Bloomberg — Brazilian meat mogul Marcos Molina dos Santos isn’t quite ready to take the final step of merging the operations of his two giant protein companies, BRF SA (BRFS3) and Marfrig Global Foods SA (MRFG3). But he’s now at least talking about a topic he has been avoiding.
Back in 2019, as beef supplier Marfrig’s founder and chairman, he couldn’t get a merger deal done with poultry specialist BRF, despite the promise of 1 billion reais ($200 million) in synergies.
Now, the two firms are what Molina calls “sister companies” after he took control of BRF — they share the same building, a balance sheet and Molina as chairman. But the operations and stocks continue to be separate.
In a rare interview, Molina, 53, said his focus this year is to improve BRF, which has seen its share price fall after consecutive quarterly losses.
“The first thing is fixing the company,” he said, suggesting both BRF and Marfrig should focus on their own operations this year. “After that, there are strategic movements that we can do in the future.”
A combination of the two companies would create the world’s fourth-largest food company by sales, rivaling JBS SA and Tyson Foods Inc.
The following are excerpts from the conversation with Molina, translated from Portuguese and edited and condensed for length and clarity:
Do you have plans to increase Marfrig’s share in BRF?
I have a limitation due to a poison pill clause.
But you could ask for a waiver to the board, correct?
I could ask. But that means adding debt to Marfrig and the scenario is adverse. We still have ongoing war, grain prices are still high, interest rates have risen and we had the Americanas episode in Brazil resulting in tighter credit conditions. Lastly, we now have this global bank crisis. I’m not in a hurry to do that.
BRF is trading 70% below the price you paid to have a third of the company...
BRF is cheap? I’m not worried about taking advantage of an asset that is undervalued. The first thing is fixing the company. After that, there are strategic movements that we can do in the future. But we can’t do a big movement amid this uncertain outlook. All energies are on improving the company.
So a merger between BRF and Marfrig is something that you foresee in the future?
Both companies have a lot of synergies. But, at the moment, each one is focused on its business. They are sister companies. They start to exchange ideas, simulations of synergy gains in freight prices, for example. But now the most important thing is not taking the focus away from each company. This year, each one will keep focused on its operations.
Are the companies benefiting from any synergy gain today?
In the past, when we discussed a merger, estimates pointed to 1 billion reais in synergies. But first we need to do the basics to improve BRF.
In the fourth quarter, BRF’s Ebitda margin was wider than Seara’s, its main rival owned by JBS, for the first time in a year. Are margins continuing to improve in 2023?
We’re returning to 2019 profitability levels that had deteriorated due to several reasons, such as high grain costs and Covid impacts on operations. With new management much more closer to our profile — which is operational — improvements have been made. We can’t forget BRF passed through two years of high grain prices.
Do you see grain prices falling?
Yes, I see a much more favorable scenario for grain costs starting in the second half and next year.
When will BRF start delivering better results?
Results don’t come in the first year. It takes two or three years to make a turnaround in a company. It took years for us to make a turnaround in Moy Park and Keystone. And I see much more opportunities in BRF than in any other company we bought in the past. It’s a Brazilian company and a business we already know, different from those other companies. We have conviction that we’ll make it. It’s just a matter of when.
What is an ideal profit level for BRF?
Our main goal is bringing the company back to margins around 15% reported around 2015 and 2016. But it also depends on market conditions, like grain prices and meat demand. BRF has very valuable assets in Brazil and in the Middle East.
Why did you decide to sell the pet food division, which has higher margins than other businesses?
BRF needed to focus on doing the basics. Of course the sale, that should raise around 2 billion reais, will reduce leverage. But it’s also good because the company will do the basics. BRF didn’t have energy and culture to invest in pet food and compete with giants like Mars and Nestle. BRF’s production capacity is 20% idled. We need to improve that, get more from its value-added brands Sadia and Perdigao.
Are you planning to sell more assets to reduce leverage further, such as the margarine business?
No. BRF doesn’t need to sell more assets because debt, of around 15 billion reais, is not that big in comparison with the size of the company. We decided to sell only non-core assets. We’ve just sold an inactive farm from an old project for 110 million reais. When BRF returns to an appropriate efficiency, debt will fall to a level close to the sector average of around 2 or 2.5 times Ebitda.
When do you expect to conclude the pet food sale?
Probably this quarter.
How was your recent trip to China along with the Brazilian government delegation?
We had the reopening for Brazil beef exports, which will favor Marfrig. All the meetings with the GACC (Chinese sanitary authorities) were very good. With Lula’s return next week, Brazil and China are likely to conclude negotiations. Exports from two BRF plants are still suspended due to Covid restrictions, and we are asking China to review that.
What’s the outlook for US meatpackers this year?
We are optimistic. The barbecue season is starting and demand should improve. Those margins of 21% (in 2021) won’t be repeated, but they should increase to a single digit slightly above 5%. But in the US, having a low single digit margin means you’ll be able to convert almost all Ebitda into cash. It’s an operation that generates a lot of cash.
Read more on Bloomberg.com