Blood is everywhere in JBS’s (JBSS3:BZ) vast slaughterhouse in Greeley, Colo., north of Denver. It’s puddled on concrete floors, smeared on workers’ white smocks, gushing from cattle knifed on the killing floor. The smell hangs on the air in a high-ceilinged room chilled to about 40F, where JBS employees in shiny black and white helmets toil at chopping tables along both sides of a conveyor belt. A sign identifies it as the “LOIN” line. With hooks in one hand and knives with flexible 6- to 8-inch blades in the other, they trim fat and pare as much muscle from the bone and vertebrae as they can, turning raw slabs into tenderloins and New York strips.
“Disassembly” lines like this one, relying not on robots but humans, are where JBS and other meatpackers make money. Profit margins are slim in the meat business, and economies of scale elusive. Rivals buy essentially the same livestock and birds, fatten them on the same feed, and hope to whittle extra scraps of profit by being the most efficient at turning carcasses into salable cuts. “Planes can go around the world, iPhones can do a zillion things, but humans have not invented a machine that can debone a cow or a chicken as efficiently as a human being,” says Alan Alanis, a JPMorgan Chase (JPM) analyst.
At JBS the human beings are deboning steers and heifers faster and more efficiently than many. Each day the Greeley plant’s 3,200 workers can slaughter and debone 5,400 head of cattle, producing 3.3 million pounds of meat ready for supermarkets and restaurants. Beef expertly cut from the bone can fetch $10 a pound at retail, while leftover scraps can get a 10th of that, quickly adding up to a lot of lost profit.
The Brazilian brothers who run the company, Wesley and Joesley Batista, are famous for their serial acquisitions—since 2005 they’ve bought more than a dozen companies for $14 billion in cash, stock, and debt. The spree has made JBS the biggest foreign meat company on U.S. soil, the world’s biggest producer of beef and chicken, and one of the largest pork producers. JBS has sustained this growth not merely by gobbling up rivals but by targeting relatively cheap, poorly managed companies and making them run better—a strategy that starts with bones. “We don’t dream to be big,” says Joesley. “We dream to be efficient.”
Each time JBS acquires a company, the brothers zero in on butchering. Their father, JBS founder José Batista Sobrinho, first visited the Greeley slaughterhouse after JBS bought the money-losing meatpacker Swift in 2007 for $1.4 billion. He was alarmed to see carvers leaving muscle and hide on the bone from the knee down. Ex-Chief Financial Officer Sérgio Longo recalls the patriarch equating the sloppy work to lost shoes because the hides could be made into leather: “ ‘Look at those guys, they are throwing away two pairs of shoes’ ” per animal.
Meatpackers zealously guard yield figures (the percentage of meat culled from carcasses), so it’s hard to know which are the most efficient. The Batistas say they’re as good as any in Brazil and close to the best in the U.S. “We are improving year by year,” Wesley, JBS’s chief executive officer, says. In the meantime, they’re continuing to amass acquisitions at a startling pace. In June, JBS said it would assume $2.74 billion of debt to acquire the Seara poultry and processed-food business from Marfrig Alimentos (MRFG3:BZ) of Brazil. When that deal closes, JBS will have $50 billion in annual revenue and the daily capacity to slaughter 85,000 head of cattle, 70,000 hogs, and 12 million birds, about 30 percent of which will be exported to more than 150 countries. “Growth is in our blood,” Wesley says.
José Batista Sobrinho, the silver-haired patriarch of JBS, built the company from a small Anápolis butcher shop 60 years ago. At 79, he still oversees JBS’s Brazilian feedlots. Sometimes he visits them in the Agusta helicopter his kids gave him for his 70th birthday. José—no relation to embattled Brazilian ex-billionaire Eike Batista—says getting swindled gave rise to JBS. He and his brother were selling cattle to meatpackers in Brazil’s Goiás state. One buyer estimated the weight of some cattle and offered to pay accordingly. The Batistas thought the estimate was low but sold anyway. It bothered them enough that they opened a butcher shop where they could weigh their own livestock. “Right there,” José says, “I learned how important it is to know your business inside out.”
