BRF S A : Transcript - 1Q24 Earnings Conference Call

Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

Operator:

Good morning, ladies and gentlemen. Welcome to the BRF call to show the results referring to the first quarter 2024.

This call is being recorded and then can be accessed at the Company's website in ri- [e-mail]. The presentation is also available for downloading.

At this moment, all the participants and attendees are connected as listeners and then we will start our Q&A session where more instructions will be given.

Before we proceed, I'd like to report that the statements, the perspective statements are based on the beliefs and assumptions of BRF and the current positions for the Company. These statements may involve risks and uncertainties having insights that refers to future events and rely on circumstances that may or may not happen. Investors, analysts, and reporters may take into account that events related to macroeconomic environment to the segment and other factors may change the results from those expressed in their respective financial statements.

Present in this conference, we have Mr. Miguel Gularte, CEO and Fabio Mariano, CFO. I'd like to give the floor now to Mr. Miguel who will start the presentation. Please, Mr. Miguel, you can proceed.

Miguel Gularte:

Good morning. I would like to thank the presence of all of you here in our call for the results in the first quarter 2024. We started the year where the brand Sadia celebrates eight year of history and 90 years as a most efficient, more resilient, efficient company, and sustainable company, we report a bid though of R$2.1 billion with a margin of 15.8%.

The numbers reflect consistent advances in the efficiency of the Company quarter-per- quarter. Our management program BRF+ is conducting the Company to the next level of operational performance, defined it as reference.

Now the Version 2.0 of our program advances with the objective of leveling the indicators of the units according to the internal benchmarks in each of the work fronts. The accuracy of our system of specification and the new permits for exportations allows us greater agility and capability in responding to potentialize our results.

The improvements in commercial execution in Brazil and the excellence of our predictive model for purchasing of grains also allows the growth and profitability of the Company. We continue oriented by high performance, more and more competitive, and prepared to capture the opportunities that come up.

I would like to invite our CFO, Fabio Mariano to present the results in details, and I'll come back right after that for final remarks and disclosure.

Fabio Mariano:

Good morning, everybody who is connected here. I'll start on the first page, the financial indicators for the first quarter of 2024, started by net revenue, which reached R$13.4 billion. For EBITDA, we reported R$2.1 billion and this give us a margin of almost 16%

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

for the period. The better results in the first quarter of the Company, the free cash flow performance was R$844 million. In working capital, we further reduced the financial cycle to 4.7 days, three days less than in the same period last year. Inventory turnover remained at lower historic levels at 75 days.

Finishing the slide with leverage, we reached 145x the EBITDA in the last 12 months, the lowest leverage in eight years.

We show in the next slide, page 4, on the left, the historic evolution of gross profit with profitability of 24.4% for the period. We disclosed gross profit of around R$2.4 billion. On the right, we can also see the evolution of EBITDA as highlighted earlier.

In the next slides, we will present the performance for segment and business. Starting with Brazil, we continue progressively evolving with the operating result. We achieved 51.1% of EBITDA margin after the period, the seasonal period.

We highlight the performance of processed products with good levels of profitability in the consumer environment that is still recovering and a marked improvement in fresh products.

In the next slide, we make it clear the growth and margins of the regular portfolio at the start of 2024 versus the average for 2023. We emphasize on the right side of the slide, again, our journey of continuous evolution in commercial execution, reflecting in a greater number of customer, availability of products in the stores, and sequential improvement in customer service levels, contributing significantly to the performance of domestic market. We also remain focused on leading innovations that meet the needs of our consumers. We launched new products in the frozen, cold cuts, and margarine categories.

On the next slide, we bring the international market. We observe the evolution, the operational evolution of the segments, sustaining healthy margins as a result of persistence, recovery of exporting, rates, new markets, and good performance in Turkey and GCC, the Gulf countries. EBITDA margin increased by 6% in comparison to the previous quarter. We saw gains in the share and exportation of chicks and ford meat to several destinations.

