Grande, we would like to mention that the biggest tragedy in the history of this state moves us, especially because of the loss of lives and also because of losses in general impacting profoundly the lives of everyone. We're totally solidary with the people from that region and also our employees and partners in the region. And we are certain that the strength of the population and the solidarity of the whole country will allow the state and the population to overcome this unprecedented catastrophe. Marfrig is engaged in this wave of solidarity with direct donations of products to all our employees in the region and those directly affected by the floods. We also launched a campaign through the Marfrig BRF Institute in which for every one real donated, Marfrig and BRF will also put in one real, tripling that amount. Besides the campaign, we're also making direct donations of canned protein. Specifically about our operations in the state, we have four units. Only one is continued. The location of our units in the south and west of the state were not affected by the rains and therefore didn't suffer any impact. As the main destination is the Rio Grande port that captains operation that allowed us to maintain our units operating under normal conditions. I now turn it over to the operator that will lead the Q&A session.

Thank you will now start the Q amp a session. If you'd like to ask a question, please press the button raise hand. you'll see. dialogue box so that you can unmute your MIC. choose the language you prefer. If your question is answered, you can lower your hand. Please hold. Leonardo Alencar from XP asks the first question. So my first question is to Tim. I would like to better understand margins. First quarter was more favorable, but Q2 seems to be delayed as far as the seasonality is concerned. Is it getting better? Is it delayed but getting better? And what's your take on Q2? That's my first question. My second question, let me now think about South America. I understand that you're Separating continued and discontinued operations, but trying to come up with the results of both operations. I believe that in early 24 volumes were very high. I believe that your operational efficiency is very high. Are there any more positive effects on operations? Was it more favorable in continued or discontinued operations because of that? shut down in China, would the benefits be more concentrated and continued or discontinued? If you could please break that down between the two different operations so that we can better understand scenarios in the future.

Yeah, this is Tim Klein. I'll answer that first question. To your point, the first quarter was as expected. The second quarter started out The main reason was wet weather across most of the country. We had a very wet spring so far. We are seeing now in the second half of the quarter a surge in cutout bags as the barbecue season kicks in and retailers are coming in buying meat. So we're seeing that especially started last week and then this week. So we'll see margin expansion as we go into the rest of the quarter.

Good morning, though. This is Rui. Let me address your questions about South America operations. Our operation planning is the same for both continued and discontinued. Of course, industrialized operations are all within continued operations. when you consider China, just like you said. So that was that decrease that revenue share across the board. But of course, we're focusing on pricing to get more profitability. But the impacts were similar across the board. Let me just follow it up first with Tim about the US. So you have some improvement signs, but the feeling we get, it's delayed. Do you believe Q3 can be better than Q2? And the second follow-up is to Rui. I understand the operations dynamics, but if continued operations are more exposed to costs, maybe discontinued operations more exposed to exports, if I read it correctly. But the second half exports pick up because of China or more US towards the end of the year, you would have an upside or a greater upside in continued operations than in discontinued operations, right?

Yeah, this is Tim. I won't provide specific guidance on Q3 other than to say that Q2 and Q3 are typically the best quarters in our business due to the seasonality and the beef demand.

Hi, Lowell. As to the prospects of exports, let me remind you that our plants are more certified they're more competitive so the benefit from exports so we we get the benefits in both operations continued and discontinued from exports thank you that was very clear thank you Lucas Ferreira from JP Morgan is up next. Hello? My first question goes to Tim. My question is about the drop value that is coming down substantially in recent months. And it's an important component in your margins, right? What is the outlook? Is it getting better anytime soon? And my second question has to do with Mark Frigg's leverage. When you look at BRF's leverage, do you believe that the company could pay out more dividends? and having a more balanced capital structure at BRF so that it could help cash positions at Marfrig and its leverage as well. Thank you.

This is Tim. Yes, the drop credit certainly has dropped a lot from where we were at a year ago, although recently it's been fairly stable. The biggest single drop has been in the edible tallow component of the drop credit, which mirrors pretty much the vegetable oils, soybean oil being a big oil that tracks with tallow. So we're not seeing any further downside in that. And in fact, if you look at the futures market on soybean oil, it's actually coming up. So If anything, we would expect that Edelbert Powell prices would improve going forward a little bit.

