JBS Sees Better Days for U.S. Beef Unit in Second Half 2016

  • Company sees recovery in cattle supply boosting margins
  • Earnings hurt by $358 million currency hedging expense

JBS SA, the world’s largest meat producer, forecast its U.S. beef unit will return to profitability in the second half as cattle supply recovers.

JBS USA Beef, which includes beef operations in Australia and Canada, continues to face "challenging conditions" after posting a $25.2 million loss in the fourth quarter, Chief Executive Officer Wesley Batista said Thursday. Still, the Sao Paulo-based company said cattle herd expansion in the U.S. will allow it to increase production and improve margins in a few months.

"There are clear signs we have better days ahead of us," Batista told investors on a conference call. "We believe we will start collecting the fruits in the second half."

JBS also said margins at its Pilgrim’s Pride Corp. unit, the second-biggest chicken processor in the U.S., are stabilizing at two-digit rates after a slump in the past quarter. Adjusted net income at Pilgrim’s missed analysts’ estimates after falling 62 percent in the period on weaker prices, the unit reported on Feb. 10.

JBS posted an unexpected fourth-quarter net loss after the Sao Paulo-based company took a 1.34 billion-reais ($358 million) expense related to currency hedges in a report late Wednesday. JBS’s profit was also hurt by a one-time expense of 460 million-reais related to a global restructuring project and a tax settlement in Brazil, the company said.

Missed Estimates

The period’s net loss was 275.1 million reais, compared with net income of 618.8 million reais a year earlier, JBS said in a statement. The average of nine analysts’ estimates compiled by Bloomberg was for a profit of 135.6 million reais.

JBS climbed 8.6 percent to 12.30 reais as of 1:15 p.m. in Sao Paulo. Brazil’s benchmark Ibovespa Index gained 5.9 percent.

JBS said it had a 1.34 billion-reais loss on its hedging of foreign exchange in the quarter. For the full year, the company gained 10.6 billion reais with currency derivatives, boosting profit to a record 4.6 billion reais. JBS has said that its currency bets protect against declines in the real that can bloat its foreign debt when measured in local-currency terms. 

Real Losses

Brazil’s real lost almost one-third of its value last year, the most among major currencies tracked by Bloomberg, as the South America’s nation struggles with the longest recession in a century amid the worse political crises in decades. More than 80 percent of JBS’s sales are in dollars and include revenue from Pilgrim’s Pride.

"All the instability and uncertainty that we have seen give us even more conviction that we need to protect our dollar-denominated debt," Batista said. "We can’t be exposed."

JBS, which has major operations on three continents, said net adjusted debt rose to 2.91 times Ebitda from 2.55 times in the third quarter following the acquisition of Cargill Inc.’s pork unit. Ebitda is earnings before interest, taxes, depreciation and amortization.

Fourth-quarter revenue climbed 37 percent to a record 47.2 billion reais. Still, that missed the 48.7 billion-reais average analyst estimate. JBS’s South American chicken and processed food unit and Mercosul beef business both posted higher Ebitda on rising exports and cost cuts.

"The results reflected strong momentum in Brazil, which offset weak performances in the U.S.," Bradesco BBI analyst Gabriel Lima said in a note to clients.

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