JBS S A : Conference Call Transcript 2Q23

International Conference Call

JBS S/A (JBSS3)

2Q23 Earnings Results Call

August 15th, 2023

Operator: Good morning, everyone and thank you for waiting. Welcome to JBS S/A and JBS USA second 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 joining this conference call of our Q2 2023 results.

The figures we present today testify to the threat of our diversified global platform and our agility and capacity to implement the necessary operational measure to optimize both our commercial and industrial performance.

We have mentioned it in our previous call, in this quarter we execute a series of important measures to regain efficiency of Seara and US Beef. The first results have started to happen, but still below our expectation. We hope that more significant results will show in the next quarters.

Even when we face a global market marked by an increased supply of poultry and tighter margin of beef business in the United States, the promising prospect we anticipate in 2023 have begun to materialize. And although the global context remain challenging for the protein sector, we have confidence that we have started a gradual recovery of our margins. In this second quarter, we doubled our margin over the first quarter.

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Looking ahead, we see a scenario of more balanced poultry supply with potential positive impact on the sector prices. We have also started capturing the decrease in grain price in our cost structure, benefiting our chicken and pork business globally.

Australia is the great example when we speak for the strength of our global diversification by geographic and by protein type. The Q2 figures from JBS Australia show we are already capturing the benefit of a greater supply of cattle, which is reflected in the increase of our margin the region. Continuing in Australia, I'd like to highlight that Huon is performing above our expectation, validating our decision to enter in the aquaculture sector.

In Brazil, the current cattle cycle is also favorable. The expansion of sales and of value-added product strengthened partnership with suppliers and customers, increasing domestic market demand open a new foreign market reinforce our perception of a positive situation for beef in the upcoming quarters.

In the United States, the challenge of beef business will persist for the coming months considering a scenario of tightened margins with a low cattle supply. Our diversification strategy has been complemented by investments in value- added product and strong brands in the countries we operate. In the end of March, we started producing breaded product in our plant in Rolândia, state of Paraná, in Brazil, and the results of this operation are promise.

Even with market challenge, we had a relevant cash flow generation and with that we kept our net dollar debt stable compared to the first quarter of 2023, while investing in expansion of our operation and distributing RUS$2.2. billion in dividends. The increase of our leverage was expected, and we prepared ourselves for this moment, even extended the average terms of our debt, increased liquidity, and reduced the cost of our debt.

All of these factors reinforce our review that JBS has a unique position in the global protein industry, and we believe that the competitive advantage of our diversified global platform have not yet been fully recognized and priced by the market. That's why we see our dual-listing proposal, announced in July, a transformational step to build a new growth avenue just as our IPO was in 2007. Our dual-listing strategy will give us more flexibility to financial our growth and deleverage, in addition to reduced capital costs.

We will have access to a broader investor base with greater financial capacity, favoring the unlocking value of our shares and expanding our investment capacity. With the registration of our bond in the United States, we are now a company regulated by the Security and Exchange Commission and will also disclose our financial results in US dollars. This is aligned with our investors for an easier comparison of our performance against our global peers.

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We must also mention that we have begun this August the celebration of JBS 70 anniversary, a company that started as a small butcher in the countryside of Brazil and today one of the largest food company in the world.

We are confident that with the diversification global platform, our culture, and our people, we will continue to generate value for all stakeholders and create opportunities for the communities and for our more than 260,000 employees worldwide.

We also thank you for closely follow our journey and now I hand over to Guilherme, who will detail our results. Guilherme, please.

Guilherme Cavalcanti: Thank you, Tomazoni. Before moving on to the operational and financial highlights, and in addition to the comments already made by Tomazoni on the dual-listing, I would like to emphasize the need for our investors to participate in the shareholders' meeting that will address this topic. We do not doubt the potential of unlocking value that an event of this magnitude can bring to the company and its shareholders.

Moreover, last year, several bondholders requested that we register the JBS bonds with the SEC. We have attended that request in July, we obtained the effectiveness of the registration of the 11 senior notes that we have. This important step is essential to expand the investor base, increasing liquidity and investors' confidence.

Since we announced the registration on May 19th, our spread over treasury has dropped approximately 1 percentage point, reducing the company's cost of capital and the interest rates on future funding. With this registration, JBS became a public reporting company disclosing its information to the SEC as of this quarter. We will be filing using the 6K form with financial statements and press release in US dollars. This is aligned, as Tomazoni mentioned, with our investors' desire to be able to better compare JBS with its international peers. It's also aligned with the company's operating structure, which has the majority of its revenues in dollars.

Therefore, starting next year, JBS will become a Sox compliant, having financial statements in PCAOB standards, will be subject to FCPA compliance, as well as other factors that contribute to the company's governance. And the dual listing has the potential to introduce further governance enhancements.

