Good afternoon, and thank you for waiting. Welcome to Marfrig Global Foods S.A.'s earnings call for Q1 2023. This presentation is being recorded and translated simultaneously to both languages. For those who wish to listen to the conference in Portuguese, please click on the interpretation button and select Portuguese. For a better experience, click on mute original audio. Today, we have Mr. Marcos Molina, Founder and Chairman of the Board, Mr. Tim Klein, CEO of the North American Operations, Mr. Rui Mendonca, CEO for the South American Operation, Mr. Tang David, Financial VP and IR, Paulo Pianez, Sustainability and Communications Director, and Mr. Eduardo Puzziello, IR Director. All participants will be only watching the conference during the presentations, and after, we will begin the Q&A session when more instructions will be provided.
We would like to inform that any statements made here during the call regarding Marfrig's business projects, projections, and operational and financial goals constitute beliefs and assumptions of the company, as well as information currently available for Marfrig Global Foods S.A. Forward considerations are not performance guarantees as they involve risks, uncertainties, and assumptions as they refer to future events. Therefore, they depend on circumstances that may or not occur. Investors and analysts should understand that overall conditions of the sector and operating conditions may affect Marfrig's future results and may lead to data that differ materially from those expressed here. I now give the floor to Mr. Puzziello, who will begin his presentation. Mr. Puzziello.
Thank you all for participating in Marfrig's earnings conference call. Let us begin this conference by reviewing the main highlights of the consolidated results for the first quarter of 2023.
Marfrig's consolidated net revenue reached BRL 31.8 billion in the quarter. Adjusted EBITDA consolidated was BRL 1.5 billion. That is an adjusted consolidated EBITDA margin of 4.7%. Operating cash flow was positive, BRL 673 million. In the quarter, the North American operation accounted for 43% of the consolidated revenues, while South America accounted for 16% and BRF 41%. When we analyze the consolidated adjusted EBITDA, the North American operation accounted for 34% of the total, whereas the South American operation accounted for 26% and BRF's EBITDA 40%. From this greater diversification, we observe that the dollar continues to be the main currency of our results, accounted for 71% of the consolidated revenues in the Q1 of 2023.
Consolidated leverage was 3.5 times, both measured in BRL and USD. The North American operation reported net revenues of $2.6 billion in the quarter and an adjusted EBITDA margin of about 4%. The South American operation reported net revenues of approximately BRL 5 billion and an EBITDA margin of almost 8% in the quarter, about 1.4 percentage points above the 2022 margin. Following our strategy of liability management, we bought back and canceled in the quarter the equivalent to $52 million of bonds maturing in 2026, 2029, and 2031.
Finally, it's worth mentioning that in the first quarter of 2023, Marfrig became the leader in the meat packing sector in the global ranking for its Forest 500 on the fight against deforestation and was among the 8% of the best evaluated companies for supplier involvement on climate change by CDP. I now turn it over to Tim Klein, the CEO of the North American Operations. Tim, over to you.
Thank you, Eduardo. Let's begin on slide 4, where I will comment on the results for first quarter. Starting on the 1st chart on the left, sales volume was 11% lower than the same quarter of last year. Please note that Q1 of 2023 included 12 weeks of activity, while Q1 of 2022 included 13 weeks. Net sales were $2.5 billion, down 14.6% versus last year, and the EBITDA of $101 million was 77.7% lower than last year, with an EBITDA margin of 3.9%. As expected, the margins in our beef plants were significantly lower versus last year's exceptional results that were driven by ample cattle availability in the post-pandemic economic rebound. Cattle prices were sharply higher, while boxed beef export prices and drop credit values were meaningfully lower.
In addition, cattle weights were lower, resulting in less sellable pounds per head. Now move to slide 5, where I will talk about U.S. market data. Starting on the left, USDA reported Kansas live cattle prices averaged $164.60 per hundredweight, up 15.9%. The USDA comprehensive cutout averaged $277.93 per hundredweight. Up 1.6%, while the drop credit declined 3% to an average of $13.40 per hundredweight. The cutout ratio was 1.74 versus 1.98 last year. As we look forward to the rest of 2023, lower fed cattle supplies will result in higher prices and reduced capacity utilization across the industry. While beef demand isn't as robust as it was the last two years, we do expect it will be better than it was during the previous cattle cycle.
