Good morning, everyone, and thank you for waiting. Welcome to Marfrig Global Foods S.A. First Quarter of 2022 Conference Call. With us here today we have Mr. Marcos Molina, Founder and Chairman, Tim Klein, Chief Executive Officer of North American Operations, Mr. Miguel Gularte, Chief Executive Officer of South America, Mr. Tang David, Chief Financial and Investor Relations Officer, Mr. Paulo Pianez, Sustainability and Communication Director, Mr. Eduardo Coviello, Investor Relations Director. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After Marfrig's remarks, there will be a question-and-answer session. At that time, the instructions will be given. Should any participant need assistance during the call, please press star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed on Marfrig website at https://ri.marfrig.com.br where the presentation is also available.
Participants may view the slides at any other time they wish. The replay will be available shortly after the event concludes. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Marfrig Global Foods S.A. management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand the conditions related to macroeconomic conditions, industry, and other factors that also cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Marcos Molina. Mr. Molina, you may proceed.
Thank you all for participating in Marfrig's conference call on the results for the first quarter of 2022. As always, first of all, I want to thank and congratulate our more than 30,000 employees. Each one of them contributed with hard work and dedication to the excellent results we will present here. Additionally, the first months of the year are the most challenging for our industry. Even so, Marfrig has just had the best first quarter in its history. To get there, we had to deal with a very complex scenario. We faced strong cost increases in all regions where we operate, and even so, we kept our units running with a high level of return. Once again, Marfrig's simplified management structure brought agility and efficiency to our business model. This was reinforced by strategic investments.
With this, we improved the efficiency of our operations and ensured greater exposure to value-added products. In this first quarter, we invested around BRL 460 million in capital. We invested an additional BRL 418 million in platforms for the acquisition of Sol Cuisine in Canada. We purchased back BRL 77 million of Marfrig shares and also followed the important capital increase in BRF by investing another BRL 1.8 billion. All of that totaled BRL 2.8 billion in the first quarter. All this progress happened while the company improved its leverage ratio, which reached 1.36x at the end of the first quarter. This demonstrates our commitment to sustainable growth, cash generation, and excellent capital allocation while maintaining a low level of indebtedness.
This was recently recognized by the international rating agency, S&P, which upgraded Marfrig's risk rating to BB+. Now we're just one notch away from investment grade. We will continue our work to generate value to all of our partners and shareholders. Now, I'll turn it over to Tim Klein, the CEO of our North American operation.
Thank you, Marcos. Let's begin on slide four, where I will comment on the results for the first quarter. Starting on the left, sales volume in the quarter was 2.9% higher than the same quarter of last year. Net revenue, however, was 30.6% higher than the previous year, driven by higher prices for beef and beef by-products. This resulted in a significant improvement in gross profit, which was almost 60% above that of last year. Finally, we achieved EBITDA of BRL 453 million, 47.5% higher than last year, with an EBITDA margin of 15%, a record for our first quarter. The key driver of our performance was continued strong demand for US beef products, combined with ample availability of fed cattle. All other business units posted improved results versus last year as well.
Please now move to slide five, where I will talk about US market data. Starting on the left, industry slaughter levels decreased 0.7% from the same quarter of last year. Prices, as reported by the USDA, averaged $138.46 per hundredweight, up 22.5% year-over-year on strong demand from packers. The USDA comprehensive cutout averaged $273.59 per hundredweight, up 21.8%, while the drop credit increased 43.6% to an average of $15.81 per hundredweight, led by increases in tallow and hide values. The cutout value was 1.98 versus 1.99 last year. Note that despite the slightly lower cutout value, unit margin dollars were higher as the components of the ratio, cattle prices and box beef values were meaningfully higher.
Drop credit values also contributed to the higher margin. Now I'll pass to Miguel.
Thank you very much, Tim. We will now move on to slide number 6, where I will explain the performance of the South American operation in the first quarter of 2022. As you can see in the chart on the left, total sales volume had a growth of 11% compared to sales in the first quarter of 2021, justified by the combination of a strong resumption of sales to China, which returned to normal at the end of last year, and the recovery of demand in the domestic market. We now move on to the central graph on this slide, net revenue. We can see that we reached, in the first quarter of 2022, the amount of BRL 6.5 billion, 41% above the revenue of the same period in 2021.
This performance is explained, in addition to the higher sales volume, by the pricing, which was 30% higher in reals than prices charged in the same period of 2021, both in the domestic market and in exports. Finally, in the graph on the right, EBITDA, we can see that we reached the amount of BRL 411 million in Q1 2022, a growth of 95% over the EBITDA of Q1 2021. This better performance can be explained by the effects of higher volumes and better prices, as I talked about earlier, and by the evolution of the captures from the operational efficiency programs. However, these positive factors were partially mitigated by higher cattle prices in all geographies where we operate and by the strengthening of the real against the dollar, which impacted our exports.
