1Q11 Conference Call Transcription

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Teleconference Transcript1Q11 Results

JBS (JBSS3 BZ)May 11th, 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 1Q11. As requested by JBS, this eventis being recorded. The recording will be available to listeners this afternoon and can beaccessed by following the instructions posted on the Company's website atwww.jbs.com.br/ir.

Taking part in this call we have Mr. Wesley Batista, President and CEO of JBS SA; Mr.Jeremiah O'Callaghan, Director of Investor Relations; Mr. Eliseo Fernadez, Director ofManagement and Control; and Mr. Andr Nogueira, CFO of JBS USA.

Now, I will turn the conference over to Mr. Jeremiah O'Callaghan, who will begin thepresentation. Please, Mr. Jeremiah O'Callaghan, you may begin your conference.

Jeremiah OCallaghan:

Thank you very much. Thank you and good morning to all. Thank you for being herewith us today as we review our performance for the 1Q11. Last night, we filed adocument with the Brazilian CVM, equivalent to the Securities and ExchangeCommission, in which we summarized the highlights for the quarter.

This document is available on our website at www.jbs.com.br/ir where you will also findan updated version of our Companys presentation, which includes the resultspresented here today. Today, we will not only analyze the result for the quarter, but wewill also analyze the main drivers for our business in 2011. After our presentation, we

will open the call for a Q&A session where we will be happy to answer your questions.

Before we begin, I would like to remind all of you that during this call, we will refer tothe expectations for results, sales, costs, and we will analyze what we believe to be thefuture prospective for our business. Please read the disclaimer on our webpage whichfurther explains the risk factors involved.

Now, I would like to pass on to Mr. Wesley Batista to proceed with the presentation.Wesley?

Wesley Mendona Batista:

Thank you, Jerry. Good morning, everyone, and welcome to our call. I would like tobegin by thanking our team for their great dedication, effort and commitment to ourCompany. Well, we began 2011 working hard, increasing our revenues and ourexports.

During the 1Q, our revenue in Reais increased by 20% over the same period of 2010,reaching R$14.6 billion, a number that we are proud in terms of our growthperformance in each business unit. In our Beef operation in the United States, weincreased our sales in 34% over the same period last year. In our Pork segment, weincreased our revenues 29%, again over the same period last year. In our Chickensegment, we increased our revenue by 15% over the same period last year.

In our Mercosul operation, we grew 27% comparing this quarter with the same quarterin 2010. These numbers maintain us as one of the top companies in our sector in the

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world and among the main Brazilian companies.

Talking about our EBITDA, we reached R$836 million in the period with a margin of5.7% on a consolidated base. Talking about EBITDA by each business unit, our Beefoperation in the United States, which includes the Australian operation, obtained arecord EBITDA of US$269 million, surpassing the 7% margin. In the Pork segment, weobtained an EBITDA of US$105 million and a margin of 12.6%.

In the Mercosul business unit, despite the increase in the raw material costs where weare also seeing an improvement in our Mercosul operation, we reached R$308 millionin EBITDA and a margin at 8.6% in this period compared with a 7.1% margin in thesame quarter last year.

Our net profit reached R$147 million, a 48% improvement over the same period last

year and a profit per share at R$0.06 per share. Some highlights in this quarter wereour export where we grew 17% over the same quarter last year in 2010, reachingUS$2.4 billion in this quarter, a number that, if we maintain this number for the rest ofthe year, we will top US$10 billion in export this year.

Now, I will pass to Jerry who will comment more in more detail about each of ourbusiness units. Jerry?


OK, Wesley. Thank you. I would start with our Mercosul unit. We have a presentationon our webpage, and you could refer to page 17 in that presentation to look at the

numbers regarding Mercosul. Our revenues increased there in the Mercosul, fromR$2.8 billion in the 1Q10 to about R$3.6 billion in the 1Q11. That is a 27.7% growth inthe period. When comparing our revenues in the 1Q11 with the last quarter of 2010, wesee a growth of 7.2%.

Besides that increase in prices, we had a 10% increase in our slaughter volume this 1Qin this region, when compared with the last quarter of 2010. And this increasedemonstrates the gradual recovery in the Brazilian livestock cycle. We believe we willcontinue to watch this trend during this and during the coming years.

