JBSAY - JBS SA (JBSAY) Q3 2023 Earnings Call Transcript
2023-11-14 14:36:03 ET
JBS SA (JBSAY)
Q3 2023 Earnings Conference Call
November 14, 2023, 09:00 ET
Company Participants
Gilberto Tomazoni - CEO
Guilherme Cavalcanti - CFO & IR Officer
Wesley Batista Filho - CEO, JBS South America
Conference Call Participants
Priya Ohri-Gupta - Barclays Bank
Benjamin Black - RBC Capital Markets
Andrew Strelzik - BMO Capital Markets
Benjamin Theurer - Barclays Bank
Carla Casella - JPMorgan Chase & Co.
Presentation
Operator
Good morning, everyone, and thank you for waiting. Welcome to JBS S.A. and JBS USA Third Quarter of 2023 Results Conference Call. With us here today, we have Gilberto Tomazoni, Global CEO of JBS; Guilherme Cavalcanti, Global CFO of JBS; Wesley Batista Filho, CEO of JBS USA; and Christiane Assis, Investor Relations Director. This event is being recorded. [Operator Instructions].
Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of JBS management. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur.
Now I will turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.
Gilberto Tomazoni
Good morning. Thank you, everyone, for participating in our earnings calls.
Our third quarter numbers for 2023 show we are on a steady path to recover both our results and margins as we flagged early in this third quarter of this year. Our business segment continues to improve, whether we are talking about margin or cash flow, thanks to the strength of our global diversified platform across geographies in proteins and the implementation of key management improvements in Brazil and United States, we have added nearly 1 percentage point for our EBITDA margin compared to the second quarter of this year, rising to nearly 6%.
These cash flow progressions can demonstrate our commitment to financial discipline and the fundamentals of our debt policy. This is the first highlight I would like to share about our results.
Moving to the second point and revisiting an issue I have previously discussed, we had 2 business areas that we are performing below their potential. In this third quarter, we continue to work on restoring the profitability of this operation, and we're beginning to see the initial results. At Seara, we have executed part of our previously-identified opportunities, and we believe that the coming quarters will be positively impacted by the realization of this benefit from these measures. Beyond operational improvements, Seara has opportunity outside its gates, meaning opportunities captured from the market with the ramp-up of new facilities like Rolandia, for example, which have yet to reach full capacity. Without a doubt, we are in the very optimistic about Seara prospectus.
In our U.S. beef operation business, the operational measures we have implemented in commercial, industrial areas are helping us navigate the lowest point of -- in the current cycle. The margin of the operation are showing gradual recovery, even amid a scenario of tighter spreads and reduced cattle supply, demonstrating our commitment to operational excellence.
The third point is our dedication to financial discipline to reduce our debt. This quarter, thanks to our strong cash flow, we reduced our net debt by $600 million. Despite this reduction, our leverage increased to 4.87x in dollar terms due to a statistical issue, which Guilherme will elaborate on shortly. This once again showed that we are well prepared to navigate this challenge period with security and financial robustness. We have extended the average terms of our debt to 12 years, expanded liquidity and reduced the cost of . This is a testament to our commitment to the financial discipline and our effort to reduce our debt.
Beginning in this quarter of 2023, we will enter -- sorry. Beginning of this last quarter of 2023, we will enter a restructural deleverage process for the company.
The fourth point I would like to highlight is our continued to grow in the commencement of our operation from the investment in new facility in the past years. As an evidence, by the opening of Rolandia branded product in the sausage factory in Parana 2 weeks ago, one of the most modern and sustainable JBS plant in the world. Likewise, our new Italian meat plant in the United States continue to rapidly ramp up production.
JBS long-term vision remains unchanged. We remain focused on our growth through diversification, innovation, value-add products and strong brands. We have a unique multi-geography and multi-protein platform that makes us more resilient in the face of challenged scenarios in any specific geographies or business line. Additionally, I would like to address our focus on generating long-term value for stakeholders with the dual listing to our shares in Brazil and the United States. We believe this is yet another way to generate even more value to all of our shareholders and our team members and our communities.
Finally, our ongoing investment in expansion, the reduction of our debt and of improvements in the management of our business show that we are absolutely focusing on what we can control regardless of other issues that may affect our business. As we celebrate our 70th anniversary, we have evolved our brand to commemorate this new chapter for JBS. It is most certainly a celebration of our past and a reflection of our present, and a vision for our future. With focus on innovation, operational excellence, quality, financial discipline and leadership in all that we do.
