Brazil's Marfrig Swings to Lose in Q4 Missing Analysts' Forecasts

Marfrig Global Foods SA reported a net loss of 628 million reais for the third quarter, missing analysts' expectations. Its North America unit -- led by National Beef -- contributed to this outcome, while Marfrig's South American segment was buoyed by stable livestock costs and improved export prices.

&Green has joined forces with Marfrig to facilitate and execute the transition of its supply chain in Brazil's Amazon and Cerrado biomes to deforestation-free cattle production. To this end, the company has signed a public roadmap under an Environmental and Social Action Plan (ESAP).

Gross Profit

Brazilian Meatpacker Marfrig Experiences Loss in Q4

Analysts polled by Reuters projected a net loss of 628 million reais for the fourth quarter of 2022, down from its profit of 650 million reais a year prior. Marfrig's proforma adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 27% to 5 billion reais during this period.

Marfrig's South American branch had an outstanding quarter, posting record sales and export revenues of BRL 7.1 billion ($1.4 billion). Adjusted EBITDA margin remained flat sequentially but improved by 310 basis points compared to the first quarter of 2022.

Marfrig's North America unit, National Beef, saw strong demand from the North American market and an uptick in international prices that enabled it to increase its adjusted EBITDA by 60% for Q4. Exports to South America also reached a new high for Marfrig - 70% of total quarterly beef sales were exported there.

Furthermore, vegetable protein product sales in Brazil surged 30% due to a partnership with Archer Daniels Midland Co. to produce an array of plant-based items at their Varzea Grande unit.

Marfrig's gross profit fell by 3% during this period due to currency and commodity price changes. Overall, global gross profit rose 13%, but was down 2% in the US.

A decline in the US economy weakened consumer spending and adversely affected construction, Marfrig's primary business discipline. Furthermore, this had an adverse effect on gross profit in Latin America where political and macro-economic uncertainty caused delays in decision making.

The US tax increase, which increased the value of the dollar by 4% against other currencies, was partially offset by an improvement in trade balance; however, analysts still view this as a headwind.

Thus, the company's financial leverage ratio remains below 3x, indicating that it isn't at risk of defaulting and on track to meet its goal of reducing leverage to a lower level by 2023. Furthermore, the expected closure of Grupo BIG Brasil acquisition should spur growth for the group in 2022.

Net Profit

Net Profit Swings to Loss in Q4 Analysts' forecasts for Brazil's Marfrig are pointing toward a decline in net profit. Despite strong sales in North America, the company will see its profitability decline in Q4 as its margins suffer from the adverse effects of interest rate increases.

The company's adjusted earnings before taxes, interests, depreciation and amortization (EBITDA) declined 47% to 2.22 billion reais in Q4 2022, while the adjusted EBITDA margin decreased 114 basis points sequentially, 192 basis points compared to Q1 2022 and 962 basis points year-on-year. Nevertheless, the company expects its EBITDA to increase over the next months as negative factors, such as increased inflation and the adjustment of utilization rates in the packaged food industry to consumption levels, fade.

Meanwhile, the South American segment remained resilient and posted record sales of BRL 7.1 billion in Q4 2022, while exports increased to 70% of total revenues. The adjusted EBITDA margin for the South American business segment grew to 9.5%, up 310 basis points from Q1 2022.

Moreover, the company's South American business unit has continued to benefit from stable livestock costs in Brazil, better export prices and improved sales volumes. The Brazilian market accounts for a significant portion of Marfrig's beef revenues and should continue to be an important one in the future.

However, investors should note that the company's recurring investments in expansion projects for its beef operations may not be enough to sustain its financial performance over time. Hence, the company will have to prioritize its liquidity management efforts in order to meet cash requirements.

With a strong international footprint, the company is likely to remain an attractive stock for long-term investors. As a result, we will keep a hold rating on the stock. Nonetheless, we will have to watch closely for any further adjustments in the company's creditworthiness to determine if its access to debt will be affected. The company's repurchase program, in particular, will be of key importance to its ability to reinvest a significant amount of cash into the beef operations.

Adjusted Earnings Before Taxes

Brazil's Marfrig Experiences A Loss in Q4

Analysts' Forecasts Miss The Mark
Brazilian meat producer CVM, which owns a significant stake in poultry processor BRF, reported adjusted earnings before taxes down 47% to 2.22 billion reais for 2Q18. This figure fell short of analysts' expectations of 2.55 billion reais for that quarter and their 3Q18 forecast of 3.35 billion reais.

In late June, Leucadia National Corporation completed the acquisition of National Beef, leading to higher operating costs as a result. This deal was meant to expand Leucadia's international reach and reduce debt levels at Marfrig.

However, the transaction wasn't without risks. It remains uncertain whether or not the company can maintain its financial discipline when selecting which expansion projects to allocate funds to. This decision will affect the terms of any loans used to fund those projects.

Marfrig could experience an adverse impact from any potential suspension of Brazilian meat exports to China due to a health warning, since that country is its primary market for South American beef. This would likely result in sharply decreased profit margins.

Rui Mendonca, head of Marfrig's South American operations, reported that the Brazilian market has recovered with increased cattle slaughtering and improved export prices. Furthermore, he expects the government to lift an embargo on Brazilian meat exports to China in March, allowing Marfrig to resume imports and generate more cash flow from within Brazil.

Meanwhile, the company seeks to cement its position as a leading global protein provider. To do this, it will focus on beef production, enhance value-added and plant-based products, and strengthen its North American business unit.

Marfrig has announced plans to monitor 100% of its direct and indirect suppliers in the Amazon and Cerrado biomes by 2025, in order to address environmental concerns. These companies must meet certain environmental standards as well as provide full supply chain traceability. Through this project backed by &Green, Marfrig hopes to reintegrate its suppliers while also encouraging best practices within the industry.

Adjusted EBITDA

On Monday, Marfrig, Brazil's largest beef processor, reported a loss for the quarter. Their Adjusted EBITDA was down 38% compared to last year due to lower iron ore fines realized prices. Analysts predict this decline will continue into the fourth quarter due to higher cost pressures caused by record cattle prices and high grain costs that are expected to reduce margins further.

Analysts have also predicted a potential growth in sales of vegetable protein-based products from the company's core beef patty unit. This could enable the firm to diversify its business and boost profit margins.

Analysts are also highlighting the company's increased stake in National Beef Packing, LLC. With this acquisition of 51% stake, they hope to access new export markets such as Japan and South Korea.

Norges Bank, working with the Norwegian government to promote responsible investment, has called on Brazil's Marfrig to cease purchasing cattle from ranches that have been embargoed for deforestation. Research by the Council on Ethics--an organization working together with Norges Bank--found that up to three per cent of cattle purchased directly from Marfrig's direct suppliers came from embargoed ranches.

In its report, the council also took issue with Marfrig's lack of supply chain transparency. It was revealed that Marfrig only began implementing systems to monitor its chain more than 12 years ago.

Additionally, the report revealed that up to four per cent of cattle purchased from National Beef's indirect suppliers had been sourced from ranches embargoed for deforestation. This issue has been identified as a problem for both companies; thus, the Council has been pressing them to take measures to improve their practices.

On April 9, the Norwegian government made a decision based on an investigation by the Council on Ethics into Marfrig's cattle purchases from both direct and indirect suppliers across Brazil between 2016 and 2019. They discovered that up to three per cent of cattle purchased directly were sourced from ranches embargoed for deforestation.