BRF S A : Transcript - 3Q22 Earnings Conference Call

Conference Call Transcript

3Q22 Results

BRF (BRFS3 BZ)

November 10, 2022

Operator:

Good morning, ladies and gentlemen. Welcome to the BRF teleconference regarding the results of the 3Q22.

This teleconference is being recorded and the replay can be accessed in the site of the Company. It is available for downloading at ir.brf-global.com.

All the participants are connected only as listeners now, and afterwards we will have a Q&A session, and more instructions will be provided.

Before we continue, I would like to reinforce that these information they have as the basics the expectations, beliefs and assumptions of BRF and the information available to the Company. Such statements do not correspond to historical facts, and they are based on currently available competitive financial and economic data, according to the circumstances that can occur, they can change.

We have Mr. Miguel Gularte, CEO; and Fabio Mariano, CFO. I would like to give the floor to Mr. Miguel Gularte, who will start the presentation. Please, Mr. Miguel.

Miguel Gularte:

Good morning. I would like to open this results teleconference. The first in BRF thanking all of you that are connected today. I am very excited to be in the BRF team and be able to contribute to such a relevant company in the food industry. We have iconic brands in its categories, excellent portfolio of products and an appropriate infrastructure.

I would like to give the floor to Fabio Mariano, who will present the results of the 3Q22, and I will come back later.

Fabio Mariano:

Good morning to all of you connected today. I will highlight the main financial results for the quarter. Starting with net revenues, we can see an evolution of 13% compared to the same period in the previous year. we have achieved more than R$14 billion.

Right below I present to you our adjusted EBITDA, R$1.4 billion more or less, similar to the same quarter in 2021, and this is a margin in EBITDA of around 10%. The net income was a loss of R$137 million, half of what was reported in the same period in the previous year.

Moving to the right, we have an operating cash flow above R$1.3 billion, a little bit under previous year. However, we have a sequence being proven here from the beginning of 2022. So it is 40% above the previous quarter, even considering a very similar EBITDA. In the working capital, although we have some seasonal advancements in the festivity crops and the second crop. We have noticed a reduction in some of the main products. We have a reduction along the third trimester, the 3Q and we have also worked with our suppliers.

Moving to the net leverage, we have reached 3.26x. The EBITDA of the last 12 months. still under the influence of a common performance in the 1Q, and this indicator was also impacted by the real depreciation. We are putting our effort to have the cash flow

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Conference Call Transcript

3Q22 Results

BRF (BRFS3 BZ)

November 10, 2022

generation as an engine for our net income so that the leverage will go back to appropriate levels.

Finally, I would like to highlight that our indebtedness days, we are still comfortable our period about 8 years. And in the next slide to the left, we have the growth profit evolution, we had around 18% and the gross profit around R$2.600 million. And to the right, we can see the adjusted EBITDA evolution, a performance that has been already highlighted. In the following slides, I would like to present the performance by business segments in the market.

Starting in Brazil, we have a sequential evolution of EBITDA every quarter about 2022, but still below or lower than what our brands usually perform our products and all the infrastructure that we have.

I would like to highlight in the Brazilian market, some important evolution in the number of active customers that will allow us better competitiveness in the following quarters. We have also portfolio simplification and also the items sold to the customers.

With improvement in the market, we have a decrease in the low profitability SKUs, improvements in market share and brand visibility initiatives. We had a significant improvement in our service levels in the secondary logistics, we had, as I said, improvements in the market share and brand visibility, mainly in margarines, cold cuts and meat products. And also, we have a 4Q with significant investments in media. I would like to highlight the investment in the World Cup streaming. We have a lot of visibility for our brand.

In the Halal segment. The chart to the left, we can see the EBITDA and margins back to historical levels as a result of more normalized offer in the region.

We have the impact of the price peaks that we have tested in the previous quarter. Turkey is still a challenge, the macro and microeconomic scenario. we increase in exports and value-added products in order to maximize our results and protect also the operation from the Turkish lira influence. We have also the added value products, expanding its sales.

We can see high levels in Halal here in market share when we assess the levels of the last years and months. And also, we have an increase of exports to the region.