Thank you all for participating in this earnings call. And now I will hand over to Guilherme, who will be detailing our financial. Guilherme, please?
Guilherme Cavalcanti
Thank you, Tomazoni. Let's go through the operational and financial highlights of the third quarter 2023, starting on Slide 12, please. I would like to start by highlighting all the work in the liability management that we continue to carry out throughout the second half of the year.
In September, JBS issued $2.5 billion in Senior Notes, of which $1.6 billion with a coupon of 6.75% in maturity in 2024 and $900 million with a coupon of 7.25% and maturity in 2053. Subsequently, we issued $500 million through our subsidiary Pilgrim's Pride, with maturity of 2034, and a coupon of 6.87%. Additionally, in October, we issued Agribusiness Receivable Certificates in the amount of BRL 1.7 billion. Thus, with the resource described above, we paid $440 million of trade finance lines in September, and we repaid almost all of our short and mid-term debts in the amount of $2.5 billion in addition, to the tender offer of PPC notes due 2027 already concluded in the amount of $868 million.
After completing this entire process, we will extend JBS average debt term to 12 years, reducing the average cost to 6.08% per year and practically eliminating the need to pay debt until 2027.
Moving on to Slide 13. We have the operational and financial highlights of the quarter. Net revenue in the third quarter of 2023 was $19 billion. Adjusted EBITDA totaled $1.1 billion, which represents a margin of 5.9% in the quarter. A sequential improvement since the first quarter of 2023, in line with what we have been mentioning throughout the year. Net profit was $117 million in the quarter.
Please now moving to Slide 14. The operational cash flow in the quarter was $1.3 billion, an improvement of 20% when compared to the previous quarter. This result is mainly a consequence of the improving in the operating results but also in working capital, which was positively impacted by $341 million. The main gains came from improvements in the accounts receivables due to the decrease in average price and increased payments from China and Middle East countries, as well as the reduction in inventories as a result of the decrease in the price of raw materials, mainly live cattle in Brazil and Australia and grains in U.S. and Brazil.
In the last 2 quarters, we informed the market that we could generate enough free cash flow to offset the first quarter cash burn of $1.2 billion. Considering the results of the second and third quarters, we have already reached $1.1 billion. That is 91% of the total amount. Historically, the fourth quarter generates free cash flow due to the postponement of payments from live animals until the following fiscal year. Thus, in the first quarter, we had a cash outflow of $440 million related to these purchases. And we expect that a good part of this amount, we will now return in the fourth quarter, which will contribute positively to the free cash flow of the year.
Furthermore, we are considering capturing more $150 million in the fourth quarter on the back of lower grain prices. Regarding tax, we are estimating an additional cash inflow of $100 million due to the refund of state tax in U.S. and monetization of tax credits in Brazil. These amounts are in addition to the $185 million we booked in the second and third quarters.
Finally, we already expected leverage in the third quarter to be the highest of the year due to the decrease in EBITDA which, as we demonstrated, it's already improving sequentially. When using the market consensus for EBITDA, our leverage in 2023 will end up around 4x net debt to EBITDA, lower than the leverage posted in the second quarter. Likewise, using market consensus, for EBITDA of 2024, which is a margin of 6.5%. Leverage would already returned to the top range indicated in our financial policy that is 3x. In 2025, using market consensus data which is a margin of 7%, our leverage would end up the year of 2025 with 2.5x.
To wrap up this slide, capital expenditures in the quarter was approximately $375 million, 52% of it was maintenance. Therefore, considering the factors above, free cash flow for the quarter was positive in $703 million.
Moving to the Slide 15, we have the evolution of our debt profile. Net debt in the third quarter of 2023 ended up at $16 billion, a decrease of approximately $600 million. The sequential operational improvement reflected in our EBITDA of $1.1 billion and the improvement in working capital of $341 million were more than enough to offset investments in capital expenditures of $375 million, accrued interest of $270 million, biological assets of $130 million and leasing payments of $101 million. Net financial expenses for the quarter were $261 million, stable compared to the previous quarter. It's worth mentioning that 79% of our debt is in the form of bonds denominated in dollars with fixed coupons.