Good morning, Lucas. This is Marcos. We had a better Q1 results at BRF, the best Q1 for BRF. And at BRF+, you begin to see some structural changes. In your projections, I think you can include that structural change Poultry remains strong internationally as well as domestically. When you combine all of these factors, we see the poultry business way more consistent, giving us better predictability. so it's a high likelihood of paying out dividends from brf to marfrig now in 2024. thank you both marcos and tim thank you isabella simonetto asks the next question from bank of america You may proceed, please. Thank you. Good morning, Marcos Rosello. Good morning, everyone. My question is about feedlot, the verticalization of herds in South America. You had 2 billion cash burn in the quarter advances to suppliers, and it's explained in the notes That is to BMFG, to MFG. What would be the counterpart of those 2 billion reals? Is it going to be reverted? Was it an advance payment to purchase cattle? I would like to better understand what the counterpart for that disbursement was. So that was the payout to MFG. That would be my first question. Hi, Isabella, this is Rui. In Q4 earning calls, we specified that that was part of our strategic plan to expand our herds. aiming at getting to 25% of the slaughter rate in our continued operations. So that was a very clear objective behind that strategy. Number one, improve supply stability. Number two, quality. That's very important. By having better raw materials, we can add more value in value-added products. And number three, speed up our planning on traceability. Not only by doing that, but also because of the genetics. We can reduce preparation times and reduce emissions It's a model being used in the national beef. It's a model we understand and we master the use of that model. So we're now better understanding the market with very good prices. Favorable grain prices, just like Marcos just said. It's a very positive cycle for the entirety of this year. 2025 will be a transition year, the way we see it, but 24 is more favorable and we want to move ahead towards that objective. Of course, it's working capital. How are we going to return it? We use it to make that operation run. But we can get the benefits from the quality of the cattle, the quality of the beef and the price selling premium beef. So you get that return gradually. And of course it comes from the market overall conditions. We're not considering reducing that percentage. That was very clear, Rui. Let me just make sure I understand. These 2 billion is not an advance payment for cattle that will be delivered this year. To a certain extent, you are funding the feedlot business that will be expended from 10 to 25%, as you said before. And in exchange, You have all the benefits you mentioned, supplying good quality cattle as or when the verticalization happens. Let me just make it clear. It's not an advanced payment to purchase cattle. You're actually funding the expansion of verticalization. So when it's a bad cattle, it's ready for slaughter, Brazil, South America operations will have to acquire that cattle from that feedlot, right? Exactly. Perfect. I just wanted to make sure. Thank you.

Next, Enrique from BTG Pactual. Good morning, everyone. Thank you for taking my questions. I wanted to explore two points in South America. First, talking about your top line, your revenue in the quarter. We see a drop quarter after quarter related to price dynamics. Q4 was very strong last year. If you could elaborate on the price side, what drove that? if my understanding is correct and what may have driven that sequential price drop and on the volume side, Q1 in the light of the investments being made by the company to expand the capacity of your continued operations, how should we see the volumes moving forward using Q1 as a starting point? Second point also for South America, when we look at the margin of continued operations, they are healthy, but lower year after year, despite the more favorable cycle and the dynamics of Q1 last year, where there were restrictions for exports. So I'd like for you to give us more color, how you see margins evolving over the year. Good morning, Enrique. Speaking about our revenue, revenue in Q1, well, there were specific factors that had an impact. Number one, we had Carnival and Holy Friday, a strategic increase of exports to national beef, especially organic beef. Since they are related operations, we excluded in South America that revenue. Obviously, this is not material to national beef, but it is for South America. Inspectors at the Ministry were slow in issuing certificates, it affected our transfers to plants and exports as well. We had a drop, a reduction in drop value and the drop of the dollar. As to the second part of your question, about China. Indeed, China was not importing most of last year prices dropped year on year. And if we look at Q4 last year, we saw a drop in Chinese prices less than 10%. It is an indication that we are get into a bottom of Chinese prices. Brazil this quarter accounted for over 50% of China exports, imports. So prices are picking up or at least remaining stable initially. And as for the rest of the year, obviously utilization reached 82% in continued operations. To give you an idea, we had our first unit certified to export boxed beef to China in South America. That negotiation is just beginning. So there are many units like that one that will be certified this year without giving you any guidance. That's clear. If you could just comment on the margin dynamics, thinking about your continued operations in Q1 specifically, should it be used as a reference for the rest of the year? Well, it has to do with what I just mentioned. There were some specific factors in Q1. The value of the dollar and the impact in China, but the outlook for the next quarters is favorable. Thank you. Next, Ben Peter from Barclays.