This should allow the industry to operate at margin levels that are stronger than they were during this segment of the previous cycle. I'll pass to Rui.
Thank you very much, Tim. We will now move to slide number six, where I will explain the performance of the South American Operation in Q1 2023. In the graph on the left, we observe the total sales volume reached 354,000 tons in the first quarter of 2023, an increase of 2.8% compared to the same quarter in 2022. Despite the reduction in volume exported due to the period of suspension to China, the company was able to appropriately reallocate its sales to other markets, including the domestic market. Moving on to the central graph, we see that net revenue in the first quarter of 2023 reached BRL 5.2 billion. Even with a higher sales volume, there was a drop of 19.2% compared to the revenue in the same quarter the previous year.
This performance is explained by the reduction of about 20% in the average price, mainly in exports. In the graph on the right of this slide, we observe that the EBITDA reached the amount of BRL 408 million in the first quarter of 2023, stable compared to the same quarter of 2022. Despite the reduction in the average sales price, as I mentioned earlier, the average price of cattle in South America dropped significantly. In Brazil, the drop in the average price per arroba was 16%. In Uruguay, the drop was 21%, and in Argentina, 13% when compared to the same period in 2022. The EBITDA margin of the South American operation reached 7.8%, 1.4 percentage points above the margin in the first quarter of 2022.
Moving on to slide 7, I'll talk about the performance of exports in the first quarter of 2023. In the graphs on this slide, on the evolution of exports, we see that China and Hong Kong continue to be the main export destinations and accounted for 63% of the international sales from the South American Operation in the period. I would like to point out that even with Asia remaining the largest importer of beef for the company, Marfrig has focused on increasing the number of its units qualified to export to other markets to capture the best commercial opportunities. As an example, in the last six months, we achieved new approvals to export to markets such as Canada, Singapore, Indonesia, Malaysia and Mexico.
The combination of multiple sales channels, an appropriate pricing system, and an important share of value-added products have allowed the South American operations to present healthy and more stable margins. I now turn over to Paulo Pianez, who will comment on the highlights of the sustainability area. Thank you, Rui. Marfrig continues to achieve relevant results in sustainability this year, demonstrating that the launch of the Marfrig Verde+ program 3 years ago brought the necessary means for the implementation of a strategy aimed at transforming Brazilian livestock farming in line with climate and nature-based solutions. In January this year, Marfrig's initiative in sustainability were the subject of a case study at Harvard Business School Agribusiness, with the case called Marfrig's Quest for Sustainable Beef. Was presented at the university in Boston to more than 200 students of the seminar.
Marfrig made significant progress in the global ranking of companies that fight deforestation, called Forest 500, and took the lead among meat packers. The company improved its ranking in the four commodities: meat, soybeans, leather, and wood. For the 3rd consecutive year, Marfrig is part of the Corporate Sustainability Index, ISE B3. It's a tool for comparative performance of publicly traded companies on environmental, social, and corporate governance practices. In the CDP Disclosure Insight Action, Marfrig is among the 8% of the best evaluated companies for the involvement and engagement of suppliers on climate change. With the Marfrig Verde+ program, the results in the most challenging topic of the sector, traceability, are very robust.
Besides the 100% of direct suppliers that are already monitored and controlled by satellite. In Q1 2023, the company already monitors 80% of its indirect suppliers in the Amazon and 74% in the Cerrado. More than 30 million hectares monitored daily, larger than the U.K. or the state of São Paulo. On the inclusion and regularization front in our supply chain, the Marfrig Verde+ program has already included and regularized 245 farms, totaling over 3,600 farms since its launch in 2021. These suppliers now operate in compliance with our high social environmental criteria.
The results achieved this quarter, the international assessments, and the recognition obtained by the company from renowned entities confirm that Marfrig is a reference and has been generating positive impacts that contribute to the development of low-carbon economy and the maintenance and recovery of biodiversity in the areas where we operate. I now turn it over to Tim, who will present financial results. Thank you, Paulo. On the next slides, we will present Marfrig's consolidated financial results for the first quarter of 2023. Here, we will once again demonstrate BRF's results consolidated with Marfrig's results according to the accounting technical regulations CPC 15 and 36. As such, the information I will comment on, except where indicated otherwise, will include BRF's figures. Starting with slide 11.