In the next slide, we qualitative highlighted the halal market, the celebration of Ramadan that's moved the market with the highlight of the launching of new products and ease and juice and breaded products.

Our brands and own distribution continue to favor the results in the region. In Turkey, we also, recorded good performance as a reflection of the growth in sales of processed products, which enable an increase of 4.7 points in market share and good levels of profitability and enter a portfolio locally. On the right, I show the highlights on the direct exportation market.

We can notice the behavior of prices and the main cuts that continue responding. We expanded our business alternatives with 25 new licenses for various markets, maximizing prices. We also highlight inventories at lowest historic levels, which continue to help reduce logistics costs and improve commercial positioning.

I'd like to finalize the business segments presentation with the next slide for ingredients and fats. This segment reported 10.7% of EBITDA margin. It's important to consider that

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

the evolution of the manufacturing yield continues to convert in the maximize and other results to the core portfolio of the Company. In path, we highlight new commercial export agreements and advances in mapping the value levers of our efficiency program, as well as the start of the integration project for ERP systems.

In ingredients, we remain focused on expanding markets and increasing sales of value added items. We also highlight the accreditation of Concordia plant by ABRA. We continue to add value to our coproducts in order to maximize business integration.

Then I'll share the progress of our efficiency program, which will be quantified in numbers, by Miguel soon. I will present the comparisons with the same periods from last year, bars in light gray color. The comparison with 2022 can also be seen in the material.

We noticed that in agriculture, we saw a drop in feed conversion for poultry and pork of 2.9% and 0.6%, respectively. Chicken mortality fell by 1% and pork by 0.7%. Hatching rates rose to 2.6 percentage points. In industry, we increased more than 3.6 percentage in factory output. In logistics, we reduced returns and raised the service levels in Brazil significantly.

On page 12, we consolidated the following highlights of sustainability. Advances in the Sustainalytics rating best rated company in the sector; publication of our integrated report, including the complete mapping of Scope 3 greenhouse gas emissions; and finally, achievement for the second consecutive year of the Seal of Good Environmental Practices of our Kezad plant in the Emirates, reinforcing sustainable practices in the international market.

We now present on page 14 the information related to the Company capital structure. On the table on the left, we see the evolution of the net debt leverage. These indicators were already highlighted at the beginning of the conference. On the right, we see the debt profile, which remains diversified and elongated with no concentration of repayments in the short term and comfortable liquidity position. The next slide, we show the free cash flow.

The graph the chart shows an operating cash flow of over R$2 billion, an investment flow of R$696 million and R$509 million in financial flow resulting in free cash flow of R$844 million. You can also see the evolution in the smaller charge, the evolution of cash flow in the recent quarters.

In the final slide, we can see the reduction of net debt between the quarters. We report net debt of R$9 billion. Reduction in low ones will continue contributing to reduction of interest charges in the coming quarters. I'd like to thank your attendance, and then I hand over to CEO, Miguel Gularte to his closing remarks.

Miguel Gularte:

Thank you, Fabio. To finalize our presentation, I would like to highlight that our capital structure, optimized capital structure, financial discipline, and continue operational recovery made it viable another quarter of we also recorded in this quarter the lowest leverage in the last eight years.

BRF+ 2.0 presented capturing of R$438 million, with advances in the main fronts, operational fronts per year. We are now performing above the historic levels in some of the main indicators. For example, mortality rate, feed conversion, and logistics service

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

level. Inventory turnover that reached 75 days allowed the lowest historic level in the Company with 4.7.

In our international operation, diversification, market diversification was determinant to maximize the revenue of the Company. We achieved in this quarter 25 new licenses for exportation.

In Brazil, we kept healthy levels of profitability with an increase in the regular portfolio margin, sustained by the consistent improvement of commercial execution and contribution from innovations to our results. As well as in 2023, the commitments that were taken and the opportunities identified drive us to continue this evolution trajectory with agility and efficiency.

