BRF SA (BRFS) 2003 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Curtis Smith of Thompson Financial. Please go ahead, Sir.

Good morning and good afternoon, ladies and gentlemen, and welcome to Sadia's conference call to discuss third quarter 2003 results.

I would like to mention that a slide presentation has also been made available in the Investor Relations section of the Company's website at www.sadia.com at the Financial Reports links.

Before proceeding, let me mention that forward looking statements are being made under the Safer Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward looking comments as a result of macro-economic conditions, market risks and other factors.

With [me] sitting in [Sao Paolo] this afternoon is Mr. Luiz Murat, Sadia's Chief Financial Officer.

First, Mr. Murat will comment on the Company's third quarter 2002 results, excuse me, 2003 results, afterwards he'll be available for a question and answer session.

It is now my pleasure to turn the call over to him. Mr. Murat, you may now begin.

Ladies and Gentlemen, thank you very much for your audience. I'm happy to give you the latest information of Sadia for the third quarter report.

On chart number two, you can see that, quarter against quarter, we increased our sales in 13%. We had reached 46% of exports out of the total sales on the quarter, against 47% on the previous third quarter last year.

On Chart No. 3, we show the nine months' revenues. We had reached 25% more sales this year than the previous one, with 46% exports against 42% in the previous. Let me address that this is continuous process starting in my 1997 that we are increasing our sales and that we reached record exports of R$90m in September.

In Chart No.4, you are able to see some highlights of our financials. As I mentioned before, our revenue increased 13%; in our gross margin, 15%, quarter against quarter. Our gross margin reached 33.1% against the 32.3% on the last year.

For 33.1% on the last quarter is much higher than average, which has reached 28.6% for the whole year 2003.

EBIT margin reached 33.6% increase against the previous year, with net income reaching R$108m from [accrued] number of [R$491m].

Net margin this quarter is 8.3% and the year-- number for the whole year is 7.8%.

We have been able to improve our [cashing] rating. EBITDA generated R$218m this quarter and R$444m the whole year. This R$218m is 28.5% in the previous quarter. As a result of our [inaudible] separation number, our EBITDA margin has increased 16.7% against 14.6% the previous year.

I just mention that [sports] revenue increased 46%, but a continuous for Sadia to reducing its use of capital had bring-- had brought the net debt to equity to 32.4% against 88.9% the previous year.

Also important to say, our cash generation almost covers-- covers more than the debt. Net [inaudible] to EBITDA is 0.9, and it was 2.2 in the previous year. Company has much less risk financial [saying] than the previous year.

We keep going forward, as can see in the Chart No. 5, that we keep improving the product figures for the company. While back in 1998, 45% of our revenue was coming from processed products. We have reached in September 50% of our total revenue coming from processed products.

When you compare in Chart No. 6 what has happened year against year, we also keep maintaining the same path from 47% last year to 50% now. Also, look have happened on Chart No. 7 from 1998 to 2003, from 53% of processed we have 81% of revenues coming from processed products. Again, products much more suited for past [stability], much more suited to broad logistics and for service.

The same process can be seen in Chart No. 8 where we keep growing the importance of generating [hamburgers] out of [inaudible] processed products, reaching 81% this year against 74% the previous one.

While we have been working much also to repeat the same movement in external area, if you move to Chart No. 9 you are able to see that back in 1998 48% of our sales was generated by poultry, while last quarter 41% was generated by poultry products. Processed products, which [were] represented 5% back in 1998, is already 12%. Look also the change made in the pork that was generating 7% of our exports some years ago and now is 16%.

Please move to Chart No. 10, and, again, the same pattern keep moving. We had an increase of processed product sales from 9% of total exports to 12%, increasing exports to for the developed countries.

Next chart, which is 11, shows that back in 1998, 47% of export was going to the Middle East countries, mainly Saudi Arabia, Kuwait and Emirates. Today, 36% go to European countries and 24% of sales go to the Middle East. As you can see, now we have reached for [modern] more balanced destination of exports, reducing, very much, our risk.