Leveraging dollars rose to BRL 4.87 in reals and $4.84 in dollars. The growth is explained by a 61% reduction in EBITDA in the last 12 months, ending in the third quarter of 2023 when compared to the same period of previous year. However, as I mentioned previously, our average debt term is quite comfortable at 12 years with an average cost of 6% and no relevant maturities until 2027.
Before I move on to the business units, I would like to make everyone aware that both in the earnings release and on our Investor Relations website, we began to disclose EBIT in dollars and U.S. GAAP for the international operations to facilitate comparability within our U.S. peers.
Let's now quickly go through the business units. Starting with Seara on Slide 16, net revenue for the quarter fell 6.7% year-over-year in the third quarter, reflecting lower poultry prices due to global oversupply of poultry. On the other hand, profitability improved sequentially throughout the quarter as a result of lower production costs and greater operational efficiency.
Furthermore, I would like to highlight that Seara inaugurated its industrial complex located in the city of Rolandia in October, advancing its expansion strategy in breaded and value-added products, particularly in the chicken breaded and hotdog segments. The new plants are the most automated at Seara and among one of the most modern at JBS globally.
Moving now to Slide 17. JBS Brazil reported net revenue of 4.4% lower when compared to the same period of previous year as a result of the decrease in beef export prices mainly to China. This result was partially offset by greater demand in the domestic market, reflecting the decrease in retail prices. I would like to highlight that in a survey carried out by the Datafolha Institute in thousands of Brazilian households, the Friboi brand was once again elected top of mind that is the most remembered and preferred brand by Brazilian consumer. Friboi wins the meat category for the fourth time and consolidated itself as the absolute leader.
Moving to on the Slide 18 and speaking from now on in dollars and U.S. GAAP, JBS Beef North America net revenue grew 7% year-over-year in the quarter with an EBITDA margin of 1.6%. Although profitability reflects the turnaround in the cattle cycle in the annual comparison, the sequential improvement in profitability is a result of the company's efforts to improve commercial and operational performance already capturing gains on several fronts.
Moving on to Slide 19. We have JBS Australia despite the decrease in consolidated net revenue, the EBITDA margin grew 3% percentage points to 6.6% in U.S. GAAP. This improvement mainly reflects the lower purchase price of live cattle given the greater availability of animals due to the more favorable cycle. According to Meat and Livestock Australia, the price of live capital in Australia fell 49% year-over-year in the third quarter.
Turning on to JBS USA Pork. Net revenue for the fourth quarter was 5% lower compared to the third quarter 2022, however, the EBITDA margin returned to historical levels. This improvement in profitability is a result of lower grain costs, minus 24% year-over-year; the decrease in pork prices, minus 18% year-over-year, and continuous efforts aimed at expanding the value-added portfolio and improving commercial and operational execution.
Pilgrim's Pride on Slide 21 presented a drop in net revenue of 2% in the third quarter 2023 in the annual comparison, however, all regions improved margins compared to the previous quarter as a result of operational excellence programs, continued partnership with key customers and increasing diversification through a branded and value-added portfolio. In the U.S. poultry cuts that are used as raw material big birds, we still face a challenging scenario, but market fundamentals have already started to improve. Mexico reported strong result in the quarter with continued improvement in the live chicken operation, lower grain prices and favorable exchange rate impact.
Finally, in Europe, the positive trajectory of margin growth continued driven by the continuous optimization of operations, cost recovery efforts, consolidation of back office activities and growth of partnerships with key customers.
As you can observe, and as we have been indicating, the sequential improvement in our profitability has already occurred and the trend remains positive in the fourth quarter, highlighting JBS Australia, Seara and JBS Brazil.
So I would like to open to our question-and-answer session, please.
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question comes from Priya Ohri-Gupta with Barclays.
Priya Ohri-Gupta
I mean I apologize a little bit, but we had some difficulties with the connection this morning on the call, the first call that you hosted, so some of this is a repeat of that. It's just because we didn't quite clearly hear the responses. Congratulations on the results this morning.
I think, Guilherme, first, if we can talk a little bit about the free cash flow performance. I think on the call this morning, you guys mentioned that the free cash flow performance in the fourth quarter should be similar to third quarter. Is that the right way to think about it in terms of the dollar amount? Or just directionally? So that would be the first question.