In June, we also announced the payment of interim dividends in the amount of US$448 million, equivalent to US$0.20 per share. Let's now move on to the operational and financial highlights for the second quarter of 2023 starting with slide 12, please.

Net revenue of the second quarter was US$18 billion. Adjusted EBITDA totaled US$903 million and represents a margin of 5% for the quarter. Net loss of US$53 million for the quarter. As we mentioned on our last earnings call, we

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were confident in the gradual improvement of results when compared to the weak performance of the first quarter, and this materialized in the second quarter. This confidence of ours is based upon the strategy of geographic and protein diversification, but also on the full confidence of our ability to execute which is fundamental in this industry given that were quickly able to identify our internal issues and address them appropriately.

Please, now move to slide 13. Operating cash flow in the quarter was US$1.1 billion, an important improvement when compared to the first quarter. This result is due to the improvement in the operating income and working capital which had a positive impact of US$355 million. The main gains came from the improvement in Accounts Receivable and reduction in inventories as a result of reduction in the price of raw materials, mainly grains and live cattle in Brazil, and also from the company's better commercial and operational management.

I would like to highlight here some important updates that we committed in the last quarter. The first is related to grains. We mentioned that we would potentially have a gain of US$240 million in the year in terms of grain prices, now we are estimating US$450 million because, due to the decrease in grain prices, mainly corn, and we already have captured US$150 million this quarter and we project to capture another US$300 million in the second half of the year.

Regarding taxes, demonetization of tax spreads of US$100 million already happened in the second quarter. Additionally, the tax to be refunded of US$85 million in US already had a US$30 million impact in the second quarter and the remaining entered in July and therefore it will appear in the next earnings release.

Finally, we had mentioned a reduction of US$250 million of finished goods inventory for the year and there has already been a reduction of approximately US$110 million in the second quarter. Capital expenditures in the quarter was approximately US$394 million, which 51% relate to maintenance Capex. So, considering the above factors, free cash flow for the quarter was positive in US$366 million.

Moving on to the slide 14, we have the evolution of our debt profile. Net debt at the end of the second quarter was US$16.7 billion, practically stable compared to the first quarter. The Adjusted EBITDA of US$903 million and the improvement in working capital of US$355 million were sufficient to the payments of the dividends in the amount of US$148 million, capital expenditures in the amount of US$394 million and accrued interest of US$263 million.

Net interest expense for the quarter was US$265 million, flat when compared to the previous quarter. It's worth mentioning that 75% of our debt is in the form of dollar-denominated senior notes with a fixed interest rate. Leverage in dollars increased to 4.15, the increase is explained by 56% reduction of the EBITDA of the last 12 months ended in the second quarter when compared to the same

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period of the previous years. However, our average debt term is quite comfortable in 9.3 years with the first major maturity occurring only in 2027.

Let's now go quickly through the business units. Starting in Seara on slide 15, net revenue for the quarter fell 3% year-over-year, reflecting lower global poultry prices due to a global oversupply. On the other hand, profitability improved sequentially as a result of operational corrections to the problems we faced in the previous quarters. Furthermore, I would like to point out that the new chicken breaded plant inaugurated in the first quarter is at an accelerated pace of production and with good sales performance, further reenforcing the growth of value-added portfolio.

Moving now to slide 16, JBS Brazil registered a stable net revenue in relation to the same period of the previous years. Beef exports reported a growth of 10% in net revenue and 2% in the domestic market in the annual comparison. It's worth noting that the results for the first quarter were impacted by the self- embargo of beef exports to China after the confirmation of an atypical case of BSE. That generated a larger inventory of beef in the domestic market and a decline in exports for the period.

Thus, with the end of the self-embargo and favorable beef cycle in Brazil coupled with a greater international demand for beef, both sales and profitability were positively impacted in the second quarter.

Moving on to slide 17, and in US GAAP from now on, JBS Beef North America net revenue grew 5% year-over-year and EBITDA margin was 1.4%. Although profitability still reflects the turn of the cattle cycle in the annual comparison, the sequential improvement in profitability is a result of a favorable seasonality in the period and the operational and commercial improvements implemented during the quarter.

Moving on to slide 18, we have JBS Australia. Despite the drop in consolidated net revenue in the annual comparison, EBITDA margin grew significantly to 8.6% in US GAAP. This improvement mainly reflects the lower purchase price of live cattle given the greater availability of animals due to a more favorable cycle.

Moving now to JBS USA Pork, net revenue for the quarter was 16% lower compared to the second quarter 2022. The main impact in the business unit continues to be the oversupply of pork in the domestic market, which pressured results for the period. On the other hand, according to the USDA, inventories are on a downward trend, which could benefit the rebalancing of supply and demand in the medium-term.

Pilgrim's Pride, on slide 20, presented a reduction in net revenue of 7% in the second quarter in the annual comparison. In the USA, despite still an adverse scenario in the prices of products for the use of raw materials (big birds), we

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