EBITDA in the Mercosul went up from R$238 million in the 4Q10 to R$308 million thisquarter. The margin also grew from 7.1% to 8.6%. This increase in margin reflects animprovement in our operations in this region. With a focus on efficiency of ouroperations and the improvement in the availability of raw material, we expect ourMercosul business unit to present better and more consistent results onwards.

Now about our Beef unit in the USA, which includes our operations in Australia, andhere you can refer to page 18 of our presentation to accompany these numbers. Ourrevenues in USD were almost US$3.8 billion this quarter, 34% higher than the 1Q10,with EBITDA increasing from US$170 million to US$269 million comparing the sameperiods, and our margin growing from 6% to 7.1%.

Exports here also were a highlight in this business unit, with the American beef

becoming more and more competitive in the international market. Our exports havebeen growing and reaching new markets. This quarter, our exports grew 48% in USDover the last quarter of 2010 and 28% in volume over the 1Q of last year. With this,

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exports account for 27% of the revenues of this business unit in the 1Q11.

Regarding our Pork unit in the United States, and please refer to page 19 in ourpresentation to accompany these numbers, our sales were US$836 million in theperiod, over US$645 million in the same period of last year. It is a growth of nearly30%. Our EBITDA was US$105 million this quarter, when compared with US$35 millionin the 1Q10, and the margin went from 5.4% in the 1Q last year to 12.6% this quarter.Again, the highlight of this business unit is related to exports, which exceeded in nearly50% the revenue this quarter over the previous quarter. Export volumes also grew 50%when compared to the 1Q10.

About our Chicken unit in the United States, and, again, here we refer to page 20 in ourpresentation. Results were disappointing in the quarter, with an EBITDA of US$-55million. The result was affected by a number of factors such as an effort to reduce

stocks, high grain prices, adverse climatic conditions which forced us to shut downsome plants during the quarter and the weak performance of chicken prices in thedomestic United States markets. This positive feature again was the increase in exportsupported by strong international demand.

The improvement in our sales mix is still the best opportunity to boost growth in oursales and profitability at Pilgrim's Pride. Despite the weak performance in the quarter,we are confident of our management's plan to improve our sales mix and captureUS$400 million in production cost reduction and revenue improvements. We areidentifying opportunities in various areas. Some recent investments, such as the returnto manually deboning, have already started to show positive results.

From the production point of view, we are adjusting volumes and carcass weight tomeet expectations of demand. In general, we have started to notice a betterperformance in our results. As mentioned by our Pilgrim's management in their resultscall, the April EBITDA was positive and our expectations are to end this year in apositive position. We also want to highlight that Pilgrim's is in a comfortable position inrelation to its financial covenants and will continue to remain so.

With this, we finish our comments on each of our business units performance. Now, aquick comment on our debt profile and leverage, and, again, in our presentation werefer to page 24 of our presentation. Our debt profile is improving with over 70% of ourdebt in the long term and our cash availability of R$3.5 billion exceeds in more than80% our short-term debt. Our leverage closed the quarter at 3.1x, a slight increaseover the previous quarter, due to the need for working capital and to the increase insales prices as well as in exports, which require a larger working capital cycle.

I now pass back to Wesley for his final considerations before we open the session forquestions. Thank you. Wesley?


Thank you, Jerry. So, despite the challenges in our sector, we had a satisfactoryquarter, with a net profit of R$147 million, or R$0.06 per share, and we expect ourperformance during 2011 to exceed that of last year.

We will continue to work hard to improve our operations and results generatingsatisfactory results for all of our shareholders. One comment that Jerry mentioned in

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various of our business units, in terms of the exports, I have been mentioned in ourprevious calls that the United States protein as a market is becoming every day and

every month and every quarter more competitive. The weakness of the USD is helpingthe protein sector to become every day more competitive.

We are seeing this competitiveness reflecting in our numbers and in our export volume.So, we are confident that the competitiveness of the United States protein sector willallow us to keep delivering good results for JBS as a whole and we will be working toimprove our results and delivering everyday better return on capital and satisfactoryresults for all of our shareholders.

Operator, can you open for Q&A, please?