Guilherme Cavalcanti
Okay. It's directionally, could be more or less the same range in the third quarter or it could be higher. What do you have for the fourth quarter is good operation margin -- operational margins for Australia, Beef Brazil and Seara. So we include -- we will benefit the operation of free cash flow. We also have more working capital release to the grain prices decrease, also working capital release through the prices of the live animals in Australia and Brazil. We also expect more $100 million in tax refund by state taxes in U.S. and credit monetization in Brazil.
And remember that every year, we have postponed of livestock payment. For example, in first quarter this year, we had $440 million that was payments that was postponed from December to January. $140 million was a deferred payment of cattle in Brazil and $300 million was deferred cattle and hogs in U.S. So if you have the same thing that we have this year, it has also a potential positive effect of these livestock deferred.
So all in all, we expect to have a good free cash flow for the fourth quarter, as well as improvement in operational margins in almost all of our business units.
Priya Ohri-Gupta
Okay. And then picking up on that point, you mentioned specifically that Australia, Brazil and Seara are continuing to see positive momentum into the fourth quarter. You guys had a really solid margin performance in U.S. Pork. How should we think about that performance into fourth quarter and then next year, particularly given where it is relative to kind of the long-term range?
Guilherme Cavalcanti
Okay. I'll pass to Wesley Filho to talk about the perspective of next year of Pork, and then Tomazoni.
Wesley Batista Filho
On Pork, we expect that when we look back, Pork is the most stable business we have overall. And this first half of the year, we consider it as more of an anomaly than more to do with the business going forward. We had a good quarter in the third quarter, and we expect the fourth quarter usually to be a bit more challenging in the third quarter. That's seasonal, nothing wrong with that, but we expect next year for Pork to be a pretty good year and to have more margins closer to historic. So that should be -- we're optimistic about Pork.
Beef, you know it's going to be a challenge, right, as we go into the bottom of the cycle. We haven't reached there yet. And especially when we start retaining effort, that's going to be good news long term but short-term pain. So when that happens, and that's all going to depend on climate and weather, if weather allows, we're going to start probably retaining half of next year, which should reduce the availability of fed cattle. And so we're expecting '24 to be a challenging year. More challenging than this year.
Having said that, we have a lot of internal opportunities that we are capturing. We have been closing that gap in the last couple of quarters, and so we expect that even though the market is going to be more challenging for Beef USA into next year, we expect that if we are able to capture all of these internal opportunities we have, we should be able not to have a worse year than this year and potentially could have a better year than this year. Even though the market will be more challenging, we have -- approximately, we still expect another 2 percentage points improvement in our operation from where we are today. We captured a bunch of the -- most of the commercial opportunities in these past 2 quarters. There are still some opportunities in our commercial side of the business, but most of it was captured, and now, operations is where we're really focused and there is probably another 2 percentage points to be captured there.
That's more or less our outlook for the U.S. business.
Priya Ohri-Gupta
Okay. That's helpful. And so we shouldn't necessarily think of Beef as losing money next year? Is that fair?
Wesley Batista Filho
It will depend a lot on all of the things that's internal, Priya. But yes, you should consider that. That's what we are considering.
Priya Ohri-Gupta
Okay. That's helpful. And then I think just on the listing, just final point as to sort of where you are in terms of the SEC conversations? And when we may be able to see some sort of a relief on the shareholder vote?
Gilberto Tomazoni
It's Tomazoni speaking. I would like just to add to what Wesley talked about the perspective in terms of U.S., we are very bullish in terms of Australia. We are now working on 1 shift. We are planning for the next year to be working 2 shifts because the availability of cattle, the market is demanding. We are very bullish in terms of our strategy operation.
And in terms of Brazil, we are very positive with Seara because we have identified the very important gaps inside of our operations. We are working on that. And we -- our perspective that we will be starting to show more robust results in terms of our internal improvement. Besides of the market conditions, we have a lot to kept inside of the company. Then -- and the demand from -- and out of the gate, we have new plants of Seara when we are able to capture more market. And we are -- and our strategy is not fine for the same space. We are focused on grow the categories with innovations. Then we are very positive with Seara.
