International Conference Call JBS 4th Quarter and 2010 Earnings Results March 24, PDF

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International Conference Call JBS 4th Quarter and 2010 Earnings Results March 24, 2011 Operator: Good morning everyone and welcome to JBS S/A s Conference Call. During this call, we will present and analyze
International Conference Call JBS 4th Quarter and 2010 Earnings Results March 24, 2011 Operator: Good morning everyone and welcome to JBS S/A s Conference Call. During this call, we will present and analyze the results for the fourth trimester and the year of As requested by JBS, this event is being recorded. The recording will be available to listeners this afternoon and can be accessed by following the instructions posted on the Company s website at Taking part in this call we have Mr. Wesley Batista, President and CEO of JBS S/A; Mr. Jerry O Callaghan, Investor Relations Officer and Eliseo Fernandez, Chief Accounting Officer. We will now hear Mr. Jerry, who will proceed with the call. Please go ahead sir. Mr. Jerry O Callaghan: Thank you, thank you and good morning. Good morning all and thank you for being here with us today as we review our performance during 4Q and the year Last night we file the document with CVM (the Brazilian Securities and Exchange Commission) in which we summarize the highlights for the quarter and the year. This document is available on our webpage at where you will also find the updated version of our Company s presentation, which includes the results presented here today. Today we will not only analyze the results for the quarter and the year, but we will also analyze the main drivers for our business in After our presentation we will open the call for a Q&A session, in which we will be happy to answer your questions and clarify your doubts. Taking part in the Q&A session will be, besides myself and Wesley, Mr. Joesley Batista, Chairman of our Board; Mr. Don Jackson, CEO of JBS USA and Mr. André Nogueira, CFO of JBS USA. Before we begin I would like to remind all of you that during this call we will refer to the expectations for future results, sales, costs and we will analyze what we believe to be the perspectives for our business. Please read the disclaimer on our website, which further explains the risk factors. Now I would like to pass on to Wesley Batista to proceed with the presentation. Wesley. Mr. Wesley Batista: Thank you Jerry, good morning everyone and welcome to our call. I would like to begin by thanking our team for their immense dedication, effort and commitment to our Company. Without doubt we would not have reached or achieved what we have in 2010 if it were not for this team. We count on all of you in continuing quest for excellence. 1 In 2010 our revenues surpassed R$ 55 billion with an Ebitda of R$ 3.75 billion and an Ebitda margin of 6.8%. These numbers place us among the main companies of our sector in the world and also rank us among the three major Brazilian companies. During 4Q our revenue amounted to R$ 14.3 billion with an Ebitda of R$ 866 million and an Ebitda margin of 6% for the period. Consolidated JBS presented an organic growth of 14.2% in net revenue in local currency in It is important that we consider that the real has appreciated 12% against the US dollar when compared with the average rate for This factor hides the perception of our organic growth; however, by excluding this effect our organic growth surpassed 14%. The organic growth of our North American operation is worth highlighting. The US is a mature market and we achieved a revenue growth for the beef business unit of 16.7% in 2010 and of 33.9% in the last two years. In the pork business unit we achieved a historical growth of 31.7% in the last year and 52% in the last two years. Pilgrim's Pride grew 10.3% in revenues since we bought the company. In our Mercosul operation, despite the relative shortage of raw materials we achieved an organic revenue growth of 13.7% last year. Our exports amounted to US$ 8.5 billion in sales and grew 20% in volume in Now I would like to turn back the call to Jerry O'Callaghan who will talk about our business unit and our balance sheet. Jerry. Mr. O Callaghan: Thank you Wesley, thank you. Referring individually to each business unit and beginning by our Mercosul operations we observe a gradual improvement in the recovery of the livestock cycle in Brazil. We had a year last year of merging and integration of the Bertin operations, which helped boost our revenues from R$ 5.8 billion in 2009 to R$ 13.3 billion in 2010, 129% increase. Our Ebitda margin, which was 5.5% in 2009, reached 9.7% last year. In the quarter we had R$ 3.3 billion in revenues and an Ebitda R$ 238 million with a 7.1% Ebitda margin. I would like to highlight some relevant factors regarding our operations in Mercosul: the number of animals slaughtered increased 62% year over year and average sales price grew 20%, both in the domestic market as well as in the export market. For 2011 we believe that the improvement in the availability of raw