On the left, in Q1 2023, we generated consolidated net revenue of BRL 32 billion, an increase of 42% compared to the period last year. With a more diversified profile, we generated 60% of net revenue in the beef segment and the remainder in BRF. 73% of our net revenues are pegged to the dollar and other hard currencies and 27% generated in reals. The graph on the right. In the first quarter of 2023, we generated an adjusted consolidated EBITDA of BRL 1.5 billion with a margin of 4.7%. On slide 12, we present cash generation. Starting on the left, in Q1 2023, operating cash generation ex-BRF was positive BRL 632 million. After the one-off payment of personnel expenses, mainly in North America, the operating cash flow was negative BRL 71 million.
In the first quarter, the investments for growth plus maintenance totaled BRL 434 million, and interest paid were BRL 750 million. The recurring free cash flow was negative BRL 1.3 billion. In the graph on the right and in consolidated terms, operating cash generation in Q1, considering BRF's performance, was BRL 673 million. Discounting the investments in CapEx plus interest paid in the period, the free cash flow totaled BRL 1.9 billion negative. Net debt and leverage ex-BRF. At the end of Q1 2023, the net debt, without considering the effects of BRF consolidation, totaled BRL 4.9 billion mainly explained by the seasonal cash flow effect. Marfrig's leverage ex-BRF was 3.55 times measured in BRL and 3.58 times measured in USD. Slide 14.
Consolidated net debt according to CPCs 15 and 36 totaled at the end of the first quarter of 2023, $7.9 billion. Consolidated adjusted leverage was 3.53 times measured in BRL and 3.53 times measured in USD. In the next slide, 15, we present the details of the debt profile. Beginning with the graph on the left, Marfrig ex-BRF ended March 2023 with a cash of about $2.1 billion. In the graph on the right, due to the consolidation, the cash position at the end of the quarter totaled $3.9 billion. I now turn it over to the operator who will lead the Q&A session. Thank you so much.
Thank you. We now begin the Q&A session.
In case you wish to ask a question, please press the raise hand button, and you will be requested to open your mic. You have to activate your mic to ask your questions. In order to listen to the conference in Portuguese, click on the interpretation icon and select Portuguese. If your question has been answered, you can click on the button lower hand. Please wait while we collect questions.
Our first question from Ricardo Alves from Morgan Stanley.
Thank you very much. Good morning, everyone. Thank you for the opportunity. My first question to Tim. You mentioned, Tim, that you expect a better performance in this new low cycle rather than in previous cycle. What are the reasons that lead to that belief?
If you could remind us of what changed in your understanding, structurally speaking, in the industry for the meat packers or in the beef supply chain as a whole, for you to believe you will have better margins in this lower end of the cycle compared to previous cycles. That's the first question.
The second one goes to Tang. Leverage ex BRF, if I'm not mistaken, was 3.6 times. The idea, if I'm not mistaken, is to end below 3.5 times at the end of the year. I just wanted to take the building blocks of your budget to achieve that target, your CapEx level, working capital, it has been very volatile, financial expenses in the same line, so that we try and reconcile the evolution of your cash generation/leverage until the end of the year. Thank you. Tim, over to you.
Yes. Thank you. To answer your question, the cycle that we're in right now, based on USDA data, cattle supplies will be at the lowest point sometime 2025, 2026, but will be somewhat higher than what they were at at the low in the previous cycle. That's one factor. The second factor is demand. The demand equation, both domestic and global, I believe will be better based on where we're at today than what it was in the previous cycle bottom. Those two combined, I believe, will allow the industry to operate at margins higher than what we did in the previous cycle low.