And about -- to answer your last question about the listing, after we present our structure of our dual listing in the U.S. and Brazil, we received the considerations from our ADR investor who would like to have the right to vote on the shareholder meetings as well the other investors. Since our present structure did not consider that option, then consider it to be a fair claim from our -- and we do not have a financial urgency in carrying out the listing. We decided to comply with the request from our shareholders invested in ADRs, and this decision forced us to redo the legal structure for our FR with SEC. Our legal department worked on this on the matter, and we resubmitted our FR to SEC. And now, we are in the process for with SEC, and that is the answer from the question.
Operator
Our next question comes from Ben Theurer with Barclays.
Benjamin Theurer
Yes. Just wanted to follow up quickly on the operations in Brazil, Seara in particular. So we've seen the sequential improvement over the last 2 quarters up now back at a margin of 5.5%, which we know is not the level you want to be. So how should we think about -- just given the comments you made sequential improvement into 4Q but maybe a little bit of a preview into 2024, how are expected lower grain prices and just the business itself also in the export markets, looking into 2024, how should we think about that margin recovery back to the more historic level at Seara? That would be my first question.
Gilberto Tomazoni
Jeremy, thank you for your questions. We see with internals improvement, with the cost of the grain and the increase of the capacity that we have invested in CapEx during this 3 or 4 years, our margin will be double digit if we are working on this.
Benjamin Theurer
Okay. So you're saying double-digit margin for next year?
Gilberto Tomazoni
Exactly. This is our forecast.
Benjamin Theurer
Okay. Perfect. And then Australia, obviously, is having a nice run, and you've mentioned the decline in cattle costs around close to 50% just on that cost side. Now as we're going through another El Nino phenomenon, and obviously, the implications from El Nino tend to be more dry conditions down in Australia, any early signs of some sort of herd liquidation because of that and what has been accelerating that cattle supply or a lower cost? Or is it really just because of everything that's been rebuilt from the last recovery post-drought situation some years ago that you now just have a healthier availability on cattle?
Gilberto Tomazoni
Ben, we -- the situation in Australia, it's -- they have rebuilt the herd and the availability of the herd is because they passed 2, 3 years, rebuilt this herd. Now, the availability the price and the availability of , the cost because the cycle is a positive cycle. So we -- I mentioned before, we are working one shift, now, we are preparing for the second shift. And -- but nothing related to El Nino. It could be a non-issue, but so far, it's too early to say something about that.
Operator
Our next question comes from Andrew Strelzik with BMO.
Andrew Strelzik
My first one is on export demand, in particular from China. You called out some pressure on export prices from China. So I guess I'm curious what your expectation is going forward as we roll into 2024 in terms of China export demand and if you're expecting a recovery and what your level of confidence in that is?
Gilberto Tomazoni
I'll give you the overview about -- consider all of the market. And then if U.S., you want to add some specific things from the U.S., please feel free to do that.
And we -- when you talk about China, it was specifically your question, we see that the demand from China keep growing because it's structural. If you look for the per capita consumption in China, it's very low considered other markets with the same income power. That means that red meat is an aspiration in China and it kept growing. When you talk about other proteins, that other proteins there is a different dynamic. China will buy just of specific cuts, but not structural.
Beef, we see that will be keep growing. And people say that the market, that the economy is not the growth as before. But look, it still grows 6% and the size of the economy is much bigger than before. We are very positive with China not just for next year, we are positive for long term in terms of beef. That the demand from the beef is structural and keep growing.
Andrew Strelzik
Okay. That's helpful.
And then my second question is just on the debt paydown expectations, you talked about entering the deleveraging phase. So how should we be thinking about the pace of that? And the debt targets you'd like to achieve over kind of -- what kind of time frame?
Guilherme Cavalcanti
So at this moment, we are in budgeting process, so we still don't know what the business units will put in the budget for margins. But one thing it's for sure for next year, maybe it's not on market consensus, is that capital expenditures will decrease, given that we finish our capital expenditures expansions both in Seara and Italian products and [indiscernible] in U.S. So capital expenditures next year will most likely be lower. Probably by the next call, I will give you our guidance on capital expenditure for 2024 once we have it and finalized it.
