BRFS - BRF S.A. Sees Yet Another Change At The Top As The Never Ending Turnaround Continues

Summary

• BRF is going through yet another CEO transition, as the company's board accepts the resignation of Lorival Luz and brings in the now-former CEO of Marfrig.
• The new CEO, Miguel Gularte, has a long history of operational success, but his experience has been with beef processing companies.
• BRF has languished through multiple restructuring efforts; there are valid and attractive core assets here, but the task of driving a meaningful turnaround is not a simple one.

Management is crucial to the long-term success of any company, and this has been an issue with BRF SA ( BRFS ) for some time now. With Tuesday’s announcement of yet another change at the top, BRF will have its seventh CEO since 2013 – a period that has seen the stock lose 60% of its value. While this latest change doesn’t necessarily presage an imminent takeover of BRF by controlling shareholder Marfrig ( MRRTY ), it does at least put an executive in charge with a strong track record of operational execution.

At this point, I’m not changing my estimates, discount rate, or other valuation inputs for BRF shares. At a minimum I would like to hear what the new CEO has to say in terms of strategic priorities (near- and longer term) and plans. The opportunity to do better is certainly here, but “opportunity” only gets you so far, and BRF management has a lot of work to do to restore and rebuild investor confidence in a longer-term growth story.

Another Change At The Top

BRF announced on August 30 that the current CEO Lorival Luz (who has served as CEO since 2019) had tendered his resignation and that the board had hired Miguel Gularte, the CEO of Marfrig. There will be a one-month transition period.

Whether or not the market had been expecting such a move is an open question. Since Marfrig effectively took control of the company – it owns about one-third of the shares of BRF and controls the company through 9 of 10 members of the board of directors – there have been few changes of consequence, but many analysts and investors have been expecting Marfrig to do “something” to kickstart the process of transforming/restructuring BRF into a more consistent performer.

Gularte had served as the CEO of Marfrig since mid-2018 and has a long career as an executive with Brazilian beef players, including JBS ( JBSAY ) and Minerva ( MRVSY ). While the transferability of market knowledge between global (or at least Western hemisphere) beef and poultry could be debated, Gularte has established a reputation for prioritizing and delivering strong operational excellence, and this is something that I don’t believe many will argue has been lacking at BRF for many years (despite some progress with the most recent restructuring initiatives).

No Simple Solutions

I am eager to hear what Gularte believes he can do differently in terms of strategy and operational execution.

BRF has exited some of its less profitable, more scattered international operations and refocused around three main lines of business – a two-tiered Brazilian poultry and packaged food business focused on an ongoing shift toward more profitable packaged foods, a halal-centered business focused on the Mideast and Turkey that is pursuing more in-region production and packaged foods penetration, and a China-centric Asian operation intended to leverage the cost advantages of Brazilian-sourced poultry.

BRF has also been prioritizing improved manufacturing and go-to-market efficiencies, albeit with mixed success. This was always going to be a multiyear process, and one that was going to be at least partially constrained by the company’s simultaneous (and contradictory) goals of improving its liquidity situation while reinvesting in plant and logistics modernization. Likewise, the company has been trying to carve out more distinct identities for its brands Sadia and Perdigao, while also fending off increased market share from rival Seara (owned by JBS).

Exactly what Gularte can do differently is an open question, though again, he is an executive with a strong track record of operational execution. Plant modernization and consolidation will likely remain a key focus, as will improved efficiencies in the distribution of BRF’s products. While packaged food has been increasing as a percentage of BRF’s sales in Brazil (and overall), a meaningful portion still comes from more commoditized products where such efficiencies really matter.

Still, the business continues to struggle from excess debt and the market wants to see improved liquidity. Balance sheet improvement has forced BRF to be more cautious with its spending at a time when many of its competitors have been investing in their businesses, and I’m not sure there are many options here unless the company chooses to raise more dilutive equity-based capital.

The Outlook

Given the amount of turnover there has been at BRF over the last decade, I’m tempted to say that this change won’t disrupt operations that much, but that’s likely not true. A new voice at the top is always a disruption, and particularly when it brings changes in strategic priorities – and I really don’t believe that Marfrig would bother to assert itself in this way if it didn’t mean to affect real change.

This could well be an interim step to Marfrig eventually taking full ownership of the business – having Gularte do what he can to turn the business around and then making the go/no-go decision to acquire the remainder of the business. At this point, I can’t say that bringing BRF fully into Marfrig would help sentiment around the latter’s stock, but if Gularte can get the business moving in a better direction, the long-term synergy opportunities from a business with strong consumer brands and a growing packaged food enterprise could be significant, particularly considering the opportunities to incorporate more beef products into BRF’s mix.

The Bottom Line

Will this finally be the strategic move that drives sustained improvement at BRF? History would advise skepticism, but BRF does at least have some positives going for it – including a poultry business that operates at significant scale, growing branded packaged food operations, and a strong halal business operating in a region where there are significant growth opportunities. If Gularte can find the combination that finally unlocks sustained operational efficiencies, the upside could be significant, but I do expect this to be a “show me story” at least until the new CEO lays out his strategy for the business.

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