Thus, we reached an EBITDA margin of 6.4% in Q1 2022, 1.8 percentage points higher than the margin in the same quarter of 2021. Once again, I'd like to highlight our business model with integrated platforms in the countries where Marfrig operates. This model provides us with a differential in the trading of our products, and the results are translated into the performance presented here, which confirms the assertiveness of our strategy. Moving on to slide seven, I will talk about the impact of exports in the first quarter of 2022 results of the South American operations. As can be seen in the graphs on this slide, referring to the evolution of exports, we can notice a significant variation in the main export destinations.
This movement was caused by the restriction in exports from Brazil to China during almost the entire last quarter of 2021. In this scenario, the company had the ability to change the sales destinations of the Brazilian operations to markets such as Europe and North America, which minimized the impact of the restrictions to the Chinese market. After this period of limitation, there was a return to normalization with a strong resumption of exports to China, which needed to rebuild part of the emergency stock used during the period to imports from Brazil. As a consequence, prices and volumes went up significantly in the first quarter of this year, benefiting Marfrig's results, which currently has the largest number of plants in South America certified to export to that country, a total of 13 units.
I now turn to Tang, who will comment on the consolidated results and the financial highlights of the operation.
Thank you, Miguel. In the next slides, we will present Marfrig's consolidated financial results for the first quarter of 2022. Starting with slide nine, in the graph on the left, in the first quarter of 2022, we generated a consolidated net revenue of BRL 22.4 billion, an increase of 29.6% compared to the first quarter of 2021. I'd like to point out that more than 93% of our revenue is generated in currencies other than the real, with more than 90% generated in dollars.
In the graph on the right, this quarter we generated BRL 2.8 billion in adjusted EBITDA with a margin of 12.3%, a nominal growth of 60.9% and 240 basis points versus the EBITDA of the first quarter of 2021. Of this total EBITDA, 85% was generated in North America. As presented in the previous slides at the beginning of our presentation, the strong performance of North America, combined with the gradual improvement of margins in South America, are the main drivers of this growth. We now move on to slide number 10. On this slide, we will comment on the net financial result in the first quarter of 2022, which was an expense of BRL 1.2 billion.
The mark-to-market of the investment in BRF shares of BRL 795 million was the main driver of the expense in the quarter. In the quarter, interest expenses were BRL 526 million, an increase of BRL 35 million compared to Q4 2021, explained by an increase in the basic interest rate in Brazil, given the new debt profile with greater exposure to debt in the local market. The exchange variation was positive by BRL 166 million, caused by the difference between the final PTAX of the periods. In Q1 2022, BRL 4.74 versus BRL 5.58 in Q4 2021. On the next slide, number 11, we will show the net result for the first quarter of 2022. In the first quarter, the net result before taxes was BRL 1.3 billion.
Discounting taxes, which were BRL 763 billion and other BRL 384 million of minority interest, the net result was BRL 109 million. Due to the ordinary general assembly, dividends of BRL 383 million were paid in April, which represented approximately 0.58 BRL per share still referring to the results earned in 2021. In the second graph below, we show the net result accumulated in the last 12 months. Due to the excellent operational performance, we obtained a net profit generation of more than BRL 4.2 billion. On the next slide, number 12, we will present cash generation. We generated in Q1 2022 more than BRL 1.2 billion of operational cash flow.
Discounting the investment in CapEx and interest paid in the period, the free cash flow was -BRL 175 million, as shown in the graph above. In the graph below, we present the accumulated operational cash generation in the last twelve months, totaling BRL 10.4 billion. More than BRL 2.7 billion were invested in important projects of organic growth and in products with higher added value. Interest expenses totaled BRL 1.8 billion. Thus, the free cash flow generation was BRL 5.9 billion. Slide number 13, net debt and leverage. Our net debt at the end of the first quarter of 2022 totaled $4 billion.
When measured in reais, net debt was 3.5% lower, BRL 21.2 billion in the first quarter of 2022 versus BRL 21.9 billion in the last quarter of 2021. We invested BRL 1.8 billion in BRF shares acquired in the follow-on process promoted by the company in January of 2022. In the first quarter of 2022, we paid BRL 357 million to National Beef minority shareholders. As a result, our leverage stood at 1.53x when measured in dollars and 1.36x when measured in reais. Lower leverage levels compared to the same period in 2021. At the end of the first quarter of 2022, approximately 70% of our debt was indexed in US dollars and 30% in local currency.
