BRF S A : Transcript - 4Q23 Earnings Conference Call

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

Operator:

Good morning, ladies and gentlemen. Welcome to BRF's 4Q and Full Year 2023 Earnings Conference.

This conference is being recorded and will be available for replay at the Company's website, ir.brf-global.com, where the presentation slide deck can also be downloaded.

All attendees are now connected in listen and view-only mode. Later, the call will be open for questions, and further instructions will be provided.

Before moving on, we would like to emphasize that forward-looking statements are based on BRF's management's beliefs and assumptions as well as currently available information. These statements may involve risks and uncertainties seen as they relate to future events and, therefore, rely on circumstances that may or may not materialize.

Investors, analysts and journalists must acknowledge that events relating to the macroeconomic environment, the industry and other factors may lead to materially different results than those expressed in such forward-looking statements.

Joining our conference today are CEO, Miguel Gularte; and CFO, Fabio Mariano.

I will now turn over to Mr. Gularte, who will begin the presentation. Please, Mr. Gularte, you may proceed.

Miguel Gularte:

Good morning. I would like to start by thanking everyone for attending our earnings conference. BRF has reported net income of R$823 million in the 4Q23. Throughout the year, we focused on efficiency and excellence while executing our business plan. We made progress quarter-by-quarter and ended the year with positive results largely driven by the Company's improved operational performance and financial discipline.

We have closed this period with significantly lower leverage, the lowest in seven years. Our ever-evolving commercial execution, improved product portfolio performance and consistent work with the Sadia, Perdigão and Qualy brands have supported our profitability boost in 2023. In the international market, we have returned to double-digit margins, advancing in value-added products and securing a record number of plant licenses and new destinations.

Now I would like to invite our CFO, Fabio Mariano, to present our financial results in further detail. After which, I will come back for our final remarks on the announcement.

Fabio Mariano:

Good morning to everyone on the call. On the starting page, I would like to focus on the main financial indicators for 4Q23, starting with net revenue, which came to R$14.4 billion. Our EBITDA was R$1.9 billion. This gives us a 13% margin for the period, our best quarterly result in many years. Our free cash flow performance was R$613 million.

That's our largest quarterly cash generation in three years. In working capital, we significantly reduced our inventories, which helped us to secure a financial cycle of 5.8

1

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

days, three days shorter than in the same period last year. The inventory turnover reached 75 days, 18 days less than in 2022. Ending this slide with leverage, we reached 2x our EBITDA in the last 12 months, lowest leverage in seven years.

In the next slide, page 4. We show on the left-hand side our gross profit over time with 24% profitability in the period. We have reported a gross profit of approximately R$3.5 billion. On the right-hand side, we also noticed the EBITDA progress as mentioned earlier.

In the next slides, we will present our performance by market or business. Starting with Brazil, we continued to progressively improve our operating results. Our EBITDA margin came to 15.6% with the help of our holiday campaign. The best profitability of the year was that, even excluding seasonal sales. Notice that the performance of processed products was consistent with historical levels despite the still sub optimal consumer environment in the country.

On page number 6, we highlight the recovery in prices of fresh cuts in Brazil, just as we had predicted in the previous quarter. At the bottom of the slide, we emphasized the increased accuracy of new product launches and continued progress of our commercial execution, which can be seen in the greater availability of products in store, greater penetration into new points of sales and a marked improvement in customer service levels, which significantly contributed to the performance of the domestic market.

On page 7, we highlight the outstanding performance of our celebratory portfolio. We showed our leadership in the market and the strength of our brands during this special festive period. Our market share was 72% in turkeys and 60% in special poultry, such as Chester.

The next slide shows our performance in the international market. We see this business's recovery coming to double-digit margins as new price levels for poultry and griller cuts and the downturn of costs with decreased grains and efficiency gains from the BRF+ program. Our EBITDA margin increased by 7 p.p. compared with the previous year. We also noticed increased market share in chicken and poultry experts to many destinations.