Ivan Fernandes, Barclays Capital:

Good morning, Wesley. Good morning, Jerry.I just want to follow-up on something youguys said on the Portuguese call about the debt restructuring. So, as I understand youare issuing ABLs, term loans and bonds in the United States and you are using theproceeds to pay down debt in BRL. So, is it fair to assume that you guys are not goingto do anything to the existing bonds? Are you going to leave those outstanding as theyare?


Yes, you are right. At this point, we do not expect to do anything with our existingbonds.

Ivan Fernandes:

OK. And just a second question, my last one is: I understand that you guys were innegotiations with BNDES, I think it was in the beginning of the year, to change theterms of the convertible debentures. Is there any progress there?


Yes, we keep discussing with BNDES and we expect in these coming months tofinalize our discussions with them.

Ivan Fernandes:

OK. Is there anything you can tell us to how that might change from the existing terms?


Not at this point.

Ivan Fernandes:

OK. Thank you very much.

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Carla Casella, JPMorgan:

Hi. I had one question on how much cash that was on the balance sheet was actuallyat JBS USA LLC?


Andr, can you answer this question?

Carla Casella:

And I guess, the other thing was, are there any intercompany loans from the UnitedStates business to Brazil at the current time?


Andr, are you in the call?

Carla Casella:

No, I guess he is not. I can follow up with him later.


Carla, we can follow up with you, we have the numbers, but I do not have them on topof my head here the cash availability in terms of the intercompany loan. We will ask

Andr to follow up this question with you.

Carla Casella:

That is fine. And then one business question, on the United States, the beef and porkmargins are very strong, well above historical norms. Do you think we will see achange in the historical norm, or should these just revert back to normal levels? Whatdo you think are good long-term margin levels?


Carla, I am not sure what you consider in terms of normal margin for the pork businessand for the beef business, but I can tell you that I believe in JBS. We believe that thepork business will run in a different level in terms of margin, basically because supply indemand in United States is pretty balanced today. And, as you can see in our results,we are already in our 3Q running our pork segment in a double-digit type of margin. So,we believe that in the pork segment, the margins will be for middle and long-term in adifferent level than it was in the previous years. So this is our view about the porksegment.

About the beef segment as well, again, I do not know what is your call in terms ofnormalized margins for the beef segment, but we believe that based on the supply anddemand, globally, around the world, the world is not producing or is not increasing beef

production and in the other hand we are seeing all these emerging markets and allthese markets in development growing and demanding more beef. We believe thatbeef prices will keep going up.

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And the beef price in the United States today, the United States today is competing

with any country around the world in terms of beef production. Because this is a bigfundamental change compared to many years ago. Because of this, we believe that themargin structure in the beef segment will be different than it was five years ago or 10years ago.

Carla Casella:

OK. Great. And then, have you seen any disruption in the United States business fromthe weather issues we had in terms of getting product to consumers or the distributionside of your business? I guess I am thinking of the flooding and the tornados.


No, we are not having major issues. We had some issues in our chicken operation, wehad some plants that we were not able to run I think last week or the week before last,we lost some days in some of our chicken plants. We have some growers that hadissues and had some of their chicken houses destroyed. But this is more in the chickenbusiness, and related to plants and contract growers, not in terms of our ability todelivery product to our customers or to run our beef and pork plants.

Carla Casella:

OK. Great. Thank you.

Farha Aslam, Stephens, Inc:

Hi, good morning. Recently we heard a discussion that United States domestic demandhas pulled back in April. I was wondering if you could highlight your thoughts on whydemand has pulled back, and your read on demand going forward for proteins.


So, Farha, as we saw beef and pork prices went up quite a lot in this last three monthsin the United States, so we believe that consumers pulled back a little bit, becauseretailers increased their sales price in the shelf. This is what we saw at beginning ofApril. But overall, Farha, we believe that demand will keep being strong globally, andbecause of a lot of different reasons.

Again, I mentioned in my last answer, the world is growing, the emerging markets aregrowing, they are developing, these countries in development are growing and we donot think that it is reasonable to see these markets growing like it is now and do not seedemand picking up. So, overall, Farha, we are quite bullish in terms of that demand forprotein. I am not talking about, Farha, for April or May, I am talking about in middleterm and long term. We believe that overall for beef, pork and chicken, demand will bevery strong.

