Marfrig expects to accelerate changes in 2015

Marfrig expects to accelerate changes in 2015

Brazilian protein group Marfrig surprised the market yesterday (15 January) with the announcement CEO Sergio Rial will stand down. Rial was a chief architect behind Marfrig's "focus to win" strategy, which has left the group on the cusp of a return to earnings stability. With internal successor Martin Secco Arias to replace Rial, the company was keen to emphasise coherence as it calmed initial investor jitters. Katy Askew reports.

As one analyst told just-food yesterday, the news that Marfrig CEO Sergio Rial is leaving the business came as a "shock" to the market. That was especially true given the timing of the announcement.

Marfrig is in the midst of a process to improve its operating performance under a strategy dubbed "focus to win". It is focusing and simplifying operations in order to generate free cashflow by deleveraging its balance sheet.

The group racked up some significant debts associated with its 2010 acquisition of US meat processor Keystone Foods for US$1.26bn. That deal came on the heels of its GBP348m Moy Park buy in Europe. As a result, Marfrig's debt to EBITDA ratio stood at 4.9x for fiscal 2013 and finance costs have weighed on Marfrig's bottom line through the first three quarters of this year.

However, the group's result has shown some sign of improvement. In the first nine months of the year, free cashflow was positive at BRL71m (US$27.1m) thanks to improved working capital management. The company said the result reaffirmed its "commitment to deliver positive cash flow for the year", which it forecasts will fall in a range of break-even to BRL100m. For the full year, Marfrig has also forecast higher sales, in a range of BRL21-23bn.

Management yesterday reaffirmed it is on-track to meet these targets - adding it was confident it would re-instate guidance for 2015 at its investor day in March. Moreover, speaking during a call with analysts, management suggested the BRL30m productivity target will be met this year and accelerated in 2015.

While Marfrig has started to reap the rewards of its efforts, the process remains in its infancy, Rial conceded. "I think the company is certainly not in a period of time you could say mission complete," Rial said in a conference call yesterday. "[The turnaround drive] is a work in progress... I leave the company knowing that it is better than the company I joined but that it is not the company I wish to leave the market."

So, with much work to do on Marfrig's continued turnaround, why is Rial exiting? The executive cited "personal circumstances" - he has recently taken up a board appointment on Delta Airlines and expects to take a role as chairman at a "leading Brazilian financial institution".

Rial was also keen to state he is leaving Marfrig in safe hands. He will be replaced by Martin Secco Arias, an internal appointee who previously headed up Marfrig's beef operations.

"The company has embarked on operational changes... Martin does not represent change from an operational point of view or even a cultural point of view," Rial emphasised. "I am convinced that by end 2015 Marfrig will be better than it is today... I believe that although there is never a perfect time to leave, [Marfrig is] the same company today as last week and we will be the same company next week."

Arias echoed the message of consistency. "I can guarantee to you my commitment with the agenda we have on the 'focus to win' plan," he stressed.

Shore Capital analyst Phil Carroll concurs there will be no change of direction following the change of leadership. "We are very comfortable with this appointment and we expect strategic continuity... we foresee the undoubted progress of recent times continuing to shareholder benefit."

There are, however, some early indications of Arias's priorities going forward. As head of the group's beef business, Arias oversaw the unit credited with the most significant turnaround in free-cashflow coming out of the third quarter, which points to a track-record of execution against the financial challenges facing the group. Rial said this expertise will now be turned to the task of deleveraging and unlocking the value in the group's international operations.

He said: "The biggest short-term opportunity for Marfrig is on the beef - particularly on the free cashflow. [But] it does not pose any questions around our commitment to international... which will continue being very critical parts of the business." The company also plans to push head with plans to float Moy Park this year depending on market conditions.

Financial discipline and free cashflow generation will remain key. As will productivity. Arias noted: "We need to go more deep on productivity. We feel we have a lot of homework to do on that."

Arias said the company will continue to follow the same strategic path, adding the process will be accelerated in the coming year. "We are continuing on the same way, we are going to keep the speed up," the Spaniard suggested.

While the company is focused on improving its financial position, it has ruled out the prospects of further M&A activity. "It's not on the table... there are a couple of companies that are very fragile and we could have made movements. That is not our plan. Our plan is to deleverage and generate free cash flow," Rial said.