JBS S.A., the world’s largest beef processor announced late last week its first-quarter 2016 results with a headline BRL2.7 billion (A$1.06b) net loss.
By far the biggest impact on the bottom line came from what JBS calls its hedging policy, a strategy based on financial derivatives. On its own, this policy resulted in a BRL5.8 billion (A$2.2b) loss, mitigated to some extent by a gain in FX (foreign exchange) variations of BRL1.8 billion (A$700m).
Warren Buffett once described derivatives as ‘financial weapons of mass destruction’ and looking back through the 2015 results posted by JBS, it is obvious they are not for the faint hearted. They ranged from a BRL2b (A$778m) loss in Q2 to a BRL9.4b (A$3.65b) gain the following quarter.
To the extent that these contracts may be based on currency movement, it reminds us of the fate of Tancred Bros, Australia’s major meat processor and private landholder in the late 1970s and early 1980s.
In 1984 Tancreds were believed to control around 10pc of Australian meat production but much of their debt at that time was in loans written in US dollars.
Floating of the A$ by the Hawke government led to massive losses for Tancred and the loans being called in. The rural properties were lost and what processing assets remained were rolled into the formation of Australia Meat Holdings (AMH) in 1986 which was ultimately acquired by JBS.
But looking a little deeper into the JBS trading results shows how such massive losses from their hedging strategy can be sustained.
Sales revenue for Q1 reached BRL43.9 billion (A$17b) a 29.8pc increase on Q1 2015. This was driven primarily by sales increases in the company’s Brazilian business units JBS Foods and JBS Mercosul and in the US business unit JBS USA Pork. However the business unit JBS USA Beef which incorporates beef processing in Australia and Canada recorded a 10.4pc decline in revenue.
While the actual Australian contribution to this result is not shown it presumably was significant as two of the four major reasons for the decline were listed as a decrease in the number of livestock processed in Australia and appreciation of the A$ against the US$.
Of the business units that recorded gains, Mercosul is perhaps the one to watch. Mercosul covers JBS beef operations in Brazil, Argentina, Paraguay and Uruguay.
Revenue increased 3pc to BRL6.9 billion (A$2.68b) period-to-period but it was the whopping 102pc gain taking EBITDA to BRL761 million (A$296m) that caught the eye. One of the main reasons given was access to the Chinese market which helped boost exports by 200pc. With Brazilian access to the US market expected to be finalised after the US elections in November, it will be interesting to see what further difference this makes.
Corporate restructure
HOT on the heels of its Q1 financial results, JBS S.A. has made a statement of Material Fact to its shareholders announcing its intention to pursue a corporate restructure.
At the centre of the proposal is the formation of a new entity JBS Foods International which will be listed on the New York Stock Exchange and the Brazilian Securities Commodities and Futures Exchange (BM&F Bovespa) through a Brazilian Depositary Receipts program.
JBS Foods International will consist of the company’s Brazilian processed food unit Seara Alimentos plus all of the business units outside Brazil.
JBS S.A. will be renamed JBS Brazil and will remain a publicly listed company on BM&F Bovespa and will continue to hold JBS’s Brazilian beef, biodiesel, collagen and global leather businesses.
The Batista family’s holding company J&F Investimentos will still be the major shareholder of the reorganized JBS Group and will maintain strategic decision making through its central office in Sao Paulo.
Wesley Batista will remain as CEO of the global business and other senior executives such as Andre Nogueira, who came to Australia in 2012 to take over responsibility for Australian operations from Iain Mars and later returned to JBS USA as CEO, will maintain their current roles.
In large part the decision to restructure would appear to stem from the paralyzing effects of the current political crisis in Brazil.
The crisis has pushed up finance costs and locked access to capital markets.
According to market analyst Bloomberg, not a single company has issued dollar bonds this year as investors and companies wait for resolution to the political stalemate.
As part of their statement to shareholders last week, JBS said that one of the principal advantages of the restructure will be to improve access to the international equity and debt capital markets which will enhance the company’s ability to raise financing to support its operations while lowering the cost of capital.
Busy week for NQ live export
WITH almost two weeks lost while Indonesian authorities issued the permits for the 250,000 head allocation announced at the beginning of the second trimester (T2), the pace has quickened with five ships scheduled to load out of Townsville this week.
Prices on offer are well back on the 345c/kg seen in T1 with opening rates of 250c for steers and 230c for heifers. However those rates have since improved to 265c and 245c respectively.
The Devon Express is expected to load and depart by Tuesday. Sitting at anchor since May 9, the larger capacity Dareen is expected to sail for Vietnam the following day.
One of the biggest vessels in the Australian fleet the Ocean Drover is expected in port later in the week followed by companion ship the Ocean Outback.
And finally one of the newer G Class vessels, Girolando Express, is expected over the coming weekend.
Combined capacity is somewhere in the vicinity of 35,000 head but it is not known whether all will fully load at Townsville or go on to top up at Darwin.