Farha Aslam:

Thank you. And then just one follow-up on the export market, your exports in thequarter were very, very strong. Do you expect that to continue? And was this volume

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driven by this overall demand in the export market, or did you take any specific actionsat JBS that enhanced your ability to export into new markets?


Farha, we expect that the export will keep being strong from United States. Like Imentioned again before, the United States is very, very competitive today. Believe it ornot, United States can produce chicken today in the same level or a little bit cheaperthan Brazil can produce chicken, and the beef price, cattle price in North America andin the United States, it is very competitive today, it is quite in the same level comparingto Mercosul.

So, because of the competitiveness of the United States protein sector in terms of priceand in terms of how the United States can produce protein, we believe that exports will

keep growing and will keep being a key factor to drive profitability and to drive theresults of the United States protein companies. About JBS specifically, for sure, we areleveraging our knowledge in a lot of different markets that

Hello?

Farha Aslam:

Hi.


Sorry, Farha. So, I was saying that yes, we are leveraging our knowledge that we havein a lot of markets, markets that usually United States was not exporting to thesemarkets. So, we are selling products from the United States to a lot of different marketsthat usually we were not.

Farha Aslam:

OK. Great. Thank you very much.

Rebeca Sarmiento, Deutsche Bank:

Hello. Good morning. I just wanted to talk a little bit about what impact the drought inthe Southern United States might be having on your cattle supply going forward. Andas a follow-up to Farha's question, are you still seeing any lingering positive impactfrom exports to Japan?


Yes, the situation in Japan is normalizing, so we saw a quite strong demand in thebeginning of the crises in Japan. Consumers went to buy more products to make surethat they had enough food to face any crises, or if the situation becomes worst. So, theconsumption in Japan went top during the crises, but now it is in a normalized mood.

In terms of the drought in the United States, we do not see this as a major problem in amiddle term or long term. In a short term, we saw some more movement in feedercattle and in cattle, because of the drought, but this is not something that in the middle

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term and/or long term we believe can create an impact to our business.

Rebeca Sarmiento:

OK. Great. Thank you.

Micah Kaplan, Bank of America:

Good morning. You guys talked about working capital, and that is obviously a lot exportdriven. Could you maybe give us a sense, looking out for the balance of the year, howworking capital is going to play out? Is it certainly like get some of that cash backthrough the balance of the year?


Sorry, I am having a little hard time to hear you in the beginning of your question, canyou repeat?

Micah Kaplan:

Yes, sorry. So, working capital, I guess the outlook for working capital given what yousee in the export markets?


OK. Basically, we saw a quite big moment in terms of meat price, especially in beef

and pork in the United States and from Brazil as well and, of course, this increased ourworking capital needs in this quarter. Our revenues went up, like we mentioned before,20% this quarter compared to the same quarter last year.

So, because this factor in terms of price movement, this is requiring us more workingcapital and as well gain price, especially in our chicken segment, it moved it up a lot ofand required much more working capital.

And as well the export, when you grow the export volume, you increase your days interms of sales outstanding because the periods you collect money from export is muchlarger than the times you collect money when you sell in the domestic markets.

Going forward we believe that we will see some stabilization in terms of grain price, wecan see some stabilization in terms of grain price and as well in terms of cattle price.We are confident that stabilizing these prices we will be able to generate free cashflow, positive free cash flow, and be able to stabilize our working capital needs.

Micah Kaplan:

OK. And so, just to conform it, I saw a headline from the Portuguese call but I guessyou guys are somewhat bearish on where grain prices you think are going to go overthe balance of the year.


It is not a question that we are bearish, we believe that grain price already moved up

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quite a lot. So, as we know, corn moved from US$354 per bushel to almost 7.5, thislevel. And we believe that the movement is already a quite large movement. So, what I

mentioned in our Portuguese call is that we believe that in May we can have moredownside in terms of grain price than upside, but I am not saying that we do not believethat we can see some fluctuation or some more increase in grain price. But, in theother hand, we believe that in May we can see more downsize in terms of price.

Micah Kaplan:

OK. And then finally for me, just I guess on the outlook for capital expenditures. Wheredo you guys think you will end up for the full year for that?