We continue focused on the development of our people, and we concluded in this quarter our annual engagement survey. We have a substantially better result in comparison to the prior cycle and above the companies -- the high performance companies, recognized by our employees and a reflection of the management best practices and dedication from the leadership.

All of our evolution will not be possible without the commitment from our almost 100,000 employees that we thank them so much. We also thank our Chairman, Marcos Molina for his constant leadership and presence. Big thanks to the shareholders council, integrated producer, customers, vendors, and all the communities where we're present.

Thank you.

Leonardo Alencar, XP:

Good morning, Miguel. Good morning, everybody. Before anything else I'd like to thank for taking my question, but I would like to congratulate for the quarter. Very good results, above the expectation. Very good performance.

I would like, maybe because of the seasonal, that really the Brazilian market has always been marked by the seasonal in the first quarter, a weaker first quarter, second quarter even weaker, and the third quarter is a recovery and the fourth quarter is stronger.

The picture that you have in 2023 shows the sequence of improvements in the context and structure as well. But in this beginning of 2024, in this first quarter of 2024, we discussed a little bit more what is the seasonal effect and operational effect, BRF+ that you have showed the deliver in the first quarter, very significantly within that number of

1.8 expected for the year. Is there a seasonality that we should expect, only recurrent for the next quarters, that is practically the average for the year?

And even the grain effect was strong this quarter, a very interesting point, but there is room yet for benefits over the grain line. So both in costs and international parts, you showed a very interesting chart in the fourth quarter for some of the cuts and exportation. This dynamic continues favorably over the first quarters. And how much for the second quarter on can you eventually assure the portfolio, or internal or external markets to think really that this cycle and the seasonal is like a commodity? It starts to grow in your thesis. So these are the two main points both in cost, grains, and also operational and sales internal and external market. Thank you.

Miguel Gularte:

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

Good morning, everybody. Leonardo, your question is your answer. I think that the set, the foundation, so I say, for BRF, it suffered a very important change from -- I'm going to go back a little bit in time, in 2022. Marcos took over the council and the management of the Company in 2022. We have this plan, and this plan starts to be executed in September 2022. We called BRF+ which is a program, I like to say that it starts in the upper level, but has capillarity at all levels in the Company.

Our team has been responding properly with all this. We don't need the trajectory of the Company, which is a tradition. So together with us, the benchmarking of two companies, and it's fundamental to make this change. The strength of our brands, of our Company in commercial terms, perfect execution in all aspects in the industry and our brands.

Obviously, our sector has a certain seasonal aspect, but we cannot confuse it with the fundamentals that we can perform better under any conditions. We find today a BRF that is much more structured, a company that has lower inventory levels, a company that produces directly from the plant to exportation, doing well within domestic market, that uses qualified information properly as well.

The pricing system that gives -- a system that gives you a very good indicator to have a direction. But obviously, with that information you are able -- if you are not able to make the operation and the execution, that information is useless.

Another important aspect, I think that the fact that this Company has a very clear strategy. I recalled the strategy company, the controller and the -- and we go to execution, obviously. When this strategy makes sense, it's well thought of and planned, and the execution transforms, so that it translates into BRF.

We work a lot. Starting to answer your question more directly, we work a lot and very carefully on those factors that depend on our management. Because we are sure that working on the factors that depend on our -- from our management, on the face of some events that are not under our control, we're going to perform better. And this makes a company that pursues performance and better compliance.

And also, answering your question about BRF+ and for future possibilities, I recall that BRF+ is a performance program of continuous improvement. And much more than a continuous improvement program, I would say today that BRF+ has incorporated the culture of the Company. It's part of our culture, our day-to-day basis. We repeat that. It's really present here at BRF. We start it every Monday in the morning.

Leonardo Alencar:

Perfect. I think that's right. You still have -- just checking who's going to say. Okay. The BRF+ is really clear, but just the commercial part, Miguel, if you could. I understand that this part is stretching the portfolio, but the market remains under on demand without Ramadan. This is valid for Middle East and Asia and United Kingdom, with very solid; I think this is valid for the third quarter, making it possible to stretch the portfolio.