On the next slide, we highlight the growing profitability in the Halal market in the Gulf countries. We continued to grow our market share in processed foods, which is in keeping with our plans to expand the range of value-added items in the region. We also reported positive performance in Turkey, mirroring the larger share of processed foods and sales volumes and sound profitability levels in the unprocessed portfolio.

We sustained our market share leadership with the Sadia and Banvit brands with 37% and 21% shares, respectively, in each of their markets. On the right-hand side, I point out the Direct Exports business. We can see our prices performed for the main cuts. We grew our business alternatives with 16 new licenses for markets such as the United Kingdom, Africa and the Americas. Our export licenses came to 66 or have 66 new ones in 2023.

We also reduced our finished product inventories by almost 80,000 tons internationally versus 2022 and Direct Factory Exports remain at high levels. Unsold inventories continue to fall, improving our commercial execution and relieving the capital we have employed.

I will end the presentation talking about ingredients and pets. The business reported an EBITDA margin of 11.7%, R$98 million during this quarter. It's important to note that the development of our manufacturing output continued to contribute to the maximization of our results in the Company's portfolio.

2

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

In the Pet business, we increased our share in sales of the Super Premium Natural category with higher profitability and higher exports throughout the year, ending 2023 with our first shipments to the United Arab Emirates. We would like to underscore the extension of our BRF+ program to the Pet operation in search of growing our efficiency.

In Ingredients, we continued to focus on growing or expanding our markets and increasing sales of value-added items such as hydrolyzed seeds. We continued to add value to our co-products in order to maximize our business integration. Next, I will share the progress of our efficiency program, which Miguel will be quantifying in figures shortly.

I will show you comparisons with the same period last year. The bars were colored in light gray. The full year comparison can also be seen in the material you have received. In agriculture and livestock, feed conversion of poultry and pigs fell by 2.5% and 1%, respectively. Chicken mortality fell by two p.p. and hatch rates increased by 5.6 p.p.. In manufacturing, we grew our factory yields by more than five p.p.. In logistics, we have reduced our returns and increased our service levels in Brazil in a very material way.

In the following slide, we show you the trend of our COGS, a major driver for competitiveness growth. On the left-hand side, we can see that the average COGS per kilogram in Brazil fell by 5 - or rather 7.5% in the year versus 2022. And more importantly, the cost in the last quarter of the year was 5% lower than the average for the year, showing an excellent transition point for 2024.

Internationally, the COGS per kilogram in the last quarter was 8% lower than the average for the year. As we have already underscored, the improvement in COGS is anchored in the reduction in grain consumption within the BRF program.

On page 14, we show you the highlights in sustainability. ESG showing achievements such as a 26% reduction in absolute Scope 1 and 2 emissions. Two, we are very close to achieving our clean energy self-production targets.

Three, we have achieved 100% traceability in direct grain suppliers and 77% traceability for indirect suppliers in the Amazon and Cerrado biomes. Four, we won recognition for good animal welfare practices. Five, we have maintained our presence in the ISE and B3 carbon efficiency index portfolios. And lastly, we continued to generate positive social impact by engaging actions in 100% of the municipalities where we have a footprint.

On page 16, we now show you information about the Company's capital structure. In the chart on the left-hand side, we see the performance of our net debt and leverage. These indicators were already mentioned at the beginning of the conference. We have the lowest leverage in seven years.

On the right, we can see our debt profile, which is still diversified and long, with no concentration of repayments in the near term and comfortable liquidity position.

The next slide shows you our free cash flow. The chart shows an operating cash flow of R$1.7 billion, an investment flow of R$741 million and R$352 million financial flow. All of that adds up to a free cash flow of R$613 million, which is the best cash generation we have reported in any quarter in the last three years.

On the final slide, we talk about the performance of our net debt between the quarters. We reported a net debt of R$9.4 billion with contributions from the capitalization of our

3

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

share offering in July. The allocation of funds from that follow-on offering will continue to help us reduce interest charges over the next coming quarters.

I would like now to thank the audience and turn the floor over to our CEO, Miguel Gularte, for his closing remarks.

