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UPDATE 1-U.S. poultry margins of Brazil's JBS to improve -CEO
August 15, 2013 / 8:15 PM / 4 years ago

UPDATE 1-U.S. poultry margins of Brazil's JBS to improve -CEO

* JBS expects U.S. poultry margins to improve in 4th quarter

* U.S. cattle margins less responsive to falling corn prices

* JBS expects Seara acquisition to increase its debt

* Expects improved EPS through end of 2013

By Reese Ewing and Fabiola Gomes

SAO PAULO, Aug 15 (Reuters) - Brazil’s JBS SA, the world’s largest meat producer, expects profit margins from its U.S. poultry division to improve in the fourth quarter of 2013 due to a bumper corn harvest that will bring down feed costs, Chief Executive Wesley Batista said on Thursday.

Residual high costs for corn and other feeds would likely continue in the third quarter for Pilgrim’s Pride, the company’s U.S. poultry unit, but then start to fall in the fourth quarter, helping profit margins, he said.

Company margins from Swift and Smithfield Beef, its beef businesses in the United States, would likely remain stable, he said, adding that cattle production costs are less responsive to swings in corn prices than poultry.

The company does not publish details of its profit margins in its earnings reports. On Wednesday night JBS said its second-quarter net earnings doubled to 338.5 million reais from a year ago but still missed market expectations.

Little known even in Brazil when the company went public in 2007 with a share offering, JBS has vaulted through a stunning array of takeovers of distressed rivals at home and abroad to become the world’s largest meat producer. HEDGING FOREIGN EXCHANGE RISK

Today, nearly two-thirds of the company’s revenue comes from foreign operations. That and the company’s dollar-linked export businesses allow it to carry debt that is denominated 20 percent in reais and 80 percent in dollars, Investor Relations Director Jerry O‘Callaghan said.

But this requires JBS to conduct extensive hedging on the global derivatives market to minimize the risks posed to its balance sheet by sharp swings in the Brazilian real-dollar exchange rate, Batista said.

Brazil’s real has weakened 18 percent since May.

“If not for our hedging efforts, we could have suffered losses of a billion reais ($435 million),” Batista said, referring to the first half of 2013, adding that JBS was exchange-rate risk averse. “There is no history of foreign exchange rate impacts on the company and we do not use hedge accounting methods.”

A growing number of Brazilian exporters that have debt and revenue in dollars have been adopting hedge accounting rules, which were designed to help avoid major swings in a company’s earnings due to exchange rate volatility.

State-run oil company Petrobras has adopted, and miner Vale said it is considering adopting, those rules.

JBS continues to reduce its leverage, which has fallen to 3.28 from 4.27 a year ago. But Batista said the approval of new acquisitions by market regulator Cade would raise leverage again to around 4.

The company expects to lower leverage, the ratio of debt to EBITDA - earnings before interest, taxes, depreciation and amortization, a measure of operational profitability - to below 3 by late 2014.

“95 percent of the debt refinancing of Seara has been approved by creditors,” he said, adding that he expects Cade to approve the sale of the Brazilian poultry producer by distressed rival Marfrig SA to JBS, announced nearly two months ago.

Batista said he expected export margins to the other countries in the Mercosur trade union, which includes Argentina, Uruguay, Paraguay and now Venezuela, to remain in the double digits, despite the weakening of the real against the dollar.

JBS struggled with high feed costs in late 2012 and early 2013 due to drought in the U.S. and South American farm belts, but bumper harvests are bringing down the price of grains again.

“JBS is at a moment where we will begin to benefit from the fruits of what we planted,” Batista said, adding that he expected earnings per share to continue to improve through the end of 2013.

JBS shares were trading down 3 percent at 7.25 reais late Thursday afternoon, but are up 28 percent from their lows in mid-June.

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