Good afternoon, Ricardo, this is Tang. You know that Q1, seasonally, is more challenging. Even so, our first quarter, we released working capital ex BRF. You can see it was positive. For the remainder of the year, working capital is flat or even positive. We will release working capital, as you have heard, because of the operations that will be stronger in the next quarters. CapEx will be only for maintenance. We won't have CapEx for growth. We've already made them all in the past two years. You can use a proxy of caps in Q1. Interest, without giving you guidance, $2.5-$2.6. With that, plus strong cash generation, operating cash generation, we work with a leverage at about 3.50x for the year.
All right.
Our next question from Leonardo Alencar from XP.
In the case of the U.S., I would like to understand the export dynamics. There has been a substantial drop in the price of exports, perhaps because of product mix. Considering the deterioration of the scenario in the U.S., exports could be important. What would have led to this price reduction? Do you think this will be reverted in the short?
Yeah. To answer your question, you know, one of the factors there is just the global economy perhaps slowing down a little bit. We have seen our export business level out now with prices being steady to higher. The strong US dollar has an impact on that as well. All in all, export business for us is a key part of our profitability and we feel confident that the markets that we trade in with are gonna be in solid shape here going forward.
Thank you, Tim. It was clear.
A second question now about South America. To Rui, perhaps, just to understand the dynamics in Uruguay, because this is something we discussed in other quarters. We expected to have a cycle change in Brazil and Uruguay. I think there has been signs of improvement in Uruguay. I'd like to hear more details on how you see if you have more room to be more optimistic with Uruguay in the forthcoming quarters. If you could also comment on China for the second quarter. GACC's data are being monitored closely because of your resumption of exports to China. Do we already have a normal flow of exports to China? Are negotiations back to normal? There is a trade show in China this week. I'd like to hear your comments on that.
Thank you, Leo, for your question.
Beginning with Uruguay, it's important to mention that even with adverse conditions, there was a strong drought period in the south. The volume of females and the birth of calves has been stable, proving the trust of producers. That leads to satisfactory supply. More important than that is to emphasize that we have the largest share of slaughter in Uruguay, 26%. We are beginning our ramp up to Tacuarembó organic growth, and we have some competitive advantages in Uruguay, like the greatest Hilton Quota, the largest organic operations, very important for the profitability in the U.S. An important highlight this quarter, and it has been the case since last year, our synergy with National Beef. Using the distribution channel they have in Japan, we have grown a lot. We are the largest exporter of Japan.
It's also a very favorable market.
That leads us to believe we will have a very good year in Uruguay. Now, going to your second point about China. Obviously, since China returned in March, average international prices are recovering, but there is a delay between our self-suspension at the end of March and the arrival of products in China. We estimate that as of June, July, demand will be strong and so will prices. We're highly optimistic about strong price recovery in China. I'd like to remind you that there is an important impact. We are now beginning to ship to Indonesia. Mexico ended audits in late April in Brazil. Two strong price markets that will help us bringing a favorable year in terms of international prices.
Clear. Thank you very much, Tim and Rui. Thank you very much.
Our next question comes from Isabella Simonato from Bank of America.
My two questions go to Tim. First, I'd like to better understand the demand situation in the U.S. If you could give us some color, how do you see new orders before the barbecue season? How do you see the performance both in retail and wholesale? That's the first question, and the situation of demand. That's the first question. The second question is, we saw an important drop in the drop credit prices. I'd like to understand how you see demand for a drop credit. Thank you.
To answer your first question, the demand picture in the US is good at this point. We're going into the best part of the year right now, entering the barbecue season, and we're seeing good orders, both on retail and food service has been very strong all along. We're already at very high levels on the cutout as it came up actually earlier than what we normally would expect. Prices are holding firm and demand continues to meet expectations as we get into this time of the year. On the drop credit, the biggest drivers there were value for our hides as the global leather demand has dropped.
Our tallow prices, which follow very closely with vegetable oils, which have dropped quite a bit here. Those are the two main factors forcing the drop credit lower.
Thank you.
Our next question from Thiago Duarte from BTG. Thiago, over to you.
I wanted to ask a question and a follow-up to a previous answer that was not clear. The question actually is to hear your outlook, the investment you made at BRF, and synergy capture and benefit capture. I understand that one of the key drivers behind that decision when you were discussing the investment was precisely the relevance BRF has with Marfrig clients in the Brazilian operations mainly and the strategic synergy this may generate to both companies. After some quarters since the consolidation, I'd like to hear your take on it. What would you say is a highlight in their consolidation? What has been or is being captured in terms of synergy? The follow-up question goes to Tang.
