JBS S.A.’s history and tradition spans over 60 years, and is a global leader in the processing of animal protein. Present in more than 20 countries, JBS has more than 300,000 customers in more than 150 countries through a diverse portfolio of products and brands. Headquartered in Brazil, JBS employs more than 216,000 people throughout its production platforms and sales offices. The operational structure includes beef, pork, lamb, poultry and hides/leather processing facilities, in addition to feedlots. JBS’ main clients are wholesale and retailers chains, foodservice – restaurants, hotels, catering and others.
In Brazil, GDP increased by 0.2% in 2014, with the inflation print in 2014 for food and beverage at 7.83%. Cattle prices in Brazil increased 25% when compared to 2013, mainly on the back of a higher demand, draught, multi-year decline in herd sizes, and exports (beef exports recorded a growth of 4.1% in volume and 7.9% in revenues over the previous year).
According to the Brazilian Association of Beef Exporters (ABIEC), the scenario for 2015 is expect to remain positive, as, in addition to expected announcements of trade agreements with new export markets, such as the US, the association has taken several initiatives to promote Brazilian beef around the world.
According to the executive president of Brazilian Association of Animal Protein (ABPA), Brazil is the world’s largest poultry exporter, shipping products for more than 150 countries. 2014 was positive for the poultry market, following the decline in the cost of grains, mainly on the back of the international impact caused by the record crop of corn and soy in the US, in addition to good availability of grains in Brazil. This trend is expected to persist in 2015, as the market forecasts that the US, Argentina and Brazil have a record grain crop in 2015.
The reopening of new markets for poultry meat also contributed to the export mix in the second half of 2014, highlighting the Russian demand and the reopening of South Africa, indicating that Brazil continues to access new markets. Yet, the real devaluation against the US dollar benefited the poultry producers, since Brazil is the largest exporter of this protein in the world. In the domestic market, poultry meat is currently the most consumed protein.
2014 turned out to be a positive year for JBS, as the company continued to harvest from the transformational movements carried out in recent years. Management stated that the timing of acquisitions carried out over recent years have been opportunistic and are feeding positively into bottom line as in 2014, the company generated more than R$120 billion in consolidated net sales in 2014, an increase of 30% compared with 2013 making JBS the largest Brazilian private company in terms of revenues whilst in 2014, JBS was also ranked the second largest food company in the world.
EBITDA was R$10.3 billion, which represents an increase of 67% over the previous year, with an EBITDA margin of 8.2%. Net leverage (Deb-to-EBTIDA) was reduced from 3.74x in 2013 to 2.24x in 2014, and management stated that it remains committed and focused on deleveraging whilst continuing to aim for a better perception of the company’s risk profile and consequently a reduction in financial costs. Furthermore, JBS boasts a healthy and rather comfortable liquidity and a strong cash position, as well as well-structured hedge position that protects the company from foreign exchange variation.
Overall, JBS witnessed a marked and consistent recovery of the American economy through its US operations. The reduction in the cost of energy and a consequent improvement in disposable income of Americans households should positively influence protein consumption in that market. For 2015, management stated that they will continue to prioritize organic growth and focus on all aspects of improving financial metrics.
Although a weakness in the domestic (Brazilian) market could slowdown sales growth, we are confident that management’s efforts to continue to grow exports, most notably in Asia and supportive data coming out of the US could keep a healthy stream of revenue growth.
Furthermore, we take comfort from recent news that the US might be allowing Brazilian meat producers to export to the US starting in August. On a separate note, JBS was touted as being in the process of reviving plans for an IPO of its US based unit JBS USA. JBS had shelved the proposed IPO in 2009 when Brazilian markets offered better valuations. This news is also bondholder positive, as proceeds from this IPO could be used to reduce debt and obtain an Investment Grade on one end, or possibly also consider additional acquisitions on the other.
Mark Vella is Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.