materials; strong growth in demand - both domestically and abroad; combined with the synergies yet to be captured will lead to a strong performance in our Mercosul operations. In our US beef business unit (which includes Australia) our sales amounted to US$ 13.1 billion in 2010 against 11.2 billion in 2009, a 16.7% increase. Our 2 Ebitda was US$ 663 million in 2010 against 398 million in 2009, a 66.5% growth. Ebitda margin increased from 3.5% in 2009 to 5.1% in In the quarter our revenues amounted to US$ 3.6 billion, a 27% growth over the same quarter of the previous year. The Ebitda during the quarter was US$ million, 54% increase over 4Q09. Ebitda margin in the quarter was 5.4%. Some highlights in this business unit are the 2.3% year-over-year growth in the number of heads slaughtered and the increase in average prices of 6.4% domestically and of 23.9% in exports. For 2011 we believe in the sustainability and improvement of our margins due to the continuity of the actions initiated when we bought this company. These actions are: one, the improvement of carcass yield; two, the increase in sales of products with higher aggregate value and exports growth - and it is worth noticing the favorable moment for the American exports brought about the depreciation of the US dollar. In the North American pork unit our sales grew 31.7% from US$ 2.2 billion in 2009 to US$ 2.9 billion in Our Ebitda increased from US$ 76 million in US$ 2009 to US$ 276 million last year, a remarkable growth of 263%. The Ebitda margin increased from 3.4% in 2009 to 9.4% last year. In the quarter revenues grew 32% to US$ 799 million when compared with the same period of the previous year. The Ebitda in the quarter was US$ 102 million, 258% higher than 4Q09 with an Ebitda margin of 12.8%. Some relevant factors to highlight in this business unit are the 3% growth in the number of heads slaughtered on a year-over-year comparison; the 21.6% increase in average sales prices in domestic and 26.8% increase in the export volumes. With strong demand and increase in exports plus the balance between installed capacity and raw materials supply in 2011 we are working to improve on last year's results. Pilgrim's Pride, our chicken business unit in the US (and a listed company) has already published its results, but I would like to take this opportunity to congratulate all of those whose hard work helped rebuild the company that emerged from bankruptcy a year ago and which has presented Ebitda margin of 7% in has begun with a challenging environment due to the high price of grains, especially corn. However, we believe that we will be able to pass this impact on to our sales prices. Here it is worth highlighting some factors that lead us to believe that the industry will be capable of overcoming this challenging moment. These factors include: we begin to notice a reduction in chicken production in the American market; we 3 see strong competitiveness of American chicken in the international market due principally to the depreciation of the dollar. To give you an idea of the situation, currently the US produces chicken as cheap as, or even cheaper than Brazil. Also the strong increase in beef and pork prices contribute with the growth of world chicken prices and consumption. And finally as a factor the gradual recovery of the American economy. Now moving on to our financials I would like to talk about the financial numbers now. We had closed 2010 with US$ 2.4 billion in cash and US$ 500 million in additional availability. Our leverage closed the year at 3x, a small increase when compared with the previous quarter. This increase is due primarily to the payment of R$ 521 million to the debenture holders and also to the buyback of stocks totaling R$ 208 million in the quarter. Our debt profile is 33% in the short term and 67% in the long-term, with 50% of this debt in foreign currency. Our receivables grew R$ 700 million year on year and our stocks grew by R$ 1.3 billion. These increases incurred due to the growth in our revenues; a significant increase in our exports and the improvement in the utilization of available capacity in our production plants. When we look at our net debt we noticed it increase exactly the same amount as our stocks and receivables. I would now like to pass you back to Wesley for his final concentrations before we open our Q&A session. Wesley. Mr. Batista: Excuse me, thank you Jerry. As we look back we realize much has been done. When we look forward we see that there is still a lot to do. So in 2011 we begin a new phase for our Company, that is, time to collect the positive results of everything we have done and invested. We will continue to work on our target to be an integrated global food company and on our constant search for new clients and markets in order to expand our distribution channels and exports. We will be completely focused on obtaining the highest possible return for our investment, thus creating value for our shareholders. I would like to take the opportunity to report that we have begun the process of listing our