BRF S A : Transcript - 2Q20 Earnings Conference Call

Conference Call Transcript

2Q20 Results

BRF (BRFS3 BZ)

August 13, 2020

Operator:

Good morning, ladies and gentlemen. Welcome to BRF's 2Q20 results conference call.

This conference call is being broadcast live at www.brf/ir.com/ri, where the presentation can also be downloaded.

All attendees are connected in listen-only mode. After the Company's presentation, we will open the floor for questions and further instructions will be provided. Each attendee will be allowed one question. Should you need any assistance during the call, please press *0 to reach the operator.

Any forward-looking statements made during this call in respect to the Company's business prospects, projections, results and the future growth of the Company are based on assumptions and beliefs of the management, as well as information currently available. These statements are highly dependent on the local market and on the overall economic performance of the country, the industry, and international markets, and therefore, they are subject to change. Please note that this conference call is being recorded.

The call will be presented by Mr. Lorival Luz, the Global CEO of BRF and other VPs of the Company are also present with us today.

Now, I will turn over to Mr. Lorival Luz. Mr. Luz, you may proceed.

Lorival Luz:

Thank you. First, I would like to welcome all of you to our 2Q20 results conference call. As you can see, for the first time, we are using video for this announcement. The purpose of the use of the video is to have a better interaction with all of you as a favor to discussion of our results.

I would like to start by saying very proudly that I am very happy with the results that we are presenting to you today, particularly when we consider the current scenario of extreme adversity with the pandemic, which has been going on for six months already.

This was a very difficult quarter, which demanded the best of each of us. We really had to work as a team and that is why I would like to start this call by thanking all our employees. Everybody was a part of our production chain, all our partners who have spared no efforts to maintain our production and the supply to the population in such harsh times.

Also, I would like to say that we have built a very robust solid and consistent results, both from the financial standpoint and also in everything related with social responsibility and the care of our people. BRF is very proud to say that it was one of the companies who have invested the most in its people's health and also in the health of the communities where they operate, and we did this even in prejudice of any financial results or market share.

This was not our primary concern, because we in BRF, we truly believe that people's health and people's well-being is a top priority. The market share can be recovered later, but lives cannot, and that is why our top priority was to take care of the people.

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Conference Call Transcript

2Q20 Results

BRF (BRFS3 BZ)

August 13, 2020

The results that we are going to present to you now also show the strength of our brands and how assertive our strategy was in expanding the portfolio of products with high value added. And I am going to give you more details later. That is why I am totally confident that we have set the basis to advance with our strategy seeking growth and generation of value to all our stakeholders.

So, as for the agenda for today, I will start with a brief 15-minute presentation, then we open the floor for questions. And we have all our VPs present with us today to help me answer your questions. But before I start my presentation, I ask you for a few minutes to pay tribute to our Board member, Walter Malieni, who left us last Friday in a very premature way. You all know that Walter has worked with us for the past three years, not just as a Board member, but also a member of two very important committees.

And in the past three years were a very turbulent period to the Company, but also vital for us to write our story. And Walter had a very active role, showed a lot of dedication. He was a unique human being and you all know that. That is why on behalf of the entire Company, I would like to pay tribute to Walter for his legacy, for his hard work, and our condolences to the family, to the wife, Luciana, and all family members and friends.

Now, I will start my presentation. So, let us go straight to slide number four. The 2Q was a quarter of investment, of taking good care of our people, of our communities, and our business. We spent about R$218 million in countless initiatives that we put in place during this period. We created internal and external campaigns, as you can see here to show our solidarity, our social responsibility and our corporate citizenship, and also always focusing on animal welfare.

The next chart shows the different initiatives that we have put in place. You can also read more about them in our management report, and I would like to highlight two points here. We work with prevention, we take care of our people. We proactively put on a leave more than 8,000 employees who were high risk for COVID-19. This includes older adults and other vulnerable populations who were put on a leave and we also hired another 7,000 employees temporarily.

Of course, this had an impact on our operations and our productivity, but we know this was the right thing to do. We were probably also one of the companies that tested the most in Brazil. Thousands of tests in more than 40 different sites to strengthen prevention, so that we could take good care and preserve the lives of our people.

The next chart also shows different initiatives in commercial and logistics, institutional relations, and the BRF Institute. In the beginning of the pandemic, we announced the donations of R$150 million and this money has benefit more than 180 entities around the world.

On page number seven, we show the impact of all this. We have more than 90,000 people working for us. And during the pandemic, we conducted a survey to try to understand what their perception was, how they were feeling. And we are very happy to know that according to our employees, we were doing the right thing. We were taking the right measures and we were communicating well with our people with the right level of transparency. This shows that we have an engaged united team working toward a common goal.

Now, moving on to financials. I will not go into the details here. This information is all in our management report and we can also give you more details during the Q&A session.