The increase in the exposure to the real is part of the strategy of better liability management, taking advantage of the good opportunities in the domestic market. On slide 14, we will present the details of our debt profile. Starting with the chart on the left, the debt schedule. We entered March with cash on the order of $2.4 billion, a 60% growth compared to cash at the end of 2021. This increase is explained by the term loan made for $800 million, whose objective is liability management and the management of financial expenses, since its cost is lower than that of current debts. Additionally, we have a revolver line available of $900 million at the National Beef level.
In the graph on the right, we can see that the gross debt is equalized between commercial bank lines and bonds, and that 78% is allocated to the long term and close to 72% in dollars. I now turn it over to Paulo Pianez, who will comment on the sustainability highlights. Thank you.
Thank you, Tang. Just as Marfrig closed 2021 with robust results in sustainability, this first quarter of 2022 was no different, confirming its real commitment to developing innovative, low carbon, deforestation-free cattle farming. In line with its strategy to establish a low carbon production supply chain, Marfrig had its reduction target for greenhouse gas emissions approved by the Science Based Targets initiative submitted last year.
The company is the only one in the beef protein sector in the Americas to have its targets approved and to commit to limiting the increase in global temperature to up to 1.5 degrees Celsius. Marfrig's targets are in Scope one and two to reduce absolute greenhouse gas emissions by 68%, base year 2019 by 2035. In Scope three, which includes Marfrig's entire supply chain, to reduce the intensity of emissions by 33% by 2035 base year also 2019. This scope includes methane gas emitted from enteric fermentation of cattle. Increase the use of renewable energy, which is today 27% to 100% by 2030.
In order to make the monitoring system even more robust, Marfrig has established a partnership with MapBiomas, one of the most renowned collaborative initiatives in territorial intelligence, and have been working to incorporate maps into the control layers of its geo-monitoring system. This is within the scope of the Marfrig Verde+ plan, launched in July 2020, and that is based on the Produce, Conserve and Include strategy. This program brings us much closer to the producers and has been showing very positive results in the first quarter of 2022, mainly on the inclusion and traceability fronts. On the inclusion front, the company supported and re-included more than 2,200 farms in its supply chain, which represents more than 770,000 animals. This is a clear example that the inclusion strategy is the most effective solution to reconcile production and conservation.
On the supply chain traceability front, including indirect suppliers, Marfrig already monitors 100% of its direct suppliers in the Amazon and Cerrado regions. As for our indirect suppliers, we closed the first quarter of this year with the identification of 67% in the Amazon region and 7% in the Cerrados. Finally, Marfrig is part of the B3's Carbon Efficient Index, the ICO2, and also in the preview published recently by B3, the ISE Corporate Sustainability Index. These efforts and results obtained with the Marfrig Verde+ plan, as well as international evaluations, prove our commitment to generating positive impacts, contributing to the development of a low carbon economy into the maintenance and recovery of biodiversity in the territories where we operate.
Excuse me. The floor is now open for questions. If you have a question, please press star one on your touchtone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Questions will be taken in order they are received. We do ask that when we pose your question that you pick up your headset to provide optimal sound quality. Please hold while we take your quesZions. Our first question comes from Ben Theurer, Barclays.
Yes, good morning, and thank you very much for taking questions and covering the very good results for the first quarter. First question is actually for Tim. Can you share an outlook on what you're seeing and what your expectation is for the coming two quarters, just given that those tend to be the strong quarters over summer? Obviously, you have a very tough comp to deal with on a year-over-year basis. We've seen some of the cutouts come down a little bit recently, but sometimes the data we're seeing might not properly reflect what you're seeing. So any comments you have on what you're seeing in 2Q so far and what your expectation is over the next coming months, that would be much appreciated. Thanks, Tim.
Great, Ben. Well, what we see to your point comping against last year is not possible given the impacts COVID has actually on last year and the year before. We kind of look back at 2019 as a base year, and our expectations are we'll have very strong quarters, stronger, you know, in second and third quarter than we had in 2019. Demand continues to be very good. Of course, we're watching the inflation trends and how that might affect consumer buying, but so far, we haven't seen any major impacts on that.
We are getting a late start to the normal run-up to cutout due to the cold and wet weather we've had here in the US. All in all, we're still confident in our outlook.
Okay. Perfect, Tim. Thank you very much. My next question is for Miguel. I'll speak slowly so we can get the translation through. Miguel, in the Brazilian operation or the South American operation, we saw a significant improvement on a year-over-year basis, and particularly a sense of re-acceleration in exports over to Asia, particularly China, Hong Kong. Now, can you give us the latest on what you're seeing on the export side, given the more strict lockdown in China and particularly over the last couple of weeks? Do you expect this to impact somehow second quarter exports, given all the backlogs at the ports? Thank you.