And I would like to close here with two highlights. First, the joint venture with PIF, an important movement with an ideal partner that will allow us through this alliance to develop the Arabic market and keep on consolidating our presence and leadership in the country. Also, the JV investments cannot be different.

They are being discussed jointly with the partners. And the business plan will be totally in compliance with the strategy to the region. Second, we have to do with the expansion of sales in added value products in the region also during the World Cup. This added value items is about 21% of our portfolio in direct exports.

In the chart 2, the left, we see the stability of the margins at a very high level. we have included a mix of products in the region, and we have expanded our performance in chicken export to Africa and other regions. To the right, we see the higher prices to the portfolio that serves the region, especially a very positive trend to pork.

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Conference Call Transcript

3Q22 Results

BRF (BRFS3 BZ)

November 10, 2022

We believe that the sanitary issue. The avian influenza for United States and Europe, this can impact positively the prices in this segment. We are prepared to capture opportunities both in the price variables and other aspects. We also bring now the development in Asia. Here, we can see a better profitability performance.

We have left the 3Q with this 12.5% in the EBITDA margin. We have reached 12.5% in the 3Q. To the right, we have seen prices positively responding between quarters in the market as Japan, Korea and China, both for chicken and pork, the last one with a relevant recovery throughout 2022. We have gained participation in the chicken exports to China and pork exports to Singapore.

I end the presentation of the business segments in the next slide with the development of ingredients and pet food. We had 21% of EBITDA margin, equivalent to R$143 million. We keep on capturing synergies in pet food. We have advanced also in the GTM plants, and we have expanded the portfolio to Gran Plus and BioFresh brands.

In Ingredients, we have an expansion of market alternatives and first sales to Thailand, and we are putting our effort to maximize the integration of our business, and consequently, our profitability.

In the quarter, we had some highlights in sustainability. We can see on the next slide some, conquers like the environmental seal by the Abu Dhabi Environment Agency, acknowledging our environmental practices in the Kizad plant. Also, we have been using satellite technology, tracking more than 95% of direct grain, and we are reaching our goal of 100% of traceability for grain suppliers in the Amazon and Cerrado biomes.

We keep progressing in our clean energy generation with the use of solar panels in many companies integrated production, and also recognized for the third consecutive year with the Gold seal by the GHG Gold program.

Now we will present the information related to the capital structure of the Company. To the left, you can see the evolution of the net debt and net leverage. We had the indicators that have been presented already in the beginning of this presentation. I would like to call your attention to those that are connected to two aspects. First, this indexation of the gross debt, the strong currency, we have reached in dollars here, these figures. And this allowed us to change our indebtedness profile, eliminating the need to use intensively derivatives. We have this coverage of our exchange.

And the second aspect is the amortization profile. We have short-term amortizations combined with a high liquidity position equivalent to more than R$12 billion, when we consider the cash flow condition and the revolving credit lines that have already been negotiated or promised.

In the next slide, we show the free cash flow. This chart will highlight R$1.3 billion, and this investment flow of R$1.6 billion without finance activities. We have an operating cash flow of R$355 million, free cash flow, or R$226 million free cash flow if we include derivatives, and also the cash flow variation. The cash flow has been recovering sequentially every quarter, as we show in this chart, the smaller charts here in this slide.

In the final slide, we can see the evolution of the net debt besides the consumption here that we had. We had a negative impact of the exchange rate. And if we consider both results combined, R$0.5 billion in the indicator. This was the variation. I thank you for the audience, and I will give the floor to our CEO, Miguel to the final remarks.

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Conference Call Transcript

3Q22 Results

BRF (BRFS3 BZ)

November 10, 2022

Miguel Gularte:

Thank you. I would like to close this teleconference on results. Talking about my first impressions in more than 45 days in BRF. I found a company with professionals, very competent professionals in all levels, very well-developed indicators that will certainly allow us to take from the Company, the performance that the market expects that we can deliver.

We have an appropriate footprint. We have powerful brands, brands present in 95% of Brazil's households, very consistent. They will allow us to build in 2023, a very appropriate performance to our excellent potential.

In the time lapse, we can already see clearly the improvements at our reach. We have the sense of emergency and consistency in execution using methodologies and indicators that are available, and together, we will build the performance that is expected.