Miguel Gularte:

Thank you, Fabio. To conclude our presentation, I would like to point out that our focus on operational efficiency and the financial discipline we have maintained quarter after quarter is what enabled the net profit and cash generation we have reported for the 4Q23. Our efforts and initiatives throughout the year were decisive for our sound performance in the period.

The Company's predicted intelligence model, combined with the efficiency gains from the BRF+ program proved to be assertive throughout the year and allowed us to capitalize on grain origination in due time as prices fell, which led to a material cost reduction in the 2H of the year. Additional returns from BRF+ totaled R$525 million in the 4Q, bringing the total for the year to R$2.2 billion.

I should also highlight the progress we have made in major indicators throughout the year such as feed conversion, unprocessed food yields, animal mortality, commercial execution and logistics service levels among others. Moreover, we have recorded the lowest FIFO discount levels in recent years, showing greater integration between our production and sales planning.

Not only that, but we have also significantly reduced inventories across the board, bringing in savings in financial and storage costs. The highlights of the year also include our higher profitability in Brazil, supported by our ever-evolving commercial execution and improved performance of our portfolio as a whole. In the 4Q, we reported an EBITDA margin almost twice that of the 4Q22.

Special mention should also be made of the consistency and progress in the profitability of our processed foods portfolio in Brazil throughout 2023. In our international operation, our EBITDA margin returned to double digits in 4Q with a significant recovery in prices in all locations. Our market diversification strategy remained consistent as we resumed our exports to the United Kingdom.

In 2023, we secured 66 plant licenses for new locations in Latin America, Asia, Europe and South Africa. I should also underscore Sadia's leadership in the GCC regions Halal market, where we gained market share in process foods in keeping with our strategy of increasing the volume of value-added items.

Our results also mirror the consistent work of our leading brands in their respective markets, Sadia and Qualy Vita in South America; and Banvit in Turkey. We also saw an improvement in our people management indicators such as engagement, absenteeism and turnover and continued to invest in our team's development.

I would like to point out our performance in occupational safety, where we reported the best rates in history, cementing BRF's benchmark position in the market. Our performance in the last quarter of 2023 confirms our team's ability to manage with focus and discipline. We step into 2024 motivated by the results we have achieved and with Version 2.0 of BRF+ already well underway.

4

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

As I often say, here, the future begins every Monday, and we will continue to devote ourselves to pressing on with BRF+ 2.0 in 2024, always striving for our Company's continued evolution. We have opened a new chapter in our history with Marfrig's consolidation as controlling shareholder with more than a 50% stake, and we are confident we will continue our journey with commitment, agility, simplicity and efficiency.

I would like to thank our dedicated associates for our progress and achievements. I would like to thank our Chairman, Marcos Molina, and the Board of Directors for their unraveling trust, constant presence and continued support. And also like to thank our shareholders, our integrated outgrowers, our customers, our suppliers and all the communities where we operate.

Guilherme Palhares, Santander:

Good morning, everyone. Thank you for taking my questions. Well, I would say that the first question is more on the cost side. We are noticing this significant decrease the Company has achieved from the unit cost standpoint. And we wanted to understand how much of that comes from operational leverage and how much comes from the slightly lowered fee costs? And what could we look forward to in 2024 when it comes to the benefits of that factor? And my second question is I would like to understand a little bit more about the exports movements. We understand the better prices and the licenses. So if you could update the Company's perspective, thinking about the beginning of 2024, that would be great. Thank you.

Miguel Gularte:

Good morning, Guilherme. As to your question with regard to prices, and considering that we are operating under BRF+, that ultimately touches on all the links of the chain. We start with improvements on the agricultural side, and then you have food conversion aspects, which is benefited by aspects in the industry.

And then you look at manufacturing, where you have costs and better performance, and you complement that with the commercial sense and will need better or more rational service and you can seize all of that on the cost side. Evidently, this is a continued process. It started at the end of 4Q22 and operated throughout 2023 which led to, as we reported over R$2.2 million excluding the FIFO effect, which would lead that to over R$3 million.