Look that the processed keep moving year against year. Back last year, 29% of exports were going to Europe, and today's it's 36%. Again, although Europe, we have been seeing continuous growth of [areas] in the other two markets. Sadia is showing that there are some other areas for us to find new markets, new products to overcome [inaudible], and that the result is here shown.

Please move to Chart 14. This is the-- what shows how much the income in Brazil had been eroded in previous periods. Average income in people that were employed working in a metropolitan-- in the [inaudible] regions dropped from R$980 back in September last year, to R$840 today. There is a 14% drop into average income. That's a total link in between this in our results and I'm going to show you next.

Chart No. 15, bear in mind that I just show you that the market has [squeezed] 15% year against. Well, we were able to reduce our domestic market sales for processed products only 5%. The reduction in poultry was more related to exports. You can see that the reduction from 30 thousand tons to 22 thousand tons, there is the same amount that there was up in poultry for exports from 131 thousand tons to 109 thousand tons. So, it was a strategic move. Otherwise the impact on income shortage in Brazil had effect most the processed products line and we were able to drop our sales much less than the average drop on total sales in Brazil in the period.

Bottom line, we reduced 3% our tonnage, quarter against quarter. In next quarter-- in next chart, you can see that we had raised 13% of our revenues. The sum of both charts can be seen [inaudible] and payroll number 17 over their bottom line with a 3% in volumes were able to grow 13%. Same way, with an 11% reduction in volumes in domestic market, we were able to grow 15%.

What was the miracle here? Well, we were able to get some price increases and we were able to increase sales of processed products. The mix of processed products is better. In any case, in the export market we have a lot of [inaudible] of the exchange rate. So, this comparison can not be done so easily.

If we move ahead to Chart No. 21, you are able to see that the average price in domestic market for processed products was up 29% quarter against quarter, for processed, 36% for poultry and 33% for pork. Please note that during the same period the packaging costs alone increased 69%.

So, Sadia, during this whole, has been making a very good job on bringing back profitability to its products. Our margin was eroded last year [for] a major growth of materials, major growth of grains and packaging.

Slowly, we have been able to catch up again with our costs structure in the result shown here. If you go to Chart No. 22, you will see that prices, average prices, went down 7% for processed products and up in pork and poultry.

Now, it's important to mention that here there's a very big difference of exchange rate during the period. Also important to mention that in the third quarter the China crisis of poultry excluded them from export the Asian region. So, price in that place increased a lot.

The same way, in the European market, the heat of the summer region had reduced production of poultry 15% of that market. So, poultry prices went up in that environment.

Well, again, packaging price, just to remember, our packaging costs went up 69% during the period and the dollar dropped 17% during the same phase.

On Chart No. 23, there is [resume] of the grains costs. You can see that after reaching a very big peak of R$27 per bag at the second semester of 2002, price had gone down roughly to R$15 and now is back to R$18. This number is much more the average price for the last 5 years. But, in any case, is, percentage wise, is smaller than what is happening with Soya. After R$50, it went down to R$37 and now is to R$40.

We are seeing a reduction of harvesting expectations on Soya in the States. We hope that in the first or second week of November, USDA is going to be publishing a new forecast and depending on this forecast, the price for Soya could be go up and down depending on such forecast.

We are not expecting major changes on the Corn prices. Also, it's important to mention that due to this very quick drop on Corn prices in Brazil, most of Brazilian crop of corn is still in the country. It's maintained in storage, and so there's a lot of grain to be bought when it's needed.

If you compare Reals per bag-- price per back Reals only converted to dollars you can see that in an average price, present corn price is not too far away, but you can see that Soya price are not aligned with average. Also-- that's a threat for us. There's a threat that a lot of producers could be more willing to plant Soya than corn. For that reason, Sadia was able to make a special buy plan which [arranged] the price of R$5 per bag for 100,000 tons in regions next to our plants. So, this kind of guarantee could give more will for farmers to plant.