In Reais, in a range between R$1.2 billion and R$1.4 billion.

Micah Kaplan:

OK. Thank you very much.

Isabela Bacchi, JPMorgan:

Hi, guys. Thanks for the call. I just have two quick questions about the reallocation ofthe debt. So, you mentioned that you expect to cancel like R$2 billion equivalent ofdebt from Brazil to the United States. Just wondering, what do you expect to be themechanism of this transfer as you raise cash in the United States into Brazil, will you

take it in the form of intercompany loans or just the capital increase?


Yes, you are right. We are working in a transaction to put this debt in the United States.The purpose of this transaction is to balance our debt structure. Today, almost all thedebt that JBS has is in Brazil, is in the Brazilian balance sheet, where we have a lot ofgoodwill to be amortized. So, in terms of tax, we are not efficient. The purpose to thistransaction is to balance this debt to be more tax efficient, and as well in terms of thecapital cost. Only for you to know, we expect a saving after tax of around US$150million coming after this transaction.

We intent to transfer this cash to Brazil through dividend payments, a portion of thismoney will come through dividend payment, and a portion of this money will come backmoney that JBS S.A. put in the United States to be capitalized, but it is not capitalizedyet. So, this cash will return, not a return of capital, but the return of capital that was tobe capitalized.

Isabela Bacchi:

OK. So, as an intercompany loan probably between Brazil and United States that isgoing to get repaid, and that is more or less the mechanism.


Yes, it is not intercompany loan because we put this money when we did the

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transaction in Pilgrims Pride, we put this money in the United States to be capitalized.So, we will return this cash, so we will not have any intercompany loan after this

transaction.

Isabela Bacchi:

OK. All right. And then, just another question, do you expect this new debt in the UnitedStates to be under the JBS USA LLC or more at the JBS USA Holdings level? I wastrying to figure out if you need to have any of your covenants on the 2014s wave, youhad a 3x leverage debt on the JBS USA LLC?


Yes, the transaction will be under JBS LLC. And about the covenants, we will be below

the covenants that we have in our 2014 bond.

Isabela Bacchi:

OK. Great. Thanks, guys.

Mitchell Spiegel, GCA:

Hi, good morning. Just a quick question, regarding your comments on the chickensegment and your expectation for the Company to be in compliance and not have anyneed to amend the bank facilities, to the extent that operations continue to struggle,would you contemplate or have you thought about expanding incremental credit to your

chicken operations to sharpen their near-term liquidity and they work through a verydifficult industry environment?


At this point, all of our projection and all of our numbers is giving us a very, very goodconfidence that we will not have any issue in terms of the covenants, and because ofthis does not intent to ask or to announce anything in Pilgrims Pride debt profile.

Mitchell Spiegel:

OK. And to the extent that things develop not as you contemplate?


Yes, we still have a quite large cushion, so the business needs should deteriorate a lotmore for us to start thinking anything like you have mentioned. But at this point, thecushion and our projection is giving us a strong and a very high degree of confidencethat it will be more than enough to not be close to break any covenant.

Mitchell Spiegel:

OK. Thank you so much for your time.

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Ana Mano, Debtwire:

Good morning, gentlemen. Thank you for the call. My question is regarding the US$2billion liability management exercise. First of all, I want to know the breakdown of thedebt that you are going to issue at the United States entity level. Is it going to beUS$1.2 billion in bonds and US$800 million will be divided between the term loan andthe ABL facility? First, some color on that please if you guys can help me.


So, Ana, we are not disclosing at this point. I mentioned before that the transaction willbe a combination of term loans, ABL and bonds, but at this point we are not disclosingthe size of each trench.

Ana Mano:

No worries. We had heard that it was going to be a secured loan, at least a portion of it,and now we are hearing term loan. So, did you guys change your mind?


Sorry, I do not know if I understood. You said that you heard what?

Ana Mano:

We had heard, year know, part of it would be a bond of US$1.2 billion, US$800 million

ABL and a secured loan. You guys mentioned term loan, so I am wondering if you guyschanged your mind.


No, we did not change our mind. So, at the beginning of the discussion, when westarted to discuss about balancing this debt and to be more tax efficient and the capitalstructure to be more efficient, our intention was to put this three types of transaction, abond, a term loan and an ABL.