stock in the American market through ADRs level II and that we will be filing the process with SEC and CVM during the following weeks. We hope to be listed by the beginning of the second semester. We believe this is a very important step in creating our liquidity in increasing our liquidity accessing new investors and thus contributing to the creation of value for our shareholders. We are working with a macroeconomic scenario of increasing demand, global demand for protein, especially in the emerging 4 economies and of a stable production in our productive sector to meet such demand. We are confident that our Company's performance will improve substantially. Our challenge is to continue being a company with gross revenue while maintaining our simplicity, efficiency, concentration and traditional dynamism. To achieve this we will work together consistently, perennially and focused on growth. Without the effort and cooperation all of our employees we would never have achieved that we have today. We thank all of those who believe and invest in our company. We count on the support of all your partner suppliers, clients, shareholders and other stakeholders. Would this we end our presentation. Please operator open to Q&A. Q&A Session Operator: Thank you. Ladies and gentlemen, we will now begin the Question and Answer session. If you have a question please press the star (*) key followed by the one (1) key on your touch-tone phone now. If at any time you would like to remove yourself from the questioning queue press star two (*2). Excuse me. Our first question comes from Mr. Luiz Cesta with Votorantim Corretora. Mr. Luiz Cesta: Hi good morning everyone. Mr. Batista: Good morning Luiz. Mr. Cesta: I am just trying to understand your general and administrative expenses in 4Q10, which represented 3.5% of revenues and it was like 2.5 in 3Q; so could you just compare this 3.5 with what would be your G&A on a pro forma balance sheet of 4Q09? And it would be also good if you could give us a sense of what is the level of G&A that you believe to achieve the full year of Thanks. Mr. Batista: Luiz this is Wesley. We had this question in the call, in the earnings call in Portuguese and we checked the numbers here. The difference between 3Q and 4Q is primarily the accrual of our bonus payment in Pilgrim's Pride and the whole US and Brazilian operations. So we have a very large number in 4Q that we accrued to pay the bonus in So this is primarily the reason for this increase. Mr. Cesta: Ok so we can assume that for the full year of 2011 G&A will likely represent the same 2.5% that you achieved in 3Q or something above this number? 5 Mr. Batista: Well, when you look at our pro forma number, Luiz, in 2009 (including Bertin and including PPC) our pro forma number in the footnote 5, page 15 in our financial statements report, we had R$ 4.8 billion in 2009 and in 2010 we had R$ 4.3 billion, so the number is quite the same, a little reduction from 2009 to So you can consider the same kind of number of percentage. Mr. Cesta: Ok thank you very much. Mr. Batista: You are welcome. Operator: Excuse me. Our next question comes from Mr. Fernando Ferreira with Merrill Lynch. Mr. Fernando Ferreira: Thanks for taking the question. I have two questions, the first one you mentioned on the other call that you are planning to exchange part of your debt from JBS S/A to JBS USA to improve your capital structure. I would like to understand how much could you switch from JBS S/A to JBS USA and how much of tax credits also and goodwill you can start to release in JBS S/A following that process. Mr. Batista: Fernando yes, you are right. We mentioned in the last call that we are looking to balance our debt. We have an inefficient capital structure today because we have goodwills to be amortized here in our Brazilian operation and the vast majority of our debt is in Brazil today. So we are looking to rebalance this debt and it should be more efficient. We are looking to complete this rebalancing in our debt in the next three months. We will have around US$ 100 million in better around US$ 100 million benefit from this restructuring in our debt structure in the bottom line. So we are looking the amount of that that we want to reallocate to our US operation. We are not finished, 100% finished in this number; but it will be around... to be balanced we should put around US$ 2 billion or more in the US to be balanced. Mr. Ferreira: Ok but this is not new debt, right? Mr. Batista: No. This is not new debt, so it is only to balance. If you put that better you will pay down debt here. Mr. Ferreira: Ok and just a follow up question to the increase in G&A: do you have any concerns about the labor shortage we are seeing especially in Brazil given that cattle and beef production are very labor intensive? Do you see pressure from higher G&A expenses or costs related to labor in 2011? Mr. Batista: Fernando no. Of course we are running much shorter than we used to run our business in Brazil in terms of labor availability; but we do not expect any major or any meaningful