Miguel Gularte:

Leonardo, we already forecasted a gradual improvement on prices when we closed the fourth quarter 2023. Our pricing system indicated that we were getting ready to take advantage of that and the opportunities. It's important to highlight that we have 66 new

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

license last year. This year, we have 25, and today, we have two more, two plants licensed for to export to the Philippines. So when you have more options and opportunities, you end up having more diversity, capturing, commercial market as a whole differently from the first quarter 2023. The market as a whole, improved in terms of price, more destinations, and more licenses. I always say that the best choice is always have many possibilities. This happened.

We are now starting the second quarter, with the guidance. We are seeing the market that in terms of price is resilient and the commercial opportunities, and these are being enjoyed by the Company that has the perfect idea, and taking advantage of the strengths of the brands Sadia and Perdigão, not only the internal market, but also for the exportation market.

We capitalize that in a -- in the best way possible with qualified information and execution in all of our different geographies and different players, local players. We try to capitalize that. We try to capture that, which has become a reality.

Leonardo Alencar

Okay. Thank you, Miguel, for the details. Again, congratulations for the results.

Lucas Ferreira, JPMorgan:

Hello, everybody. I hope that you can hear me well. My first question is about international market and especially the chart, I found it interesting, the price of chicken breast increasing well, maybe because of new licenses, U.K. Explore a little bit more how you are seeing this market, which is a more premium, prime market, and if there's any perspective or any visibility of going back to exportation to Europe in some moment?

The second question is about Brazil. The result was really strong, the lower costs. The prices, from what I understand, the comparison base is more difficult than last year, and we have some effect of cheaper raw material pulling the prices of some of the processed products downward. So my question is if this effect is over, or if you're able to possibly increase prices in some of the categories. Is there any perspective of having an average price, better average prices in the future, and eventually the recovery in volume? Thank you.

Miguel Gularte:

Thank you, Lucas. I'm going to address the first question, and then I'm going to share the second answer with Fabio. Obviously, the market, the international market with the new licenses and opportunities, it was well explored by BRF, as I answered in Leonardo's question.

But on the other hand, it's important that, within these licenses, we had eight plants licensed for U.K. This also allows us to have the conditions to continue moving forward, up to a year in markets where we were absent.

On the other hand, BRF has that trajectory, in the sense of working with more added value products, participation of these added value products in the portfolio, in the general portfolio of the Company.

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

And finally, but not least important, we had a year 2024, a recovery of markets in general. So, obviously, with more licenses, with plants performing better, working with a criteria that we produce well. So we have the opportunity to capitalize them and make them into commercial actions, and this commercial action materializes into results.

So we see this scenario of exportation, as I already said, favorable. And we are paying close attention to all opportunities. Obviously, not only -- paying attention not only to the performance of the Company, but also to the possibility of having market choices and internationalization of the portfolio.

And now Fabio will answer the second part of question.

Fabio Mariano:

Good morning, Lucas. I'm going to talk about Brazil, which was the second part of your question. I think that when we compare the average prices from Brazil with the prior quarter, we have to take into account that we don't have the portfolio, which is a specific portfolio for the fourth quarter, the holiday products. So that mixes the product.

So another element that influences the fresh in natura products as we advance in opportunities and sales destinations, we start to have some choices. And among these choices, we can redirect products that before were commercialized, traded in the Brazilian market, and now are traded in other destinations exportation.

They end up having references and influence in the mix of products. And when we think of processed products, it's important to notice that the performance in some categories, for example, margarine, That was a category that has its profitability expanded because of the main input had reduced in value, the soybean oil. We have a little bit more of price pressure, and this is still consistent.

But talking about expectation, I think that from the consumption, we understand the environment is under recovery. Brazilian's income has improved because of the inflation process from the third to the fourth quarter. Inflation is still high. Employment is resilient. We don't have an ideal scenario yet, but it's a scenario that is more favorable than the scenario that we experienced last year.