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Conference Call Transcript

2Q20 Results

BRF (BRFS3 BZ)

August 13, 2020

But on page nine of the presentation, I would like to stress how consistent our results are. And this consistency was maintained through the crisis, through the pandemic, and for the fifth consecutive quarter, we are working with gross margins at the level of 24%, 25%, and our EBITDA margin at 13%. Of course, this is for recurring operations and everything we do. We also had a focal impact here, both on costs and expenses as we reported and the results for this quarter.

But it is worth noting that in addition to these identified costs, we also had further impacts. We had impacts relative to our productivity, relative to servicing certain markets, and the supply of certain products, because depending on the timing, some of our plants had to stop or reduce their production, so this could cause focal breakouts or short supplies in some markets, and this is not quantified here. But everything that we have been doing in the past two years helped us bring to you consistent and sound results.

On page number ten, we have a summary of Brazil and international results, and these are also very well detailed in our management report. And this shows how strong our portfolio and our brands are. Here, as I said, we have been working with EBITDA margins of about 14%.

But let me focus on page 11, in the part, where we talk about our market share. Our market share for frozen meals and margarines for April and May show evolution and resumption, and this was a result of our commercial strategy and the launch of products and innovations, always with the preferred brands of the market, which are always top of mind.

On the right side, we have the new reading for May and June, both for sausages and franks and cold cuts. And this precisely reflects the actions and decisions that we took and made over the course of 2Q, putting the lives of people as top priorities.

For example, in Rio Verde, the region where we have our largest processed foods plant in Brazil, we proactively and preventatively interrupted our production. That is where we had the largest mass testing effort. We tested nearly 9,000 people with PCR tests. We waited for results and only after that did we resume production, and of course, this had an impact. This had an impact in terms of supply and increased breakouts and also an impact in the mix of products, because in order to supply the market and avoid breakouts, we focus on the products with the highest volume, not necessarily the most profitable.

On page 12, we see how strong our brands are and how assertive our strategy has been. This is a snapshot of what we are selling in Brazil based on our product portfolio. Here we see two axis in this chart: evolution and growth of the products over two years, and the growth of our products over one year.

What is important to note here is that about 80% of our products are high-margin, high value-added products, which build the strength of our brands. These are branded products with the best brands. If you think of any global trade or global positioning, you will know that for these products and this type of operation, it usually has an EBITDA of 13x, 14x, and only 20% of our portfolio is made up of In Natura products with a lower added value, but still with positive margins.

And these products are commoditized products, which are traded at about 7x. So the direction, the strategy and everything that we are putting in place now has the purpose

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Conference Call Transcript

2Q20 Results

BRF (BRFS3 BZ)

August 13, 2020

of growing the Company more and more and growing these products in our portfolio more and more, as you can see here.

And in the next two slides, we show you how we have been doing this. We have numerous launches, for example, in Brazil, we have more than 56 new SKUs. You can see some of them here on this illustration.

Also, slide number 14 shows our international launches, about 57 new SKUs internationally.

On slide 15, we see our capital structure, which continues to show this positive change. We are seeking the ideal capital structure for the Company. We went from 3.74x, now we have 2.89x due to the FX effect. And if we were to calculate our leverage in dollars to remove this FX effect, our leverage would be about 2.3x, which shows the current trends and our financial discipline.

And this is also strengthened, as you can see here on slide 16, by all of the operations and initiatives that we have taken on to expand the average debt term from 3.2 years to

4.2 years, and this already considers the operations that we made in July and August or the latest operations.

Now, let us talk about our outlook for the future. We have heard about the very good results that we had this quarter, but now we are working toward preparing the Company for future growth. We have new licensed plants in different countries as you can see here, and we also had at a final stage of conclusion, we had our new sausages and franks unit in Seropedica, Rio de Janeiro, which as of 1Q21, will add an additional 30 kton per year of capacity to BRF.

We also have the new plant in Dammam, Saudi Arabia, and we have already started our expansion process to start producing in Saudi Arabia and expanding the production of process products in Saudi Arabia with the highest added value.

Before my final considerations, I would like to call your attention to this overview about the protein supply and demand globally. This chart here shows a relevant drop in the production of animal protein around the world.

And on the bottom of this slide, you see that there was an increasing trade globally, but there was a drop in per capita consumption. And this is a consequence of the growth of the population, so the population is growing, more people need to be fed, but at the same time production is decreasing. So, if we could go back to the per capita consumption of 2018, the world would have to be producing currently about 350 million tons.

And what I mean with all this is that the market will continue to demand more and more, and production is below expected to meet this demand. We have list of initiatives, we are managing the Company in a very focused manner and with an eye at our responsibility with the environment, the community, and our governance, which is a type of governance, which ranks high across all aspects.

I would like to call your attention now to the following: It is my final remarks, my conclusions and then we can move on to questions and answers. I would like to call your attention once again to this quarter's results, a quarter where we traded above 1 million tons even in a moment of pandemic.

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