He imparted this lesson to his sons mostly by letting them learn it for themselves. Wesley, 43, and Joesley, 41, have been in the business since they were teenagers, plucked out of high school by their father to run slaughterhouses in central Brazil. These days, Wesley is the detail guy, known for doing complex math in his head and reminding slaughterhouse workers to shut off water spigots after they rinse cattle blood off their boots. The lankier Joesley, CEO of J&F Participações, JBS’s holding company, is focused on plotting worldwide strategy. When they were teenagers, they knew little about pricing cattle, managing inventory, and dealing with customers—and their dad didn’t give them much help. “I have seen many cases of rich men who died and the rest of the family didn’t know what to do with the business,” José says. After putting young Wesley and Joesley in charge of two packing plants, their father stayed abreast of the business but “never was there telling us what to do,” Wesley says.
The brothers started by slaughtering 80 head of cattle a day; in two years it was 700. Before either brother turned 35, they decided JBS—named for their father’s initials—ought to go global. They weren’t sure how but thought they could figure it out. Former CFO Longo says, “They were basically Brazilian rednecks.”
In 1996 they started exporting rib-eyes, rump roasts, and tripe. Two years later, Wesley visited beef plants in Iowa, Wisconsin, and Nebraska with Jerry O’Callaghan, now the company’s head of investor relations. They were impressed at how the Americans pushed out huge volumes of meat to reduce per-pound production costs, in contrast to the slower, more careful method that JBS employed at the time. “This was a different model,” says O’Callaghan. “The plants were ugly. They didn’t wear nice white uniforms, but they were making money and selling a lot of beef.”
One night in the early 2000s, the Batistas dined with other JBS executives at Leopolldo, a pricey São Paulo restaurant. On a napkin, they sketched ideas about how to establish production strongholds that would enable them to export anywhere in the world, Longo says. They also listed possible acquisitions, including Swift in Argentina and Swift in the U.S., which they called “the Swift gringa.”
JBS bought Argentina’s Swift in 2005 for $200 million. They raised almost $800 million from investors in an initial public offering in 2007, and soon after bought Swift gringa from private equity firm HM Capital Partners. A Swift executive told Harvard Business School researchers that, on the day of the May 2007 announcement, “I was in the office by 6 a.m. and learned we had been bought by a company named JBS. I thought, ‘Who?’ ”
Wesley moved to Greeley in 2007. The high school dropout spoke only Portuguese and started picking up English watching TV news. One of the first things he did was tell Swift cafeteria staff that they shouldn’t be serving chicken; JBS was all about beef.
JBS spent heavily on training and equipment, including knife sharpeners installed next to each line worker, to improve the yield. Generally, JBS says, a steer or heifer can yield 72 percent of its gutted weight. The company also installed overhead screens that flash numbers indicating whether workers are meeting yield targets. Green numbers mean they’re reaching their goals; red means they’re underperforming. Progress is also measured in bones: The clean, white skeletal fragments are tossed into baskets behind the disassembly line, where supervisors occasionally count how many each line worker is detaching. Top producers wear black hats and get paid more.
Volume is also important. The more boxes of meat trundled to the loading docks, the lower the per-head production costs. When JBS took over, Greeley was operating at 70 percent of capacity on a single day shift, for a production cost of $212 per head, according to the 2008 Harvard study. JBS flooded local radio with ads and, barely six weeks after the deal closed, 600 newly hired workers were ushering cattle to the killing floor. The night shift added more than $1 billion of revenue in the first year, cutting per-head costs to $164. JBS says that ratio has since improved.
After buying Swift and later Smithfield Beef Group in 2008, the Batistas were itching to get into poultry. They didn’t know the business, and rivals wondered whether beef guys could master it. But poultry offered enormous sales potential in developing countries, because chicken is cheaper than beef or pork to produce.