So if I -- and if I put the market in consensus, for the fourth quarter, no. As we are mentioning, especially because of Australia, Brazil and Seara, we will see most likely the EBITDA in the levels are higher than we saw in the third quarter, the same for free cash flow. But again, even if we put market consensus that on the Bloomberg, we can get it for the fourth quarter, we will finish this year at 4x net debt to EBITDA. Then first quarter next year, remember, because the fourth quarter 2022, remember, we had $870 million EBITDA.
And again, just you see the exchange of EBITDA, we'll improve plus the free cash flow, we make this fast deleveraging for the fourth quarter. Then first quarter 2023 was the worst quarter, and we had $460 million in EBITDA, which will be replaced to a much higher EBITDA in the first quarter 2024, then despite cash consumption.
In the first quarter, we will see the statistical effect in our benefit, decreasing again the leverage. In the second quarter, we start to generate free cash flow, plus the EBITDA improvement that we mentioned. That's our expectation for next year. We will see this deleveraging path, which we have more clear after the budgeting process. But again, even if we put the market consensus in the model, you will see that we will finish next year with 3x net debt to EBITDA. And if you put market consensus in 2025, we will see 2.5x net debt to EBITDA. Bear in mind that the market consensus is 6.5% margin for next year and 7% margin for 2025, which we think that is more on the conservative side.
Operator
Our next question comes from Carla Casella with JPMorgan.
Carla Casella
Just a couple of follow-ups on the earlier questions. Just on -- in terms of the listing, is it really just a shareholder vote that is the last hurdle? Or are there other hurdles that you need for that listing? And also related to that, have you -- do you have any early thoughts in terms of how much your business should be paying out in dividends once you're -- you said on the listing versus what you paid today?
Guilherme Cavalcanti
Okay. I will start with the dividend question, and then I'll pass to Tomazoni.
So remember that we announced that when leverage was , we announced a special dividend in case of general assembly approval and the list of the listing process. Now the leverage is beyond what we allow for extraordinary dividends, which is threshold. So going forward, we will be able to pay extraordinary dividends except from the minimum obliged by Brazilian corporate law, only when this leverage goes below 3.75 . And of course, if we list in U.S., we do not have this requirement of minimum dividend. So this could also -- the 3.75 will be exactly the threshold that will allow us to pay dividend.
So the only thing that we have contemplated for next year is the special extraordinary dividends in case of the listings approved that we announced when leverage was 3.15 .
Gilberto Tomazoni
And Carla, just to add what Guilherme said in terms of -- there is -- the listing in U.S. is our priority. And the only change that was that we consider to give to the -- our investors and the right to vote in our shareholder meeting. It's just that this is an implication because it's a legal implication. It's the only change we have done so when we have launched the project.
Guilherme Cavalcanti
Yes. So we have to do another F-4 application, and we are in this process of questions of SEC on this new application that we changed to allow our ADRs to be able to vote, given that our ADRs still over the counter.
Carla Casella
Okay. Great. And then just one business follow-up. We've heard a lot of companies talk about some variable trends in China, and I know you've got some business there. Can you just talk about what you're seeing in kind of China and the Asian market and how that impacts your different regions?
Gilberto Tomazoni
We are optimistic with this market, and we have increased our sales from Brazil, from Australia. The only issue that we are facing in U.S. because the availability of cattle in U.S. And we are -- but the other business in the U.S. for pork and chicken, we are optimistic with the Asian market.
Wesley Batista Filho
And Carla, I would just add that the lower availability of U.S. beef is going to be a great opportunity for green feed out of Australia. So we're already seeing that today where a lot of times, it's much better for us to sell -- some of the cuts are better for us to sell in the domestic market. And that volume is going to our green feed business in Australia. So that's pretty good for the Australian business.
Gilberto Tomazoni
And Carla, this is one of the benefit from our diversified platform when we have -- we can catch the opportunity for different geographies. Like U.S., we have a restriction in terms of beef, but Brazil and Australia, we are catching the opportunity.
Carla Casella
Okay. Great. And then one -- this is -- I'm not sure how much of it you can or will answer, but in the past, we've asked and talked about normalized margin ranges for the different businesses. I know the businesses have changed dramatically with more prepared foods, some facility additions, efficiency improvements. Can you just give us any sense for what the normalized range is for your operating margin are on the different businesses, recognizing we may not be in that yet, in some of the businesses where we're in the down cycle?