impact in our G&A cost because of this, so 6 we are confident that we will be able to run the plans and that we will have enough labor available. But we do not expect a meaningful impact in the cost. Mr. Ferreira: Ok thanks Wesley. Mr. Batista: You are welcome. Operator: Excuse me. Our next question comes from Farha Aslam with Stephens Inc. Excuse me Farha Aslam your line is open. Mr. Batista: Hi Sarah. Ms. Farha Aslam: Hi. Jerry and Wesley could you comment on the recent events in Japan and the Middle East? Have there been any benefits or disruptions to your businesses around the world as a result of these two regions? Mr. Batista: Farha in Japan of course it is a very sad situation in Japan; but for our business we are seeing a quite strong demand. People are quite short in meat in Japan, the retailers, so our Australian operation is getting a benefit on this shortage. We are seeing prices moving up especially from our Australian operation, so demand is quite strong in Japan and we believe that we will keep seeing demand strong Japan. People are trying to build some inventory in their homes to make sure that they will not run short in food, so this is increasing demand. In terms of the situation in the Middle East until now we pulled back from our Brazilian operation a little bit to the Middle East especially to the Egyptian market last month, now we are restarting to ship products to Egypt. So we are not seeing a major impact yet in the Middle East. Of course we are monitoring the situation over there and we will keep looking what is going on there to make sure that we are on top of the situation and we will not ship products if the situation starts to deteriorate. Ms. Aslam: Thank you, that is helpful. My second question relates to Pilgrim's Pride. The 23% that JBS currently does not hold of Pilgrim s now that you have a US listing are you thinking of potentially folding Pilgrim s into that listing? Mr. Batista: No Farha. We are... our provision in Pilgrim's Pride's acquisition does not contemplate to exchange this in ADRs. Our agreement only contemplates if we become a public company in JBS USA, listed in the United States we can do this merger. But in our agreement we do not contemplate that we can exchange in ADRs. So we are listing... actually we are moving; we already have ADRs level I and we are moving to ADRs level II. But it does not contemplate the possibility to do this. Ms. Aslam: Great, thank you very much for your comments. Mr. Batista: Welcome Farha. 7 Operator: Excuse me. Our next question comes from Mr. Aaron Holsberg with Santander. Mr. Aaron Holsberg: Yes good morning. I just wanted to ask... hi. If you have any plans to turn down your average maturity. I noticed you are still at 33% short-term debt. Mr. Batista: Aaron we feel that one third of our debt is in the short-term. We feel that this is a level that is an appropriate level. When you see our cash position we have today US$ 2.4 billion in cash plus US$ 500 million in availabilities. So all our short-term debt we have cash or cash available that is the same amount of our total short-term debt. So we are comfortable with this third in short-term and two thirds in the long-term. Mr. Holsberg: At this moment the bond market is very favorable and many other Brazilian issuers are doing 10 and even 12-year deals; might JBS consider coming to market? Mr. Batista: Look JBS S/A from our Brazilian operation we are not looking to go to the market. Like I mentioned before we are looking to rebalance our debt and to be more efficient, to have a better capital structure, to be more tax efficient. We are looking what kind of transaction we may do in our US operation to balance this debt. This is what we are looking for. But this does not mean that we will issue a bond or... we are analyzing all the alternatives that are in the market today to see what is the most efficient way to balance and to be efficient in our capital structure. Mr. Holsberg: Thank you. Mr. Batista: Welcome. Operator: Excuse me. Our next question comes from Ms. Carla Casella with J.P. Morgan. Ms. Carla Casella: Hi, this is Carla Castella. One more clarification question on the debt that you may issue in the US: is that R$ 2 billion that you will take to the US or US$ 2 billion debt? Mr. Batista: Hi Carla. Look, we are not done in our analysis. We are not making an affirmative statement here that it is 2 billion; but if... it is around this number if we to be balanced in terms of leverage between the US and the Brazilian operation we should put US$ 2 billion, US dollars, not reais. Ms. Casella: Ok that was very clarifying. Thank you. Mr. Batista: Thank you Carla, welcome. 8 Operator: Excuse me. Our next question comes from Mr. Juan Raffetto with Metlife. Mr. Juan Raffetto: Hi good morning. Mr. Batista: Hi Juan. Mr. Raffetto: Just a question on your Capex plan for 2011; how much more or less do you plan to invest and in which of the operations? And also a bit of comment on your capacity utilization last quarter. Mr. Bati
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