JBS S.A. (BBB-/Negative/--) is the world's largest meat processor and has the industry's most diversified portfolio by products and geography. It posted revenue and EBITDA of R$364 billion and R$17 billion, respectively, in 2023. The ratings on the company have been fluctuating since we assigned them in 2006 because of debt-financed acquisitions, volatile performance, the use of speculative derivatives, growth, and business diversification.
Following one of the largest corruption scandals in Brazil involving the company's founding family members, we cut the ratings on JBS to 'B' and placed them on CreditWatch with negative implications in May 2017. Since then, the company went through structural changes consisting of the exit of involved family members from the board and executive positions, a normalization agreement with creditors to use all excess cash to pay debt, and restrictions on mergers and acquisitions (M&As) and shareholder returns. Moreover, the company implemented many new layers of risk controls and compliance requirements, which along with the continued business strengthening and significant leverage reduction, led us to upgrade JBS to 'BBB-' for the first time in June 2022.
However, a year later, the company's weak operating performance caused its leverage to spike, which led us to revise the outlook to negative. Currently, we're receiving many questions on what could prompt a downgrade of JBS or whether its recent financial results are enough to revise the outlook back to stable. Here, S&P Global Ratings presents frequently asked questions from investors about the outlook on JBS.
Frequently Asked Questions
What caused the July 2023 outlook revision to negative?
JBS faced unprecedented weak industry conditions across all protein categories and geographic markets where it operates between late 2022 and most of 2023. A global excess supply of pork and poultry, high feed costs, and weaker exports dented JBS's margins. In addition, high cattle costs in the U.S., the operations in which represent about 32% of JBS's revenue, will continue to hinder EBITDA in 2024. We revised the outlook on JBS to negative ("JBS S.A. Outlook Revised To Negative From Stable on Weaker Performance; 'BBB-' Ratings Affirmed"), after which its consolidated EBITDA plunged by almost half in 2023 from 2022 and its leverage peaked at 6.1x in September 2023. The latter started to decline in the fourth quarter.
What has changed since then?
The company's operating performance improved in the second half of 2023, as we expected, especially in the fourth quarter, and consolidated EBITDA will recover to more than R$25 billion by the end of 2024, which is almost 40% higher than the breakeven EBITDA of about $3.55 billion (or about R$18 billion) per year. In addition, JBS did the following in the second half of 2023:
- Implemented several cost-cutting measures;
- Invested in operating efficiency;
- Adopted countercyclical measures such as reducing capital expenditure (capex) close to maintenance levels;
- Bolstered working capital; and
- Used cash generation and proceeds from bond issuances to repay existing debt.
We expect the company's operations to continue improving in 2024, and we will monitor how the working capital improvement enables the company to reach its leverage target of below 3.2x by the end of 2024, which compares to our adjusted forecast of close to 3.6x.
What are your main adjustments to the company's credit metrics?
We adjust some of JBS's EBITDA and debt figures that differ from reported ones. As of December 2023, the following are the main adjustments for debt:
- Reported debt of R$96.8 billion;
- R$8.9 billion of lease liabilities;
- R$2.7 billion of refinanced tax liabilities;
- R$5.1 billion of reverse factoring plus third parties agreements; and
- Minus R$22.1 billion of accessible cash.
As of the same date, the following are the main EBITDA adjustments:
- Reported EBITDA of R$16.1 billion;
- Minus R$47.5 million of expenses of unconsolidated companies;
- R$62.5 million of dividends received from equity investments;
- Minus R$72 million of gain/loss on disposals of property, plant, and equipment; and
- R$953 million of fair value of biological assets, penalty payments to the U.S. Department of Justice, and settlement payments from the antitrust suit.
By how much will margins need to improve for JBS to reach its leverage target?