In the previous question, speaking about the building blocks behind your leverage, I'd like to understand when you spoke about interest expenses, what number were you referring to? Could you just go over that number again? Thank you.
Good afternoon, Thiago. This is Tang. Just to clarify, the interest I mentioned was about BRL 2.7 for the year without giving you guidance. You talk about billion BRL, right?
For xBRF
Beef yes. BRL 2.7 billion.
Thiago, this is Marcos. I think I can answer that question to you if I understood well the investment Marfrig made at BRF. First of all, I believe we are very pleased with the investment we made at BRF despite the challenging 2022 and also a challenging Q1 in 2023. There was increased freight cost, increased grain cost in 2022, war, drought, energy cost.
In 2023, that present a scenario where the cost of energy coming down, the same for the grain cost. Expected improved exports. In a joint study we conducted with Miguel and Luis Tony, this new organization at BRF, today we have a well-prepared team over there to run BRF. We are absolutely certain that BRF in Q1 already shows good results, even in challenging scenarios. Satisfactory results, I would say, as compared to the industry. I'm fully convinced that we do not regret the investment we made. Another work front that BRF has been working with Marfrig international freight for some customers. We are also present at APAS . I'm sure that Marfrig plus BRF supplement each other, and we derive v-value for both companies. We're very pleased.
I think the two companies working together, undoubtedly, this was a strategic long-term investment and will add value to both companies. I don't know if I answered your question or if you have a follow-up question.
You did answer, Marcos. Thank you very much. That was it. Thank you.
There is a lot to be done. I'll give you the example. On the approval of our plans for exports to China, BRF had 5 suspended plants. 4 are back online and 2 today. Campos de Lucas, for instance, a plant that is very important for BRF. Besides, this past month, 16 new approvals of plants to export. We have a significant opportunity for BRF. We're about to resume exports to the U.K. and Europe. We will be working a lot together in Europe. Thank you very much.
Our next question comes from Ben Thayer from Barclays. Ben, over to you.
Hello. Hope this works. Thanks for taking my question. Actually, just one quick follow-up for Tim. You've talked about your expectations, like, kind of aligned with USDA expectations to see the cattle stock coming down and then basically bottoming out in 2025, 2026, which would kind of make it a fairly long period of downturn. We've seen already a lot of pressure, at least with some of your peers. More recently, you've done still a little bit better over the last quarter. Most likely, summer is gonna look a little better.
If we think about it into the onset for 2024, how do you feel about the supply of cattle as it relates to the need to keep your capacity utilization high and how you feel about what the industry might be doing as it relates to rationalization of some of the capacity particularly for next year? Thank you.
Yes. We are seeing capacity rationalization as we speak. I believe as we got into the first quarter, there were a lot of orders that were out there, and production was at a level in order to fill those orders. As margins compressed, the industry cut back production to match the supply of cattle that were there available. I believe that's gonna be the case as we, as we go forward, and we're seeing that happen now.
This concludes the Q&A session. I turn it over to Mr. Marcos Molina for his final thoughts. Mr. Marcos Molina, over to you.
Thank you all very much for participating in one more Marfrig's earnings call. First of all, I want to commend the whole team, both at BRF and at National Beef and Marfrig in South America for the excellent performance we achieved in a challenging quarter that we had. On South America, we had increased sales of value-added products, branded products that made a difference. At National Beef, undoubtedly, even in a challenging scenario in the U.S., consistent margins. Proving the dedication of the team working in adverse conditions with operational excellence. BRF in Q1 was able to navigate through rough waters with results that were better than expected. The financial team had excellent financial management on liquidity. It was a tough scenario in Brazil.
Congratulations to the whole team. Marfrig is very pleased with all its business divisions, and we are now ready to unlock value for the company, which is falling short of what we believe should be. We will work with the shareholders to unlock value for the company. Marfrig's earnings call has been concluded. If you have other questions, you can send your questions to our IR team. Thank you all for your participation, and have an excellent afternoon.