In 2008, Pilgrim’s Pride (PPC), the poultry company founded in 1946, filed for Chapter 11 bankruptcy protection. By then, Wesley had gotten to know co-founder Lonnie “Bo” Pilgrim and other managers. “We kept very close,” he says. In December 2009, JBS bought 64 percent of Pilgrim’s Pride out of bankruptcy for $800 million, plus $2 billion in debt. (JBS now owns 75.6 percent of Pilgrim’s.)
In Pilgrim’s, the Batistas saw another company that hadn’t been managed well and could be bought on the cheap. Bill Lovette, now CEO of Pilgrim’s Pride, says the company was trying to please too many customers rather than focusing on seven or eight lucrative ones. After JBS bought it, Pilgrim’s Pride returned to deboning breasts by hand. As with beef, making real money on chicken comes down to how the birds get sliced.
Lovette explains this on a whiteboard in JBS’s offices in Greeley. Using a brown felt-tipped pen, he draws a diagram of a headless chicken. Deboning chickens, he says, involves more than 100 different types of cuts made by a variety of knives specific to certain tasks, such as cutting shoulders. “I’m very passionate about deboning a chicken,” Lovette says. “I have a very, very specific philosophy about how to do it.”
Human performance has limits, so it’s important to be cutting what customers want. Not long ago, boneless, skinless breasts accounted for more than half the revenue from an average chicken, according to Lovette. That has dipped to below 40 percent with the growing U.S. population of Hispanics and Asians who tend to prefer dark meat.
Lovette points his pen at the chicken diagram. “You can sell it as a whole chicken, which has a lot of value right now,” he says. He makes a few slash marks through the bird. “For KFC (YUM), you cut it into eight pieces.” Matching cuts to the sales mix “is a lot of complicated math,” he says, “but if there’s a secret sauce in this business, that’s it. It’s almost impossible for a financial analyst to model.”
After losing more than $1 billion in the two years before JBS took over, Pilgrim’s posted a profit of $174 million in fiscal 2012. Its stock price has tripled in the past year to about $17 a share. JBS now thinks of itself as a poultry company, too. Wesley went back to the Greeley cafeteria and told the kitchen staff, “You can start serving chicken.”
In the meat department of an Extra Supermarket in São Paulo’s Moema district stands a life-size placard of Brazilian soap opera star Tony Ramos shilling for JBS’s Friboi brand beef. The smiling cardboard man is saying, “Carne confiável tem nome,” or, “Meat you can rely on has a name.”
The ad campaign is part of the Batistas’ newest push to reposition beef as a branded consumer product such as Bud Light or Chobani. Unlike chicken and even pork, almost all beef is still sold as a commodity: red muscle in a white Styrofoam pan wrapped in clear plastic. The Batistas are betting they can sell branded products at higher prices and with better profit margins by equating quality and safety with Friboi, the name JBS has long been known by in Brazil. In the U.S., the company has branded products such as Aspen Ridge Natural Beef, from cattle grown without hormones or antibiotics.
The same sort of thinking underpins JBS’s recent acquisition of Seara. In addition to slaughtering more than 2.5 million birds a day, Seara has a stable of branded products that contribute a third of its revenue. The deal also puts JBS in direct competition with crosstown rival and processed-foods giant BRF (BRFS3:BZ), which has about $15 billion in revenue. Analysts estimate the Seara purchase will push JBS’s debt-to-Ebitda ratio closer to 4, after the Batistas promised it would drop below 3 by the end of this year. On Brazil’s Bovespa exchange, the company’s stock has languished around $3 a share, partly because of the debt load. “The market is in denial,” Joesley says.
Some analysts worry that JBS has spread itself thin and argue it must focus on fixing the companies it already owns. U.S. ranchers are concerned that a foreign company with such market power jeopardizes domestic food security. The brothers insist they’re focused now on cutting JBS’s debt and getting Seara into shape. There will be no deals for a while, they say.
But don’t expect them to wait long. Analysts speculated in June that Hillshire Brands (HSH), the packaged meat and baked goods company spun off by Sara Lee last year, is an attractive takeover target. When asked if JBS might go after Hillshire, Wesley pauses. Seven seconds tick off of his silver Rado watch. “Not now,” he finally says. He grins. “Maybe at the right time, at the right price.”