We assume the following for each of the company's business units, which we believe is realistic according to current market data:
- U.S. Beef: The low availability of cattle, which already increased their prices by more than 30% since 2022, will remain the case in 2024 and likely part of 2025. Strong demand is not sufficient to compensate for such cost increases, which should keep the segment's EBITDA margins as low as below 1%.
- Australia: Despite some volatility in cattle prices due to weather conditions, costs are mostly lower, improving margins and benefiting from Primo Foods' branded portfolio and the salmon operations.
- U.S. Pork and Pilgrim's Pride Corp.: Supply adjustments and robust demand, which along with lower grain costs since the second half of 2023, improved profits, while the shift in consumption from beef will continue to boost demand for pork and poultry. Margins should range from 10% to 12% this year.
- Seara: Despite results below those of peers, margins should improve gradually amid lower feed costs and after expansion investments, reaching expected double-digit EBITDA margins in 2024.
- Friboi: Beef prices in Brazil remain low amid high availability of cattle, while new markets should raise export prices and overall margins.
As a result, consolidated margins should be about 6%-7% in 2024, enough to bring our adjusted leverage to around 3.6x.
Is the recent operating improvement enough to revise the outlook back to stable?
We would need to see a longer track record of higher margins and cash generation to revise the outlook to stable. However, the current scenario has diminished the pressure on JBS's credit quality. Our assessment of JBS's financial risk profile as significant requires leverage to remain below 3x with some cushion to approach 4x amid industry downturns. Our current baseline forecast assumes leverage of about 3.5x-4.0x by year-end, so the consistent improvement in operations will result in ratings stability. In addition, we expect the company to continue improving operating efficiency, optimizing working capital, keeping capex closer to maintenance levels, and not making acquisitions until leverage builds a cushion.
What are your estimates for dividend payments?
Brazilian public companies, shares of which are traded on the stock market, are required by law to pay a minimum dividend of 25% of the previous year’s net income. As JBS reported net losses in 2023, it doesn’t have a minimum required dividend for 2024, and payments will depend on the board's decision. We still model approximately $450 million of dividend distribution this year, which is what the company promised to shareholders if its bid to list its shares on the New York Stock Exchange is approved. We continue to expect the U.S. SEC to give the approval in 2024. Once that occurs, we believe dividends will be highly discretionary, subject to financial performance and targeted financial metrics.
Is JBS’s business risk profile at risk?
We assess JBS's business risk profile as strong, the highest category among agricultural commodity companies, because we believe it has sufficient scale and business diversification that offsets volatility of commodity prices. Historically, weak performance of JBS's specific business was offset by improvements or stable operations of other units. The deep industry slump in 2023, in our view, was an unusual combination of meat consumption changes during COVID-19 and global supply glut, sapping prices amid high input costs and logistics bottlenecks. These factors have dissipated, and the company will continue to benefit from its diverse profit base. If not, we could revise our assessment of JBS's business risk profile to a weaker category.
Would the listing of JBS's shares in the U.S. affect the ratings?
Not immediately. We already analyze JBS on a consolidated basis, and we don’t expect substantial changes in its capital structure upon the listing. From a governance standpoint, although we believe the U.S.-listed company could have a broader and more diverse board composition, JBS's control and strategic decision-making will remain at the family level. If the company issues shares and raise capital in the U.S. for further acquisitions or debt payment, we will analyze the credit impact. Currently, we analyze JBS at the ultimate company level, but we have pointed out that once J&F Investments' ownership of the company increases beyond 50% from 48% currently, our analysis of JBS will be at the holding level. As the ownership is very close to the threshold, we have been assessing J&F's creditworthiness, according to which the credit quality of both entities is the same. J&F has other assets, but JBS represents more than 95% of revenue and EBITDA, and J&F has about R$15 billion more in debt than JBS as of December 2023, including the leniency agreement debt. If J&F's future M&As increase its leverage, its credit quality could impair that of JBS.
Is the return of Joesley and Wesley Batista to the board a negative rating development?