We have talked about the design of BRF+ 2.0 for 2024, and that continued to bring in effects throughout the year, and we expect this improved efficiency also enabled by a better situation in terms of international costs and prices. We should be able to report a satisfying performance at the end of the year. I will now turn it over to Fabio, who will add to the first part of your first question and also add to the second question because, obviously, I only gave you the answer in broad strokes.

Fabio Mariano:

As already said, I will try to add a little bit to the answer with regard to costs. And then we can talk a little bit about our prospects for the markets, especially the international market. I think that 4Q was when we saw the lowest level of costs. And it does have to do with the decrease in feed prices, but also has to do with the efficiency plan that we have adopted BRF+. So that plan also involves what you mentioned, which is the operational leverage,

5

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

seeing as we have increased our volumes and really made the most of our operational structure.

As we transition now to 2024, comparing this level with our cost in 2023, on the international side, you see a difference of 8%. And in Brazil, you see that difference is 5%. All of that should help us in terms of gross profit to have a very positive start of the year. And when we combine that with the cost benefits in the favorable prices, all of that makes us optimistic about the beginning of the year. So we are seeing healthy prices and a very competitive cost ratio that lead us to believe that the Company has reason to believe we will have great results also in the 1Q24.

Guilherme Palhares:

That was perfect, guys. If you could also talk a little bit about your prospects for the export market.

Miguel Gularte:

Well, Guilherme, we are seeing the export market and the year with prices on the rise. And it's important to highlight the 66 new license that BRF's team was able to secure is very important. These new licenses take us to that quote that we have repeated over and over across the - throughout the year, which is the best option is to have a range of options. And when it comes to experts, that opens a range of choices for us in terms of new markets. And from a situational standpoint, we are seeing the entire market respond in time.

So when the entire market is responding in terms of price, a company that has new licenses for new destinations and can leverage all of its brands, which are leaders in several different places, that allows you to predict and seize on those opportunities throughout the year. So in 2024, we go into a process where the Company is performing well in terms of operations in a market that's also performing well. So there's a better balance between demand and supply.

Guilherme Palhares:

Excellent. Miguel and Fabio. Thank you so much for your answers.

Gustavo Troyano, Itaú BBA:

Good morning, Miguel and Fabio. Thank you for the opportunity. Well, there are two things I would like to go over with you. The first has to do with the cash flow. In our last conversation, you talked a little bit about the breakeven and EBITDA, especially focusing on CAPEX and financial flow. And it's interesting the financial result in 4Q. So I just wanted to know if we can assume that this is the new breakeven point if it's reasonable to consider this the new normal?

And when it comes to cash flow, I know it's difficult to advance the results because of the average grain prices. But when it comes to finished goods inventory, is there any room for reductions? Or has all of that been tackled with BRF+ in 2023?

Now on housing, we had some preliminary data pointing to higher inventories in January and February. I would like to hear from you if there's any movement from the Company in

6

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

terms of increasing or expanding housing, which could lead to lower prices moving forward? Or if there's any other side to that, that we are not seeing? Thank you.

Miguel Gularte:

Hi Gustavo. Good morning. I will start with your first question, talking about the breakeven point and free cash generation. Well, what I can tell you is from a structural perspective, our focus would be to invest around the same level as we did in 2023, so around R$3 billion, maybe with a capacity for the biological assets, maybe even a little less than that, between R$2.8 million and R$3 million. And then we need to consider the financial expenses. So we are working with a range between R$1.8 billion and R$2 billion considering interest charges and other factors as well.

That would take us to a structural breakeven that would fluctuate between R$4.6 billion and R$6 billion, also depending on the interest rate charges that also affect that and the debt that's incurred in strong currency. So that's essentially the equation for the Company to generate cash flow, it needs an EBITDA around that size.

Fabio Mariano:

On finished goods inventories, we have significantly reduced levels over the course of 2022. And just to remind you, in finished products inventories in Brazil, we reported in advance that we had already identified opportunities to reduce the finished goods inventories internationally throughout the year, and we decided to wait for the right moment because for most of the year, we navigated the market with outstanding prices.

So it's not the right environment to solve inventory problems. Now 4Q because there was a recovery in prices, we saw the opportunity to tackle that. So that's why we are seeing inventories with a turnaround time of 75 days, so pretty optimized.