We need and we are going to advance in our energy efficiency. We are going to prove the index in mortality, profitability, both in slaughter and boning, and constantly, we will improve our factory index. We will improve our time worked without hampering or jeopardizing the costs. And certainly, this will bring to BRF, the performance and reliability that is expected.

Our work together with the Board and the other levels of the Company. We will go through the fine-tuning of our performance and operational performance. We are building a solid benchmarks, and we should, as always, keep on investing in capacity building and training of our collaborators. This is basic and critical to this high labor business.

The geographic location of our grains purchase they are very competitive aspects that should be enforced so that we can have a more balanced supply chain that is flexible and dynamic. We are going to improve our price system and inventory as well and flexibility to the domestic market and exports.

So that in the perfect timing, we can have quickly a more agile and flexible company. We will keep on diversifying our market, focusing on profitability, and we should not forget the improvement of our industrial park for the demands in the world. We have more than logistics. We are focusing the improvement of fleet, the improvement of the service level to customers. And we will work to better be facing and optimizing the energy costs.

We will continue to improve services and commercial performance. We will, in the brands, continue to invest in communication, looking for innovations and a better profitability profile. Environment is critical, and we are going to be very strict working in the short and long term and not jeopardizing the future. We will be reasonable, and we will have our incentive models to faster the execution of our tasks and improve our performance.

I would like to close the presentation with this conviction of more than 80 years of history, we have this latent performance culture that will be consolidated with the delivery of these results. Agility, pragmatism, focus and rationality, we are totally sure that it is possible that we are able to deliver and fulfill our commitment. I would like to thank you all and reinforce our commitment with more than 89,000 collaborators, our controller, our shareholders, our Board of Directors, customers and partners and everywhere, BRF is present.

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Conference Call Transcript

3Q22 Results

BRF (BRFS3 BZ)

November 10, 2022

We will continue to evolve with the Company so that it is more and more competitive in the world. Thank you. We will now start the Q&A for investors and analysts.

Gustavo Troyano, Itaú BBA:

Good morning. I have two questions here, specifically for you, Miguel, focusing on your final message, focus on operational performance and productivity. I would like to focus on this topic, in an exercise to understand what is the main opportunity that you have managed to map so far in terms of operational improvement and maybe the main challenge, anything that you could advance in this topic would be great.

And then the second question would be more related to market. Here, I would like to hear your vision, the exports of corn from Brazil to China. And I would like to ask if this could be a challenge in terms of grain exports in the short, medium term, and the level of current stock, if this is enough to off balance this situation with the corn. Thank you.

Miguel Gularte:

Good morning, Gustavo. Thank you for your question. I will start by answering and then Fabio will speak about the grain scenario.

We have started this effort at BRF, as said, 45 days ago more or less. And the first thing was to have a diagnosis and an action plan very carefully by using our leadership. So, you do not run the risk of not getting where you want to get, which is way out there at the production. So, we have united all the leadership, all the management, and then we worked in a very detailed way in all the aspects that plan goes through field base, people, industry.

And to give you an example, we have a labor intense industry with over 98,000 employees. So, in this kind of industry, you need to work on the main indicators. So, we must work on employees' attendance, not to have so much absenteeism from our employees. We need to work on conversion centers, both for pork and mortality for pork as well as poultry. If we go into the industry, you must look at the fixed cost, but we must also work on productivity in terms of slaughtering or boning and so on.

So, this is a transformation industry. So, you need a processing industry. So, when you have slaughtering activities, you must follow this in depth. When I talk about optimizing indices, it's very important to stress something that's important at BRF. If I were to compare this information at BRF, when you have a car, and you have a 3D panel, with these precise indicators, the main challenge is to build an indicator that is reliable and applicable. And here at BRF, they are very precise, very accurate. So, the information is accurate.

So, the information is accurate. So going into logistics, if we are working with the logistics area, to improve efficiency. I am talking about the lead; I am talking about rationalizing the network. So, we are working specifically on logistics.

If I work on planning, it's very important. We are working very hard on this. We have a pricing system that connects all the areas. So, we have a company that needs to be agile to take the right decisions. So, if you have a pricing system, you need to be assertive in your decisions, and you manage coordinating exports, domestic market segments as Halal.

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