Not necessarily. The family, including the two brothers, has extensive industry expertise, which resulted in JBS's historically robust operating performance and ability to improve margins of all assets the company had acquired. Both brothers currently don’t have any legal obstacles from holding the board or executive positions, and strategic decisions have always been made at the family level. After the big corruption scandal in 2017, we used to penalize our ratings on JBS by two notches because of governance issues. But since 2022, this has narrowed to a one-notch penalty. We believe there were significant improvements in control and compliance risk assessments, and a removal of the remaining notch penalty would depend on track record of strategic decisions in preventing significant credit metrics deviations and on all stakeholders’ interests. We also believe that our assessment of JBS's governance as moderately negative reflects the company's weaker governance than those of other ‘BBB’ rated companies.
What are the main downgrade risks?
JBS still needs to improve its leverage to avoid a downgrade. For the current rating, we expect leverage to be below 4x, with temporary discrepancies, but for the company to adjust quickly its operations to meet this target. A simultaneous erosion of meat markets across the regions, which could be a result of bird flu, high feed costs, and global oversupply, along with JBS's poor operational execution, could lead us to revise our assessment of its business risk profile to a weaker category. If the company adopts more ambitious growth through investments or acquisitions, or a more aggressive dividend distribution, which would deviate metrics from the company’s public targets to keep net debt to EBITDA below 3x, it could lead us to revise JBS's financial risk profile to a lower category.
| JBS S.A.--Forecast summary | |||||||||
| Industry sector: Agribusiness | |||||||||
| --Fiscal year ended Dec. 31-- | |||||||||
| (Mil. R$) | 2020a | 2021a | 2022a | 2023a | 2024e | 2025f | 2026f | 2027f | 2028f |
| Revenue | 270,204 | 350,696 | 374,852 | 363,817 | 366,514 | 377,029 | 386,404 | 398,213 | 411,375 |
| EBITDA (reported) | 28,341 | 41,298 | 34,490 | 16,075 | 25,952 | 27,469 | 28,698 | 30,151 | 33,551 |
| Plus/(less): Other | 813 | 4,065 | (438) | 896 | (48) | (48) | (48) | (48) | (48) |
| EBITDA | 29,153 | 45,363 | 34,052 | 16,971 | 25,905 | 27,422 | 28,650 | 30,103 | 33,503 |
| Less: Cash interest paid | (3,505) | (3,944) | (4,799) | (6,438) | (7,959) | (7,431) | (6,457) | (5,924) | (5,779) |
| Less: Cash taxes paid | (3,329) | (6,086) | (5,288) | (355) | (1,895) | (2,532) | (3,124) | (3,659) | (4,459) |
| Funds from operations (FFO) | 22,320 | 35,333 | 23,965 | 10,178 | 16,051 | 17,459 | 19,070 | 20,521 | 23,265 |
| EBIT | 22,344 | 37,178 | 25,632 | 7,858 | 17,433 | 18,426 | 19,460 | 20,548 | 23,600 |