So any gains after that should be marginal. They should not be as representative as those we were able to secure throughout 2022 and 2023. And lastly, when it comes to housing, well, we have data for chicken housing of over 600 animals, but there are prospects for February and March, that point to a decline.

It's important to note that Brazil supply is not what explains the production volume when it comes to poultry protein. Of course, Brazil is very representative, but we need to consider data from housing in the United States, Europe and Africa as well.

In the United States, we already have figures showing that 2023 was a year when housing decreased when compared to 2022 and even 2021. We must also consider in that equation, the supply and the demand side. In Brazil, we see a consumer environment, although not as attractive, a lot better than the environment we had in 2023. Per capita income is going up, employment is resilient, consumer confidence is at a sound level. And on the international side, we see strong demand in areas where we are dominant in the market such as in the Middle East.

We plan to have a very successful campaign during the Ramadan period. We have the spread with beef and poultry returning to levels, which are just slightly above the historical average. So we also need to assess demand and not only the supply side. And our understanding is the environment today is a lot more balanced than the one we had to navigate last year and even the year before that. So I will now turn it over to Miguel to add to my answer.

7

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

Miguel Gularte:

Well, I think you were very comprehensive. We should navigate a more normalized environment. And it's to be expected that the less efficient the environment is, the less efficient we will be in that market.

And it's also important to remember that BRF is currently in a commercial position from the international standpoint that's very special. In 3Q and 4Q23, for example, we saw exceeding Brazilian exports to Asia, even more than to the Middle East. And BRF has been a dominant - dominance in that case, sometimes exceeding 50% market share.

So we are ready for that. And evidently, a company with lower inventories, or unsold inventories, with no stopped inventory, and that's capitalizing a lot more agile - in a much more agile way that type of situation, that's a huge plus. So we expect to see gains not only in the international market but also in the domestic market as well.

Gustavo Troyano:

Thank you, Miguel and Fabio. That was great.

Ricardo Boiati, Safra:

Hello, everyone. Good morning. Thank you for the opportunity of asking question. My first question is in relation to the inventory levels. Of course, it is a surprisingly low level. It's clear that efforts have been made for the reduction of inventory levels, especially for finished products. My question is related to the efficiency of this inventory level. Can the Company maintain those historical levels?

And can the stock out to the efficiency level be maintained without losing anything in the domestic market or in the international market? Have we reached a level where we need CAPEX for expanding the capacity to meet the demand even better as you have mentioned? And you have mentioned that the demand has been very healthy, both in Brazil as in the exports market. And we are - the competitors are increasing capacity in some lines. And can the competitor cause any impact on the price, especially in the domestic market?

So this is my first question. I understand that you do not disclose the information on the profitability per product, but could you provide a ranking of the categories of products that performed better in this 4Q in terms of profitability, processed food in natural, fresh and processed, poultry. Could you provide a ranking roughly? What were the main drivers that led to a better profitability? It would be very nice for us to understand what's happening to the Company.

Miguel Gularte:

I am going to answer the first question, and then Fabio will answer the second question. I believe we have to understand that the BRF+ program touches upon all of the aspects, not only inventory levels. There is a pricing system that provides an indication of related to which is the location and what's the price you have to employ. And then you can increase your level and the commercial assertiveness. At BRF, we can see that we have made a lot of headway in the food rate.

8

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

And our disruption rate is the lowest ever in the Company. And being very objective when answering your question, by means of operational efficiency, we maximize the gains with low inventory levels. And this is from the logistics viewpoint. And at the same time, we had a very high level of logistics performance, reaching high levels. From the viewpoint of commercial execution, we have the honor to say that both in Brazil and the international market and when I mentioned international markets, I include Halal geography, I can say that we have reached the right timing.

And we can go beyond. We can even talk about grains. Let's mention the previous quarters when we talked about the timing to purchase the grains, BRF followed its indicators and we saw some different situations in the market. And for that reason, we let our grain inventory levels low - at really low levels. And when they reached the lowest level, we started purchasing grains, and we had a very comfortable position, and that was reflected in the costs.