Yeah, good morning, everyone. And thank you very much for taking my question. Two questions, one for Tim and one, I guess, for Rui. So Tim, first, you talked a little bit about the intra-quarter dynamics and the weakness at the beginning of the year. And you cited some wetness and rainfall. So how can you kind of try to separate a little bit what was the impact short term because of that as it relates to the quarter, but what could be the positive situation as pasture conditions improve and we potentially get into a more accelerated heifer retention for the rebuild of the herd for the years down the road. That would be my question for Tim. And then for just following up on the dynamics in the South American continued operations business. Can you update us as to the commercial initiatives and the relationship with BRF and the integrating part of it, how that is going to play a role in coming quarters to kind of regain margin strength, which maybe was a little soft at the beginning of the year, but as you just said, is expected to be better towards the rest of the year. Thank you.

Yeah, this is Tim. Regarding the dynamics in the second quarter, it was a late start, delayed start because of the wet weather. Beef demand continues to be, in our opinion, very good, although we do see consumers trading down to some of the lower priced cuts, ground beef being a big component of that. But when you put it all back together, the cutout value and the cutout ratio remains stable. The wet weather certainly has helped some of the drought areas that caused the massive liquidation that we've seen here the last couple of years. What we are seeing is the cow slaughter is coming down. So it appears that ranchers are keeping their cows rather than sending them to the market. So that's a result of having good grass. We haven't seen, you know, large heifer retention start yet, but we are seeing signs that the last several weeks that we look at the percent of heifers in the kill and it has come down a little bit. So if grass conditions are good, we should see heifer retention start.

Thanks for that.

Good morning. Let me talk about the synergy between PRF and Marfrig. We work together in several areas. Commercial is one of them. Customers are talking to the two companies. Logistics are also shared. Admin, departments, supply, So the synergies that are already being collected, I mean, are very positive. The highlight on new opportunities, new activities you mentioned, I would like to point out the number of certifications, 36 in total last year. We are at 27 this year. So once you have a new market, You are developing specific products for that market. So that requires a lot of development work so that we can get all these new opportunities we have for these new markets.

Thank you very much.

Mr. Guilherme Pagliaris from Santander asks the next question. Good morning. Thank you for taking my questions. And thank you for supporting the efforts in Rio Grande do Sul. My first question goes to Tim. Tim, could you talk about this first quarter? We had a better performance in select than in other cuts and premium cuts have been more stringent in the quarter. Do you believe we can go back to premiums and prime choice and select cuts? So what would be impacting the performance in a very short term? Let me ask pianists about easy. There were some issues regarding that index. Could you please elaborate on the company's point of view as to that index and how are you dealing with it?

Yeah, this is Tim. On the Choice Select spread, the first quarter, it was narrow, but it was mainly because the grading on the cattle, the prime and choice was higher. So there was limited supply of Select. And there's customers out there that only buy Select. So there was a tighter supply. So the price went up. But the spread has now gone back to what would be normal for this time of year. It's right around $12 a hundred weight. So- We don't see that as being an impact at all. We like to see the prime and choice cuts maintain a spread to select. It's a higher quality beef. It's better for beef demand, so forth. The P&S question, I'm not sure what that was. Was that for me or?

I was asking P&S that second question. Hello. Good morning. We were surprised when we heard the latest data. But we're surprised because out of the 60 companies that were part of that portfolio, MaFrig is the 22nd best Of all those criteria, we are above average in five of those. One criteria was the culprit that would measure the company's goodwill. And we don't think that assessment is correct about SmartFrig's sustainability activities. We are top ranked in all those categories. And this is only negative stories out in the press clipped, but does not actually reflect the company's reputation. This swipe list gets only negative criticism. They do not qualify whether what's in the news is either a fact or not, whether it was responded by the company or not, whether it was checked or not checked. They simply collect clippings and by using their criteria and within that index, companies that had a score above 50% We were at 51 in that easy index. Let me give you just two examples very quickly. Marfrig has an index from the Ministry of Agriculture, a way more critical. An NGO provided a negative evaluation. So what impacted negatively was announced by one single outlet that impacted the company negatively. That was another report made up of 20 European NGOs assessing banks that fund commodities companies. They mentioned several companies on a bad light, including Marfrig, and that was published in Europe. We were assessed by a report that was not evaluating the company per se. So that was the only reason we were excluded from that index. We are at 82.29% and we are ranked 22nd in that ranking. The only company that had an A score in CBT that will help us increase our position. But this criteria that measures reputation, and we don't believe that it's the proper assessment that ended up causing that exclusion, despite being assessed at a better position than other companies that remained in the index. That was very clear. Thank you. Let me just follow up with Tim. Tim, could you please, elaborate on that breakdown of grading where does my frig rank between prime choice and select and the rest of the market i think that would be interesting if we could have that kind of information tim well i'm not going to provide specific information on what our grading is uh we we try to buy the very best cattle the highest quality cattle uh we

have customers that like prime and high choice beef. So we tend to focus on those type of cattle to satisfy