Lucas Ferreira:

Thank you. Congratulations for the results.

Gustavo Troyano, Itaú BBA:

Good morning, everybody. And thank you for the question. We have two points here that I'd like to explore with you. The first is related to BRF+ 2.0. You've already commented a lot about the process of continuous improvement. What I would like to quantify with you is the point that you have your efficiency versus your benchmark and that you dealt in the beginning for BRF+ 1.0, let's call it like that, and understand how this 2.0 would compare to the 1.0. At the moment, I'm trying to have this order of to see the phase of the efficiency, what has been delivered, if you have reached the benchmark that you had proposed at first.

And the second question, still about cost, but focused a little bit on commodities. I think that what I would like to explore with you, within what you have visibility today, the grain

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

that is already in the BRF system, do you think that we have room, more room to see the cost per tonne drop in in the next coming quarters? I remember that in the middle last year, you already had a visibility that cost would drop a lot in the second half of 2023. I would like to hear from you if you have some granularity to from what we heard last year from you in regards to commodity. That's the first part about efficiency, second part about grains.

Miguel Gularte:

Gustavo, I'm going to answer the first part of your question, your first question, and Fabio will answer the second half of your question. BRF+ program, when it starts, takes as a base the year of 2019, a year before COVID. And we had an interesting basis in terms of performance because we could use some indicators as reference taken as basis 2019. We proceeded like that, taken as a base 2019.

When we designed after the success that BRF+ was the initial BRF+. When we designed BRF+ with the team, BRF+ 2.0, we changed the reference. We took as, based the internal benchmark, and we took as base as the indicators of performance in each of our locations with geography.

And this reference has started to be the reference to be pursued by the other locations. So, this showed us an excellent opportunity of improvement. We are talking about data and demands. So but a concrete basis. More than a concrete base. We had our own basis and we had the experience in 2023. And we were able and we're going to be able to better the plan for 2024 as it goes because of continuous improvement. And as I referred to in the first question that I received, it is not only a performance plan, but it's almost a cultural plan for the Company.

A continuous pursuant for improvement, accessible, easy to understand and that is in our hands to achieve. This has been happening. We have the expectation for 2024 and we continue improving the performance of the Company based on BRF+ 2.0. Now I hand over to Fabio to answer your second question.

Fabio Mariano:

Good morning, Gustavo. You asked about the expectation in terms of costs, thinking of the following quarters, upcoming quarters. The first aspect I can report, there is no symmetry in regards to the efficiency program captures. We hope it is a continuous improvement program, and then we have the conditions that at each quarter improve the indicators. So this should happen within the environment for the next quarters. Specifically thinking about feed that has to do with the grains, we adopted a strategy that is really similar to the strategy from last year.

So although we have challenges in the Brazilian harvest, and there is an expansion in the case of soybean. We have an expansion close to 5%, corn 6%. So we think we believe that there is a lot of production, enough production, especially in the case of Brazil, in the case of the smaller output where we can generate products at very competitive prices.

So we have a stance of having a less -- that has conditions at the shorter output to increase the position and somehow influence the average prices of inventory. If this market reading materializes, we then really have the CTV view for the third quarter and

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

the fourth quarter of this year. We can notice a retraction of costs, influencing positively the profitability of the portfolio.

Gustavo Troyano:

Thank you. It's really clear. Thank you.

Isabella Simonato, Bank of America:

Good morning, Miguel, Fabio. Thank you for the opportunity. I would like to ask a little bit about the balance sheet and the use of funds. As you pointed out really well, we have a level of leverage much lower than the Company had been running. I think the level of CAPEX, from what I understand and what you've been saying, shouldn't go up very much.

Yesterday, you announced a buyback program. I'd like to explore a little bit, how do you see now the allocation of Company's capital? If the focus is going to be the return of the funds to the shareholders. How do you see eventually new avenues for growth? This is the main point that I would like to talk about. Thank you.