And this also shows that the efficiency and the execution of inventory levels, both as to grains or for exports, products for the domestic market, everything is integrated and interconnected. So the answer is yes. The Company can and will continue providing those levels of efficiencies, operating at a reasonable level of inventories with no risks of disruption because we have extremely quality information.

Fabio Mariano:

Now providing a complement on the investments on production capacity. I have already mentioned in the previous question when I talked about the breakeven of cash generation. I said that we must invest at levels of R$3 billion - between R$2.8 billion and R$3 billion. And it's important to consider that the Company in the pandemic years expanded its capacity quite a bit. In terms of production, especially in the line of processed products, this capacity has not been fully used.

That means that we still have some idleness in the lines, so we have an important growth plan for the years to come that will start in 2024. So the Company has the capacity to grow and expand its volumes with a very marginal investment. In relation to capacity as a whole, as we see in the market, historically, we understand we have all the conditions to compete. We have strong brands, quality products, and we hope to find the market logic, which is disciplined. Now I am going to address the last part of your question.

You asked some more information about the categories. I would rather provide you with a breakdown saying that the most important contribution in relation to profitability, in addition to the seasonal portfolio of commemorative product comes from the recovery of unprocessed food as we had previously mentioned.

We had already mentioned in the 3Q, we were making the transition to the 4Q by using the best prices of cuts and the processed products continue to be resilient, but the biggest contribution came from the commemorative products, seasonal product. And this is what I can disclose to you in terms of the domestic market.

Ricardo Boiati:

It's really clear. Thank you, Miguel and Fabio.

Lucas Ferreira, JPMorgan:

9

Conference Call Transcript

4Q23 Results

BRF (BRFS3 BZ)

February 27, 2024

Good morning. My first question is about capital allocation, considering that the Company is reaching to times net debt over EBITDA, cash positions are comfortable, BRF+ program which was very successful. My question is, when are you going to start considering accelerating growth or not or maybe even focus on the payment of dividends, maybe you have conditions to increase the payout? Is it going to be a year where are you going to be more conservative in order to reduce even further the leverage? So this is my first question.

And the second is specifically, if you could provide more details on the relevant market for you. I understand all the things about the licenses and everything, but I would like to understand more about Japan, where we are in the process of price recovery. Last year, we had avian flu issue. And you see that the inventory levels are more normalized. And also China, do you see any opportunities for the year? Or do you see difficulties in recovery in China? Thank you.

Fabio Mariano:

Thank you, Lucas. I am going to answer the question about capital allocation, then I will pass the floor over to Miguel so that we can discuss Asia, Japan and China, as you asked.

What I can say about capital allocation is that our focus is on growing the Company. And this is what we have done in the previous quarters. As I have said, we still have some capacity to be occupied, so we have a very important focus on organic growth so that we can dilute our infrastructure of fixed costs even more. So this is the plan: grow volumes, use the idle production lines, and this is what we intend to do in 2024.

Of course, when we consider the finance needs, this is a very important year for us to be active because we do not have a lot of needs for amortization in 2024. So we are going to bring further assertiveness as to the financial expenses in burden. So this has to do with liability management.

So what we expect from our execution is this. So I turn the floor over to you for you to answer the second question.

Miguel Gularte:

Good morning, Lucas. Yes, we observed that Asia has been extremely relevant even though I have mentioned that in the last two quarters, we had a volume exiting Asia. So we had the Secex information about 130,000 tons. And for the quarter, 136,000 tons in Asia against 138,400 in the - we see this movement in terms of price at the end of the year and also in the beginning of January.

The price of swine has a reaction and also poultry prices have had an impact, especially in China. So there were trends that we expected; they even happened before our expectations, or expected by the market, and we could make some movements in relation to those price increases.

And in the case of Japan, Japan received a higher offer in the 4Q, and this goes back to normal levels. There was an excess in the offer previously, and we see internal inventories going back to normal levels, and prices adopting a new dynamics related to recovery. And I insist to say that it's relevant for our business. It's very important for us to have different options.

10