| Interest expense | 4,770 | 5,265 | 6,930 | 8,647 | 7,959 | 7,419 | 6,444 | 5,910 | 5,765 |
| Cash flow from operations (CFO) | 23,812 | 25,660 | 14,221 | 12,004 | 9,048 | 11,595 | 13,094 | 15,306 | 17,706 |
| Capital expenditure (capex) | 5,987 | 9,624 | 11,227 | 7,492 | 6,500 | 6,565 | 6,926 | 7,252 | 6,734 |
| Free operating cash flow (FOCF) | 17,825 | 16,037 | 2,994 | 4,512 | 2,548 | 5,030 | 6,168 | 8,054 | 10,972 |
| Dividends | 1,445 | 7,425 | 4,462 | 2,248 | 2,250 | 2,273 | 2,309 | 2,331 | 2,331 |
| Share repurchases (reported) | 1,820 | 10,605 | 4,614 | -- | -- | -- | -- | 1,000 | 1,000 |
| Discretionary cash flow (DCF) | 14,561 | (1,994) | (6,082) | 2,264 | 298 | 2,757 | 3,860 | 4,723 | 7,641 |
| Debt (reported) | 65,907 | 92,518 | 92,354 | 96,822 | 96,822 | 96,822 | 96,822 | 91,991 | 87,607 |
| Plus: Lease liabilities debt | 6,104 | 8,344 | 8,984 | 8,914 | 8,914 | 9,360 | 9,828 | 10,319 | 10,835 |
| Less: Accessible cash and liquid Investments | (19,680) | (23,239) | (13,182) | (22,122) | (20,086) | (20,401) | (21,720) | (18,966) | (19,467) |
| Plus/(less): Other | 6,235 | 5,666 | 5,851 | 7,793 | 6,638 | 6,638 | 6,638 | 6,638 | 6,638 |
| Debt | 58,567 | 83,290 | 94,007 | 91,406 | 92,288 | 92,418 | 91,568 | 89,982 | 85,613 |
| Cash and short-term investments (reported) | 19,680 | 23,239 | 13,182 | 22,122 | 20,086 | 20,401 | 21,720 | 18,966 | 19,467 |
| Adjusted ratios | |||||||||
| Debt/EBITDA (x) | 2.0 | 1.8 | 2.8 | 5.4 | 3.6 | 3.4 | 3.2 | 3.0 | 2.6 |
| FFO/debt (%) | 38.1 | 42.4 | 25.5 | 11.1 | 17.4 | 18.9 | 20.8 | 22.8 | 27.2 |
| FFO cash interest coverage (x) | 7.4 | 10.0 | 6.0 | 2.6 | 3.0 | 3.3 | 4.0 | 4.5 | 5.0 |
| EBITDA interest coverage (x) | 6.1 | 8.6 | 4.9 | 2.0 | 3.3 | 3.7 | 4.4 | 5.1 | 5.8 |
| CFO/debt (%) | 40.7 | 30.8 | 15.1 | 13.1 | 9.8 | 12.5 | 14.3 | 17.0 | 20.7 |
| FOCF/debt (%) | 30.4 | 19.3 | 3.2 | 4.9 | 2.8 | 5.4 | 6.7 | 9.0 | 12.8 |
| DCF/debt (%) | 24.9 | (2.4) | (6.5) | 2.5 | 0.3 | 3.0 | 4.2 | 5.2 | 8.9 |
| Annual revenue growth (%) | 32.1 | 29.8 | 6.9 | (2.9) | 0.7 | 2.9 | 2.5 | 3.1 | 3.3 |
| Gross margin (%) | 19.6 | 21.4 | 18.5 | 13.8 | 14.7 | 15.4 | 16.0 | 16.4 | 16.8 |
| EBITDA margin (%) | 10.8 | 12.9 | 9.1 | 4.7 | 7.1 | 7.3 | 7.4 | 7.6 | 8.1 |
| EBITDA/cash interest (x) | 8.3 | 11.5 | 7.1 | 2.6 | 3.3 | 3.7 | 4.4 | 5.1 | 5.8 |
| All figures include S&P Global Ratings adjustments' unless stated as reported. a--Actual. e--Estimate. f--Forecast. |
This report does not constitute a rating action.
Related Research
- JBS S.A. 'BBB-' And 'brAAA' Ratings Affirmed Following Implementation Of New M&G Criteria; Off UCO, Jan. 12, 2024
- JBS S.A. Outlook Revised To Negative From Stable On Weaker Performance; 'BBB-' Ratings Affirmed, July 13, 2023
| Primary Contact: | Flavia M Bedran, Sao Paulo 55-11-3039-9758; flavia.bedran@spglobal.com |
| Secondary Contact: | Luciano D Gremone, Buenos Aires 54-114-891-2143; luciano.gremone@spglobal.com |
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