Good morning. Thank you for your question. What we see right now is a situation where the logistics
Was a reason for concern 10 days ago, but now it's going back to normal. The bottlenecks we saw at Chinese ports are beginning to disappear, and vessels are being unloaded without any problems. That can be explained because Chinese ports are highly automated. Once operations go back to normal, products flow quite easily. In terms of the market, what we see is if we compare the market to 2021, it's looking much more promising because in the first quarter of 2021 there was low cattle supply, and that's not the case this year. There was an increase in slaughter supply in Brazil of 10% and at Marfrig that was 25% in the first quarter. Now, if we consider the fourth quarter of 2021 so that we can compare that to 2022.
The fourth quarter in 2021, Brazil didn't take part in the exports because it was delisted. We hope that won't happen in 2022. The price of raw material was much more competitive for exporting packing houses such as ours if you compare 2022 to 2021. Raw material prices are more competitive. We have more supply in the export market. The exchange rate is very favorable towards the BRL. In China, which is our main destination, and that's very, very positive for Marfrig because we have the largest number of qualified plants to export to China from South America. The Chinese market has much higher prices now than the previous year. We're talking about $2,000 per ton comparing year-on-year and month-on-month.
It looks like we're gonna have a great export year with lots of raw material at very reasonable prices.
Okay, perfect. Last question, if I may. That one's actually then for Tang. We go all through here. On the financing side and leverage. Net debt, as of the first quarter, depending on how we want to express it, but it's been somewhat stable in dollars. I mean, obviously because of BRL depreciation, appreciation, it came down in BRL. If we look forward and the need to consolidate BRF [stake], any initial thoughts you can share in regards to where you think the leverage is going once you consolidate the higher leverage BRF stake within your financials? Also given obviously the expectation of EBITDA over summer being less than last year, your leverage is likely to continue to go slightly up given the tough comp base from last year.
How should we think of leverage over the coming quarters as we start seeing this consolidation? Thank you.
Okay. Leveraging considering BRF share in Marfrig will only be considered as of the second quarter. That's the first important point. The second point is, as in my answer about capital allocation, that's liability management and also reducing the service of the debt. Marfrig's leveraging should not go up. It won't go up. Okay?
Okay.
Perfect. Thank you very much. Our next question comes from Robert Dickerson, Jefferies.
Great. Thanks so much. Tim, just kind of broad question for you. You know, I think you had said in response to the earlier question, you know, that demand seems to be still very good, right? I mean, obviously pricing is through the roof to a certain extent. You know, as we enter the growing season, you start to think about maybe some competitive activity. There's not a lot of conversation around US PPC and trade down risks just throughout the entire food industry.
Do you have kind of any feel to kind of guess, you know, personally as to what might happen if you just say look back in the prior periods that might not be exactly the same but somewhat similar in terms of, you know, price increases, consumer strength, what have you? I realize it's hard too, because obviously demand has been strong for, you know, over two years and pricing continues to get stronger. Just trying to think about kind of what could happen as we get through the back half of the year and how you think about those price increases. Thanks.
A great question. We are watching price trends across all products and other products as consumer spending may change. However, what we do normally see on beef is a trade-off between different cuts. In normal recessionary time periods, for example, we see consumers buying more of the less expensive beef cuts and walking away from the more expensive. All in all, when you put a pack together, the overall cutout value remains relatively stable even through that environment. We do not see very much straying away from beef to pork or poultry or you know less expensive forms of protein. You know, we're watching it, but we're not overly concerned that we're gonna see a change in consumer demand for beef.
Okay. Super. You know, maybe excuse my ignorance before I ask the question, but I thought I'd ask it since I was sitting here coming to you, Tim, again. It's just, you know, live cattle prices are down a little bit over the past few months. But obviously there's a lot going on and I assume on the feed side. Maybe just kind of the, you know, brief explanation as to why you think those prices are down and kind of if you have any kind of assessment as to where you think they settle out, you know, as we get to the year. That's it. Thanks.
Well, live cattle actually since the first of the year have been relatively stable and have actually moved up a little bit. We would expect a normal seasonal decline from now until the summer months and then probably back up again in the fourth quarter. The shorter supplies and the highest prices will be out in the Q4 from what we can see here. All in all, if the industry continues to run at full capacity and there are still, at least through the first quarter, enough cattle for everybody to run at full capacity, that will continue for at least another quarter. Then we'll see fewer numbers as we allow them to through three and particularly through four.