JBS S A : Conference Call Transcript 1Q23

International Conference Call

JBS S/A (JBSS3)

1Q23 Earnings Results Call

May 12th, 2023

Operator: Good morning, everyone and thank you for waiting. Welcome to JBS S/A and JBS USA first quarter of 2023 results conference call.

With us here today we have Gilberto Tomazoni, Global CEO of JBS,

Guilherme Cavalcanti, Global CFO of JBS, Wesley Batista Filho, CEO of JBS USA, and Christiane Assis, Investor Relations Director.

This event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After JBS' remarks, there will be a question-and-answer session. At that time further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator.

Before proceeding, let me mention that forward-statements are based on the beliefs and assumptions of JBS' management. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur.

Now, I'll turn the conference over to Gilberto Tomazoni, Global CEO of JBS.

Mr. Tomazoni, you may begin your presentation.

Gilberto Tomazoni: Good morning, everyone, and thank you for participating of this earning call.

We started 2023 facing many challenges, but our global and diversified platform continues to be effortless, especially when we look at full year.

With the operational management measures and significant improvement in the outlook, we can see more positive performance in line with our potential. As we pointed in our last quarter, this period faced a high-input costs, persistent inflation, and supply and demand imbalance, in addition, being a traditional weaker period for the global protein industry. All necessary action to reduce the impact of these circumstances have been taken.

Beyond market conditions, 2 business were particularly impacted this quarter: Beef USA and Seara. In the United States, we faced high cattle prices and a compression of margins. Additionally, commercial, and industrial performers fell below our expectations, which are issues that we have already been addressed.

In Seara, we faced a challenging of falling price in export, high grain cost and low productivity in agriculture, which impacted cost and volume. We have taken

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measures to reverse productivity in the field and the cost of grain is already showing more favorable results. The increase in our leverage was already expected due to the normalization of margins, therefore, the company prepared for this scenario by extending the average terms and reducing the cost of debt, improve liquidity through the increase of revolving credit lines and align bond clause, which is the last issues when the company was already the investment grade.

We do not have any significant maturities until 2027. In addition, we have already identified the potential to release US$1.2 billion in working capital. In the in the upcoming quarter, we expect better conditions in several important markets. In the US, the market historically stronger with the grilling season approaching when the consumption of protein and the value-added product is heightened. Global logistic conditions are also improving with a reduction in container cost, [unintelligible] for the Asian exports. A significant decrease in corn meal and soybean price is ongoing in important producer markets, which is positive impacts in our poultry and pork operation globally.

In Australia, the cattle cycle is starting to show favorable signs with continuous improvement in supply expecting throughout 2023. In Brazil, resumption of China export, new export authorization in Canada, Philippines, and Mexico, as well as strengthening domestic supply relationship programs, provide the Brazilian business beef with much better outlook for the months ahead.

Our diversification strategy has been complemented in recent years by our investment in value-added products and strong brand in the countries where we operate. In the last 12 years, during which we have already had a global platform, this is the first quarter that we have faced adversity in almost all countries where we operate. This make us believe more than ever that our team members and our geographical and protein diversifications are our great strength, especially during the challenging times.

It's clear that this year first quarter does not reflect the potential of our business and even less what we expect from this year. This first quarters in 2023 is an outlier.

Guilherme Cavalcanti will now explain our results in more detail. Thank you.

Guilherme Cavalcanti: Thank you, Tomazoni. Let's go over the operational and financial highlights for the quarter starting on slide 12, please.

Before moving on to the consolidated results, I would like to start by highlighting the ongoing work in liability management that we continue to carry out. In April, we issued senior notes at Pilgrim's Pride for the total amount of US$1 billion with a 10-year maturity, a coupon of 6.25% and being significantly oversubscribed. With the proceeds, we fully pay the PPC term loan B in the amount of US$473 million, reducing the company secured debt to below 1%. As

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a result, our average maturity of our debt increased to 10 years against 8 years in the same period of last year.

Now let's move on to this slide 13, where we have the operational and financial highlights for the quarter. Net revenue for the first quarter was US$17 billion, adjusted EBITDA totaled US$416 billion and represents a margin of 2.5% for the quarter. Net loss was US$280 million for the quarter. As we mentioned in our last earnings call, these results reflected challenging market conditions in unconventionally weaker quarter for the global protein industry. However, we maintain our confidence in the gradual recovery of our results in the following months based on our strategy of geographic and protein diversification and the growth of protein consumption in the coming years.

In addition, some short-term key indicators, such as grain prices, the rebalancing of global supply and demand for poultry, the larger herd of cattle in Australia and Brazil, among others already start to positively impact results.

Please, now moving to slide 14, the operational cash flow in the quarter was negative by US$586 million due to the reduction in the EBITDA margin. Working capital consumption was US$959 million, a significant reduction when compared to the consumption of US$1.5 billion in the first quarter 2022. Over the coming quarters of this year, we have the potential to release working capital considering the current levels, which depending on market condition and grain prices could more than offset the first quarter consumption.

More specifically, US$440 million seasonal impact of deferred livestock payments that happens every year from December to January and therefore tends to revert in the last quarter. 185 million in taxes to be refunded through throughout the year, US$85 million in US and US$100 million of monetization of tax credits in Brazil. US$100 million from inventory reductions due to the reduction in corn and soybean new prices and in a scenario where grain prices do not rise - bearing in mind that future curves indicate a decline -, we could potentially release an additional US$120 million.