In any case, the Soya market is market us much more aggressive right now than the Corn market.

Sadia-- on Chart No. 26, Sadia remains the first producer of frozen refrigerated products in Brazil and we're the second in margarine. Although we are the first of poultry turkey-- in chicken, turkey and pork, we are, each time, more looking such products as raw material for processed products and frozen.

Chart No. 27 shows that although Sadia had been able to be a very [innovative] company for the last years, launching an average of 62 products for the year, on the first nine months of this year we launched 22. The reason for that is that due to the very weak demand, we halted some of our launch for a better period. We have a lot of ideas in our heads, but we are holding this.

Examples of these launches of this year can been seen in Chart No. 28. We launched, for example, large Chocolate Mousse Pie, we launched a Sadia Vita Lite Italian Sliced Salamis and many appetizer. Those are the type of products we launched this third quarter.

Chart No. 30, please. You can see that capital expenditure on quarter was 16% lower than last year.

On Chart No. 31, presumes that we are 28% below the whole year of 2002. Although I had mentioned that we are targeting from R$100/R$120m of investment for 2003, we are a little bit below that base due to the fact of the low demand in Brazil, but investment will be done. Some of them are in process, we only have not paid yet.

In any case, R$120m or R$110m of investment [resembles] the same number as depreciation. That's one of the reasons why cash generation has been helped.

On Chart No. 32, please see that cash generation for third quarter EBITDA of R$218m is 28% larger than the previous-- on the same quarter last year and it resembles the same cashing ratios as I had generated in the whole year 2000.

On Chart No. 3-- 33, when we compare what has happened in the whole year, we had reached already R$44m, which is almost all the number that obtained in the whole year of 2002. So, that's results in best cash generation is already in Sadia today-- [inaudible] is in Sadia today.

Please go to Chart No. 34, Statements of Income [and last year] deals with the most important items here. Again, when you see in the first line that our gross operational revenue went up 13%, the result of it is that we are able to get a gross profit of 15% in gross profit from 32% to 33%, and that's result of everything I told you about best prices in the commercial-- in [inaudible] market, best prices in international markets, best costs of production, mainly due to their drop of grain prices this year against last year.

But, the most impressive things are seen in the middle of this statement. Please look what happened with the sales expenses. Although we had raised 13% our gross revenues, our sales expenses went up only 3%. So, even in nominal terms, we dropped from R$231m to R$225m, reaching then 17.2% of total sales against almost 20% the previous year.

So, same process was done in the administrative expenses. We have reached a number-- a nominal number even smaller than last year, even considering that we have paid two digit salary increases this year. Our administrative expenses went down 5.7%, reaching 0.9% of sales.

On the EBIT number, as a result of other proceedings, we are better now 33% than the previous year, reaching R$186m of profit-- operational profit.

Well, another important victory for the Company is maintaining our financial expenses very low. When you [inaudible] the financial net results plus equity pick-up, don't forget most of the equity pick-up is resulting from financial arbitrages generated in our financial companies plus exchange variations on our inventories offshore, well, the sum of those two numbers, financial net results plus equity pick-up, this year is much smaller than the previous one.

Well, as a result of everything I have said, income before taxation this year is 66% higher than last year. Please bear in mind that this year we are making a provision to pay R$51m of income tax, something that we have not done the previous one. Even with the-- such payment of R$50m now, we are generating a net income for the quarter of 12% higher than the previous one. Well, this same chart explains the next one, which is Chart No. 35.