Miguel Gularte:

Good morning, Isabella. I think that the first aspect, in fact, the leverage decreased at levels that we hadn't observed, as it was put at the beginning of the conference, at least eight years. This doesn't change the focus of the organization of continuing and persisting very energetically on reducing our gross debt.

Our intention is to continue to advance on rates and go back to being a company evaluated as investment degree. And it's natural, all the deleveraging process as we have a readjustment of the capital structure that we can have opportunities and possibilities for investment.

Specifically talking about CAPEX, we still have opportunities of growth for the Company with investments, marginal investments. This brings a message of idle. We don't have the full occupancy of our plant footprint. So this year, very much likely, we should grow the levels of CAPEX that we have observed, that we observed last year, I mean. In general, that would be, it hasn't changed in comparison to this trajectory.

On liability side, it's important to highlight that we're going to be very attentive and paying very close attention. Although we don't have concentration of that maturity dates in 2024. We're going to pay attention to the possibilities, that the marketing offers liability management and exchange liability so we can reduce the debt costs and favor this process that I have tried to convey here to you.

Isabella Simonato:

That's super clear. If you could, just emphasize the point of dividend of the buyback, the idea we can think of a minimum dividend, or is there the possibility of a higher return on funds to the shareholders?

Fabio Mariano:

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Conference Call Transcript

1Q24 Results

BRF (BRFS3 BZ)

May 8, 2024

Good morning, Isabella. Here we are working here at a company, that's very hard and diligently to improve the results, investments depending on the controller decision, for the strategy of the Company.

Isabella Simonato:

Okay. Great. Thank you.

Ricardo Boiati, Safra:

Good morning, Miguel, Fabio, and other attendees. Congratulations for the excellent quarter. Two questions from my side. The first one about international market, more specifically about China. If you could comment a little bit more how you have seen the offer dynamics and demand dynamics in the Chinese market, talking a little bit about chicken meat and pork meat, so we can understand a little bit how to think of this market, this major market in international operations for you. I think that Halal is also well understood, very favorable. But I'd like to understand a little bit more about Asia and specifically about China.

And the second question is about the situation in Rio Grande do Sul. If you could comment with a little bit more details what you have noticed in terms of impact, not only in your operation directly, in your plants, production of the Company, but also in integrated chicken farms and partners of the Company.

And also, logistically speaking, I think that this is a very important, relevant point, the capability of feeding the plants and poultry farms, and delivering the production. We have the strike of the truck drivers that generated a logistic discussion that was really relevant at the national scale, but I would like to understand what the situation is like in terms of logistics, the current situation. You haven't been able to deliver and flow this production outside the plants, and this has happened to your partners as well, integrated or affiliates. So we want to know if this situation may complicate the logistic, if it doesn't solve over the next coming weeks. Thank you.

Miguel Gularte:

Ricardo, answering your question about Asia and China, I think it's interesting to observe the SECEX data. It we compare the first quarter of 2023 in Asia, China, a 153 tonnes from China from 2023. 62,000 went to China. If we look at the same number in 2024, a 153,000 of chicken, in this case, poultry, and in China, 39,000, around that.

So if we compare data for SECEX for poultry, we're going to see Asia and Brazilian exportation in the first quarter of 2023, out of 400,000 tonnes, 153,000 since 2023. Now 2024, looking at the same picture, we're going to find Asia with 125,000, 147,000.

Here, we have clearly a displacement of performance for exportation in Asia. So Asia, specifically China, continues to be a relevant destination for Brazilian exportations. We noticed, in the case of poultry, a recovery of price in the first quarter. This recovery, regardless of the intensity and the magnitude, it is happening.

And in regards to pork, we have a more balanced situation, but we also see pork performing, going back to a level that is more normal in terms of price. Obviously, when you have 66 new licenses, in our case in 2023, and 20 plus, and two more today, also for pork in the case of China, we licensed for Philippines, two plants for the Philippines

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