Gilberto Tomazoni
Carla, it's -- if you consider that we are working on the Seara for 2 digits, we are working for Australia close to a digit or 2 digits, we are positive of chicken in U.S. as well in Europe. And the only really challenge we are seeing is the -- our beef in the U.S. The other...
Wesley Batista Filho
And you could consider -- sorry to interrupt, but you could consider beef to be in the low single digits, somewhere close to that, and the lower side of the low single digits during the very down part of the cycle. And high single digits for pork, something like that.
Operator
Our next question comes from Benjamin Black with RBC Capital Markets.
Benjamin Black
Just a couple of questions on credit side. It seems like you're reasonably confident in the deleveraging path of your business for next year. Maybe just talk a little bit about excess free cash flow? And if you would ever consider maybe taking out some lower dollar debt in the future given the current rate environment?
And then second question just being, going back to the Chinese consumer, beef prices seem to be a little bit of a headwind in your Brazilian beef segment. On the structural demand part, I totally understand where you're coming from on that. But I guess, maybe just speak to some of the pricing weakness that you're seeing? And what it would take for that pricing out of China to move back up?
Guilherme Cavalcanti
So I will start with the free cash flow question.
So we -- again, as I mentioned, we are still in the process of budgeting, which would give us more clarity once it finished about capital expenditures for next year. But so far, we've been able to consider a breakeven EBITDA of around $3 billion. So you get the difference of your estimate of EBITDA to $3 billion, which is our interest expenses per year, which is around $1.1 billion fixed, plus $500 million of operational leasing. Then we have the capital expenditures, which is again, we're still revising. But so far before we finished the budget, we can work with this $3 billion.
So -- and given that our EBITDA next year, as Tomazoni and Wesley Filho mentioned, we'll be improving -- the margins will be improving for almost all the business units, except the U.S. Beef. We will probably see a higher free cash flow as well for next year. For example, Ben, January 1st quarter, we have cash consumption. Every quarter, there is seasonality. But on the second quarter next year onwards, we start to see free cash flow generation.
And then you have a relevant question, is that what we will do with this excess free cash flow? Remember that our indebtedness policies forbidding us to make acquisitions beyond net debt to EBITDA, so we will only be able to deploy capital for acquisitions once we decrease the leverage below these levels. And we cannot pay extraordinary dividends above . So in case -- so most likely this excess cash that we start generating in the second quarter next year will be used to pay down debt, which that because we have -- we will be left over with mostly, basically, almost all capital market debt. We'll have to choose what will be more efficient way to tender for the debt.
It's an opportunity because given the low coupon that we have on those debt, they are trading below face value. So any payment will decrease gross debt more proportionately than net debt if we buy those debts at the discount. On the other hand, our average cost of debt is very low because we have bonds with coupon of 2.5%, with 3%, even a 30-year of 4.3%, which is very cheap. But again, that is the kind of calculations that we'll have to do, which will be a more efficient way to decrease our debt. It's clear?
Benjamin Black
Right. And then just on the Chinese pricing part of beef?
Gilberto Tomazoni
In terms of -- you talk about in terms of pricing. The demand, we are positive with the demand in China. And we are positive because it's a long term, it's a structural demand, it's a debt increase -- increase the per capita consumption. If you consider that the per capita consumption in China is very low. It's 7.8 kilos per capita is, if you consider globally, is very low, that this we will keep growing. It's not just for next year, but we keep growing long term because the economy is keeping growing. This is 1 point.
If you look for now, the current price that you need to consider, it is a consideration in terms of the cost of the cattle we have in Australia, the cost of the cattle we have in Brazil. In the current price in China, the margin is not too bad. But of course, there is opportunity for growth. The price, if you consider the historical, the price can grow. But even that not grow, if you consider the current price, the margin is not bad that we are positive in the China for next year.
Benjamin Black
Perfect. So you would think that JBS Brazil should see sequential margin improvement from here?
Gilberto Tomazoni
Exactly.
Operator
This concludes today's question-and-answer session. I would like to invite Mr. Tomazoni to proceed with his closing statements. Please go ahead, sir.
Gilberto Tomazoni
I would like to thank you for all of you to participate in this earnings call. Thank for our team members that their commitment to make this company stronger and focus on operational excellence. Thank you.
Operator
That does conclude the JBS audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.
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JBS SA (JBSAY) Q3 2023 Earnings Call Transcript