Looked at [inaudible] is written adjusted as [inaudible] corner. What is that? Well, three months ago I had already mentioned to you that we had some extraordinary gains and that had happened on the second quarter and in the third quarter. The second quarter was R$51m and the third quarter was R$27m. What is that? Back last year, we had gain a [battle] suit against our Government due to ITI taxes. So, when we had paid such tax some years ago, we had deduct such expenses from gross profit. So, right now that we gained a law suit, the right place to put it back is on the same place. So, it's deducting from costs. So, this number had reduced-- had increased the gross margin last year and so, for the purpose of [comparison], I'm taking out the adjusted number. With some of that, gross profit that last year was 30% has reached 33% now. So, much better besides the very weak market conditions in Brazil. That's quite an achievement.

Chart No. 36 explain the same thing for the year without adjustment. In Chart No. 37 explain the same thing for the year with adjustment and [inaudible] [level] we show you goes straight to gross profit. You can see that gross profit 9 years this month against 9 years the previous year deducting the [non-recurring] gains is 28.6% now against 28.2% the previous one. Alright.

Well, let's get moving to financial debt which is Chart No. 38. Hold on a second, let me double-check. Yes, 38. Please note that total financial debt this year reached R$2.7m against R$3.3m the previous one. Financial investments reached R$2.3m against the same R$2.2m for the last one. So, net debt this quarter reached $487m against R$1.1b in the previous one. As a result of such smaller financial debt, per cent of net-- net equity-- net debt to equity today is 32.4% against 88.9% the previous one.

Also important to note, that last year, out of the R$1.1b of net debt, about 30% was dollar denominated. Today, we do not have dollar denominated debt anymore. Again, as we are generating cash EBITDA enough this year to pay debt, so debt is only R$1.9b of EBITDA. One year ago, we needed [2.2 EBITDAs] to pay net debt. So, a much better risk.

Well, Chart No. 39 shows how the trend towards reduction of the net debt to equity, a continuous trend reaching 32.4% from a 100.8% back in the third quarter-- or second quarter-- or third quarter 2002 after we had bought [inaudible] we had invest a lot rebuilding the herds on such company. Today, it's 32.4%.

On the net debt to equity of total EBITDA, this is calculated in rotating 12 month phase. So, today it's 0.9 against 4.6 back in third quarter 2002.

Please move to Chart 42. Over there you can seen in the left corner that by January 2002, while our shares were quoted at R$1.48 per share in the Bovespa, our book value per share was R$1.25, so market was paying 118% of book.

Back in September, at our shares trading at 2.55 with our book at 2.22, we are trading at a 115% of book value.

Chart No. 43 please, suggests the most liquid share in the Bovespa market. So, out of the [foot] selector, 64% of the shares trade in Bovespa are Sadia shares. The same thing is happening in New York, where the most liquid is Sadia.

Chart No. 44 shows a [resume] of share recommendation of some financial institutions in Brazil where they have made a recommendation, what's the recommendation and what's the target prices-- target price.

Last chart, but not the least, let me give you what was shown in yesterday's newspaper. This is net-- activity, industrial activity, in the state of Sao Paolo. I can just give you an idea that, in average, September had a better activity-- 6% better activity than August, and dividing in several sectors as shown there.

So, why I'm showing this? Well, it's important to know that although, as I mentioned at the very beginning, the salaries have decreased or have been eroded by inflation as unemployment has reached a record 20% in the big cities. Well, there's some light at the end of the tunnel right now that we can see by the last numbers I'm showing here.

We have seen yesterday's presentation of our big supermarket chain showing that they all-- they also are making better sales right now than they did in the second quarter and we are seeing the same thing. All the relationship we are having with the supermarkets for negotiating the Christmas products are going very good pace, so we are forecasting a slightly better Christmas this year than the previous one.

Cost wise, we expect that corn prices will be most flat or just slightly up, but we expect that Soya prices are going to be higher in the fourth quarter than they were in the third. But, please, don't forget we always have a delayed result from price increases or decreases in grains. It takes about 3 months for any change to be seen in our results.

Well, that's what I have to say about numbers and am free now to answer your questions. Please go ahead.