Ana Mano:

OK. Thank you. This is clear. What debt do you plan to pay to clear up the Brazilianbalance sheet, if you are not touching the balance issued by the entity in Brazil, whatlines are you targeting? I mean, what expense of debt do you intend to get rid of?


The short-term debt that we have with commercial banks in Brazil.

Ana Mano:

OK. And what banks are involved in the liability management exercise? Can you name

the banks, please?

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It is a group of banks, I will not mention the names.

Ana Mano:

OK. And one more question, you talked about US$150 million in annual savings, youtalked about better tax management and also a reduction in the cost of the debt. Canyou breakdown the US$150 million? I mean, how much of it is tax savings and howmuch of it is lower debt severance cost?


Lower debt cost is around US$120 million and US$30 million and some is tax benefit.

Ana Mano:

OK. Thank you very much, and good luck. And the deal will be on the street this week,you know, after you release the results, are you going to launch this all at once thisweek or what is the plan, the timeline?


Probably, our expectation is to start this week with some of these operations.

Ana Mano:

OK. Cool. And all of it will be under JBS LLC?


Yes.

Ana Mano:

Thank you. Bye-bye.

Ken Zaslow, BMO Capital:

Hey, good morning, everyone. I amjust sort of curious, I know you talked about thelong-term trend of beef packer margins and pork packer margins. I was just curious,the reversion of a way came a little bit quicker than we would have thought. Could youtalk about the reasons why you think beef and pork packer margins came down asquickly, but more importantly, is this a temporary issue? And how does it get workedout? I guess this is the bigger question.


Well, Ken, I am not sure if I understood exactly your question. Can you repeat, please?

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Ken Zaslow:

Yes, so, the beef packer margins and pork packer margins have been extremelystrong, but over the last, call it, three to four weeks, they have come down a little bit inthe United States, seemingly there is some price elasticity on the beef and pork side,but, you know, how temporal do you think it is going to be? Do you think it is going torevert back?

You know, there is a view that pork packer margin at least should expect to come backa couple of months down the road, and just how are you thinking about it, I know yougave the longer-term view, I am just a little bit more into the midterm view?


Ken, look, we saw big jumps in pork price and beef price in these last three months,and it is normal consumers to pull back a little bit in terms of consumption becauseretailers passed a big price increase in their products. And the consumer is seeing thismore now than during last quarter.

So, in our view it is normal that demand is a little bit softer than it was in the 1Q. Andwe believe that this is a normal thing when you have strong quarter and prices jumpand increase a lot, consumers pull back a little bit and margins become a little bitsofter. So, we consider that this is normal thing in terms of the cycle.

In terms of middle term and long term, look, we believe that the pork segment, we donot see a reason that the pork industry in the United States cannot run in a double-digit

type of margin.

Ken Zaslow:

OK. Do you think that the demand pulling back because of the price, how quickly canthe industry in both beef and pork adjust? Is it something that can be adjusted, I knowthat this quarter it has started to slow down, can we see something over the next two,four, or will it take like eight or nine months before the packer start to pull back thecapacity?


I think this can be in a short term, Ken. I do not see any reason that the industry willtake a year or nine months like you mentioned to try to get margins back. So, I thinkthis in a short term. I do not know if this is in 30 days, 60 days, 90 days, but I do notbelieve that this is in nine months, you know.

Ken Zaslow:

OK. But you feel comfortable that the industry is aware that the demand is comingdown and that adjustments have to be made.


I think so.

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Ken Zaslow:

Great. I really appreciate. Thank you, guys.

Operator:

There are no questions. This concludes the question-and-answer session. At this time,I would like to turn the floor back to Mr. Wesley Batista for any closing remarks.

Wesley Mendona Batista

Thank you all that are participating in this call with us today. We would like also tothank all of those who believe and invest in our Company. We continue to count on the

support of all of our partners, suppliers, clients, shareholders and stakeholders, and weare here working hard and everyday trying hard to improve our business and todelivery better numbers to our shareholders and a better future to all of our partners.

So, thank you everybody, and have a good day.


Thank you.

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1Q11 Conference Call Transcription