US$100 million reduction in biological assets also due to the reduction in grain prices, and US$250 million from finished goods inventory reduction, therefore not characterizing a guidance, we have the potential to release approximately US$1.2 billion in the following quarters.

Free cash flow for the quarter was negative in US$1.2 billion against a negative US$526 million in the first quarter of 2022. The first quarter has seasonally the characteristic of consuming cash due to the concentration of payments from cattle and pork suppliers and restocking of inventories, mainly in grains mentioned in the previous item. I will go into more detail about this cash consumption in the change of the net debt on the next slide, please.

Moving on to slide 15, we have the devolution of our debt profile. Net debt ended the first quarter 2023 at US$16.5 billion, an increase of US$1.3 billion

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against last quarter explained primarily by consumption of working capital of US$959 million, the main consumption was in the supplies account given the concentration of payments in the first quarter due to the payment of the differed balance of livestock, both in US and Brazil, and CapEx totaling US$331 million which is already US$85 million below the first quarter 2022 and in line with the full year estimate of US$1.3 billion, which would be 40% below the full year 2022.

Expansion CapEx accounted for 55% of the total in this quarter. Net interest expenses for the quarter was US$263 million. Considering new debt issuance, the increase in interest expenses on the short-term debt, which corresponds to 13% of our total debt, and the increase in inflation measured by IPCA which indexes 10% of our debt in the form of agribusiness receivables certificates, the projected financial expenses for the year is US$1 billion. It is worth mentioning that 78% of our debt is in the form of senior notes with a fixed interest rate.

Additionally, estimated lease payments for the year are US$450 million, therefore, if we add the working capital, financial expenses and CapEx numbers mentioned above, an estimated EBITDA to reach a breakeven free cash flow would be below US$3 billion.

On this slide, you also have our cash and debt payment schedule in a pro forma view, that is, already considering the issuance of Pilgrim's seniors notes in April. With that, we present a total liquidity of US$5.5 billion, of which 3.2 billion in revolving credit facilities and 2.2 billion in cash. Short-term debt rose to US$1.9 billion as the cash burn was covered with US$550 million of trade finance and US$750 million of cash use.

In relation to the long-term debts, the most significant payment only happens in 2027, which US$850 million are PPC senior note that is already callable and has a reduction in its call price in September of this year. Amortizations above US$1.5 billion are only after 2030, above US$2.5 billion only after 2032, and we have US$2.8 billion maturing in 2052.

The debt allocated to Brazil represents 22% of the company's total debt, which is in line with that [unintelligible] EBITDA generation. Debt in reais represents 12.5%, in line with the proportion of the company's revenues in reais and the average cost in reais are 13%, which is below the current Selic rate of 13.75%. The average cost of the debt in US dollars stood at 4.83%, also below the current FED fund rates of 5.25%.

Now let's quickly go through the business units. Starting with Seara on the slide 16, net revenue for the quarter grew 9% in the first quarter as a result of rising prices and volumes. On the other hand, the quarter's profitability was pressured by a production cost which remained high during the year alongside a scenario of global chicken oversupply. However, in the domestic market, the highlight was the prepared foods category which sales grew by 30%.

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To further strengthen the value-added portfolio, we inaugurated the largest and most automated JBS plant for the production of braded chicken products, in Rolândia. In addition, investments in the brand, innovation and quality continues to reap good results. We are already present in 90% of Brazilian households and the repurchase rate continues to grow quarter after quarter.

Moving now to slide 17, JBS Brazil recorded a reduction in net revenues of 15% year over year. Sales and profitability were pressured by the Brazilian self- embargo on beef exports to China, which is the main destination for the protein in the international market, which lasted approximately one month. Part of these volumes were absorbed by other markets, including the domestic markets, whose volumes grew supported by the various initiatives to improve commercial execution.

Moving on to slide 18 and speaking now in dollars and in USGAAP, net revenue for JBS Beef North America decreased by 4.9% year over year in the quarter and the EBITDA margin was negative 0.4%. As expected, the results reflected the turn of the cycle, the turn of the cattle cycle, reducing the availability of animals for processing, therefore, live cattle prices are according to the USDA grew 16% in the period while wholesale prices grew only 2% pressuring profitability.

Moving on to slide 19, we have JBS Australia. Net revenue fell 1.6% in the first quarter 2023 year on year, impacted by exchange variation as sales grew 4% year over year in local currency, explained by the higher volume sold in the domestic market and growing demand from Asian markets. However, profitability was pressured by beef segment, the largest segment in Australia, as the price of live cattle available in feedlots was still at high levels during the first quarter, but better prices are already being observed given the greater availability of animals.

Now moving on to JBS USA Pork, net revenue for the quarter was 5% lower compared to first quarter 2022. The oversupply of hogs in the domestic markets linked to the high cost of grains pressured the results for the period. On the other hand, according to the USDA, exports grew 12% year over year in the quarter mainly to Mexico and Asia. I also like to highlight the opening of January JBS first Italian specialty meats plant in the US, in line with the company's strategy of spending its value-added portfolio.

Pilgrim's Pride, on slide 21, presented a reduction in net revenues of 1.8% in the quarter compared to last year. In the USA, despite a still adverse scenario in the price of products for the use of raw materials, the big birds, we were able to partially offset profitability through a more diversified branded portfolio and our partnerships with key customers. In Mexico, the normalization of supply and demand coupled with better commercial execution returned profitability to the historical levels of the quarter.

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