Thank you. Ladies and Gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press the pound key. I would like to mention that today's conference is being held exclusively for financial analysts and investors. We kindly ask reporter who may be participating in this conference to please direct any and all questions to the Company's Press Relations Department. Please restrict your questions to two at a time. Our first question comes from Daniela [Bretauer] from Banco Santander.

Hi, Murat. Good afternoon. Congratulations again on a very strong quarter. You mentioned that the gross margin in the fourth quarter is unlikely to be at the level that we saw in the third quarter, which caught the market by surprise. My question is, can you give a margin indication? Are you saying that it's going to be below 30%, or around 30% is a good guess for the fourth quarter gross margin? That's my first question.

Well. So, thank you, Daniela for compliments, first of all, and thank you for the question. Our our crystal ball shows the following. Unfortunately, we are forecasting worst international prices. Why? Well, China had returned to sell to Asia, the European producers had already [revamped their herd so they are already producing without any problem they had before. So, we are forecasting for the national prices to start to get softer than they were first. We are not forecasting major increases of prices for the fourth quarter in Brazil and, very likely, some of the grains impact could happen at the end of [inaudible] December. So, our crystal ball shows that, as for now, we are not forecasting the same kind of gross margin as we had had on the third quarter.

Just to get a little more guidance, do you think it's around 30% or even more than 30%?

My crystal ball is not clear for that, Daniela, I'm sorry.

With regards to your [inaudible] averaging. Do you think that fourth quarter, you will continue to reduce your debt, or this level is cost more or it should go up a little bit back to one net debt to EBITDA around 40% of your debt to equity?

Yes. We are absolutely not forecasting any increase. We are in other side. We're still hoping for some downturn. Why is that? We're still expecting to generate-- to keep generating cash. We keep squeezing to maintain now use of working capital very tight, and so we absolutely do not think that we are going to be going up. On the opposite side, we are going down and we still have some room on our receivables fund to cashing. As soon as we receive such funds, that increases our liquidity. So, net debt to equity and net debt to coverage from EBITDA is going to go even down. That's our forecast.

To follow up on the receivables funds. Any time frame for the cashing of the amount and how much are we talking about here?

We are forecasting that we are going to be receiving 100% of the money in the fourth quarter. So, we are not going to be lacking any-- leaving any room for the end-- for the next year. So, we are going to be cashing in 100% of the proceeds of the funds and that's about R$50m.

Okay. Thank you.

Your welcome.

Our next question comes from Mr. Andrea [Veiner] with [Liquid Bactual].

Hi. [inaudible. My question is in regards to SE&A expenses. Can we expect some of the expenses to go up in the following quarter amount for next year, or are you gus saying that you can keep SE&E over net revenue ratios around 18%.

Thank you for the question, Andrea. Unfortunately, we expect both expenses to go a little bit higher on the fourth quarter and let me address that. Sales expenses will go down naturally as a consequence of more distribution for the year. We need to distribute much more in the fourth quarter and for the season and, as a consequence, sales expenses are going to go up.

In administrative expenses, we are starting to go-- very slowly they're going to start going up a little because we thought that we had decreased to much our managerial structure. We are hiring some more white-collar people because we had been, again, squeezing too much restructure and we need more time to think. Everybody was working too much and not having time enough to think. So, [we] are going to be a bit more loose in our people structure than we were before, but nothing very dramatic. Nothing very dramatic. Very unlikely we're going to be higher than 1, and very likely we're going to be higher than 19% on [salary] expenses, if that's a good bet.

Thank you.

Our next question comes from Miss Juliana Rosenbaum with [Etils].

Hi, Murat. I'd like to explore a little bit the reduction on selling expenses. We know that it changed the mix of exports to conceived sales and sub-sales and, of course, this should have helped this reduction. I want to know if you could quantify this effect? And second, the [counts] party of that would obviously be an impact on prices and I would like to know if you could also quantify how much that-- how much will that impact on the export prices?

Well, thank you for your question again. But, there is no direct [inaudible] in between the rate that we export and final price for the product. Let me address that very specific. You are correct, we changed our rate of invoicing instead of making [inaudible] cost insurance, duty free-- duty paid because it's better in a tax matter and it's a much better service to our clients. It's going to have a major impact on the revenues side itself. It's more a service and a quality thing than anything else. Okay.

Second point, what has been interfering most with price is-- are the reasons I gave you before [inaudible] were the China crisis for poultry and the summer-- very high temperatures in Europe. Internationally saying, those are the most important factors.

There's one extra, which is as soon as the Europeans placed a new tax on salted raw meat, it raised the level of European meat. So, this raised the floor of fresh meat in that market.

So, all those things are much more important than the simple comparison of I'm exporting free on board or the duty paid. Is that clear?

Yes, thank you.

Your welcome.

Our next question comes from Mr. Rich Peck with American Century Investments.

Hi. My questions have already been answered. Thank you.

Okay. Thank you, Rich.

Our next question comes from Mr.-- no, no. Ladies and Gentleman, as a reminder if you would like to pose a question, please press the star key followed by the one key on your touchtone phone now. Our next question comes from Mr. Antonio Weirmac with Investor Particolar.

Hi, Murat. This is Antonio Weirmac. I have two questions for you. One is on the operating side and the other is for the financial side. Your ongoing gross margin, year to date, of 28.6% doesn't look terribly exciting compared to 28.2% adjusted for the IPI one-off last year. You-- this was done in spite of incredible price increases in the domestic market, a recovery prices in the international market and a substantial improvement in your product mix with industrialized products. If your foreseeing some US crops of sardine even if you're in hedged in some production locally and that you've anticipated some of the prices internationally may drop, is it fair to assume that for the ongoing 2004, you are looking into a gross margin which could be blow the 28% and, if not, what would make it believe that we could-- you-- actually be going above that?

The second question has got to do with your clever financial strategy and it's very simple. Does Sadia have a multiple EBITDA as a [target] for trading in the stock market?

Okay. Thank you for the questions. First of all, our-- let's talk about year against year, because that's what you mention here on the 28-- on adjusted 28.6% against 28.2%. I agree with you. It's nothing something margin. It would not be in any case, please. Bear in mind that the whole year 2003, although we had increased our prices, we are not increasing our prices for [inaudible] better than it was two years ago. What we are only doing right now is to recovering more than we hedged for. We are not building-- we [have] rebuilding something that was destroyed. Again, don't forget, last year, price cost increases were major and we absolutely enabled to pass along from cost adjustments to price. This year we did the offset. We said, okay, I'm going to do cost structure increases increasing my prices. Even if I have to give up with some quantities, and that's exactly what I've been doing, if you look in processed products, year against year, we are able to grow at 2.7 even although we are growing our prices. Well, no doubt, there is a product mix structure here. This 2.7 don't increase on volumes of processed don't tell the whole truth. No doubt, the products who have the better margins which are the most value added and so on will be products which suffer the most reduction of consumption. There was a trading down during this period of low income in Brazil. So, the average profitability product went down this year as a result of reduction of this income factor I just mentioned to you.

Is that clear?

Yes. It is more clear, but it doesn't really answer the question about what you anticipate for next year. Do you [inaudible] below the 28 or above the 28.

Okay. That's a hell of a good question. Well, we are looking-- well, our crystal ball is expecting for 2004 a better demand here than it was in 2003. If that happens and as we have our price structure which better aligns with costs structure than it was before, so, we can see that gross margin for next tend to be better than it was before.

And on your financial front. You've got charts indicating the trading value of the shares on the Sao Paolo stock market. Does Sadia have a target of-- on multiple EBITDA for trading in the stock market at all?

No. No. We are targeting-- something that are looking very much are net debt to equity, net debt to EBITDA, but we are not making any forecast or looking at multiples in the market, because there's nothing we can do about it.

Okay. Thank you very much.

Your welcome.

Our next question comes from Mr. Bruno Gransford with Bernstein.

Hello, Murat. I have a couple of questions regarding your results. One is, explain the special increase in the income taxes. Why don't we start with that?

Well, tax, the fact is that we're-- on the previous we still were having a lot of tax credits from the acquisition of [Rosendi]. Please remember that when we acquire Rosendi, some of the income tax credits that we had received they could be used 100% on the same year as the profit was generated, because, you know, in Brazilian accounting, when you have profits generated in the [agro] business you are able to get-- losses generated in agro business can be compensated by profit generated in agro business in the same year. But, if you are in a different sector other than agro business, losses generated in the business can be compensated only one-third out of each year's profit.

So, I don't know if it is clear for you, but I will have to keep going.

Until last year, we still stock of agricultural tax credits, which were launched against our profit in such year. Right now, the profit that we generated can only be compensated with one-third of the net debt which we bough from Rosendi.

Is that clear, for now?

I think, I think I understand. When do you expect that to expire?

In three years.

From now?

Yes. Well, we still have credits which are going to be used until 2006, including. But-- I don't the balance of it, but our-- the information, our notes they says is [inaudible], I don't have this information in my hand right now, but out notes in our balance sheet-- note 13 gives the specific details on that. Okay?

Great. My second question is really to export sales. It doesn't sound like you've been that affected by the Russian quota? Or, you've made up for that?

No. [inaudible] press is also very good on this specific. Until recently, well, until the previous quarter, we are able to keep growing. We have still had a lot of stock over there and so we were able to sell still the stocks. That's why we were not hurt yet. But, you are correct. In the next feature, we will be suffering reduction volumes, but we do not forecast reduction in the revenues for the fact that prices are increasing right now as a result of these reductions on volumes. By the other token, we are going to be using such volumes in some other markets in such a way that in an aggregate amount, we are going to be exporting more volume with more dollars in the fourth quarter than on the third. That's our expectation.

So, you're offsetting the Russian decline with other markets, or?

Perfect. That is correct. Let me give you an example, okay. We are entering in Venezuela market, it was not outlined six months ago, we are entering in China, we-- well we increase in sales to Japan. So, we are increasing-- we are selling to Iraq; something that we haven't been doing for a years. We did some a lot of years back, but halted and now we are coming back. So, we are making some very good improvements also in the Caucasian countries, like Romania, Azerbaijan and so on, we are increasing sales and accretion.

Thank you very much.

Your welcome.

Ladies and Gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touchtone phone now. Our next question comes from Miss Daniela Bretauer with Banco Santander.

Murat, a follow-up question. Given your good third quarter results and positive outlook for fourth quarter, is it possible to expect another healthy dividend for the second half of the year?

Well, Sadia has a very well defined dividend policy. Although the general law requires a minimum payment of 27%, our bye-laws require a 28%. As you can see our history, we are always ahead of that. If I'm not wrong, the last four or five years, our averages are in 33% or 34%, something like that, and we are not forecasting any major change in our policy for the time being. So, we are going to be maintaining our trend of being good payers of dividends.

Thank you.

Our next question comes from Miss Juliana Rosenbaum with Etils.

Okay. I want to follow-up. Let's assume that 2004 is great in the domestic market, how much if you could increase your production to such a demand [inaudible] without increasing capacity?

Thank you for that. It's very good question also. I had mentioned that last quarter and I'm going to repeat that again.

Sadia, each time more, is becoming an assembling company instead of being a disassembler as it had been for decades. Each time more, Sadia will be buying parts and components from third parties and to feed our clients needs.

We still have room for feeding the market. We are operating at roughly 80%-85% production, but we are able to increase much more our sales. Again, by more parts and components from third parties. Let me address this point for you. Nowadays, we buy half [cart] cases of pigs in the market as we buy [legs] in the market, as we buy-- we have an agreement with [Globar] for example and they have a full rented facility for us producing 100% of our food for us. Some-- the ice cream that we are selling is not produced directly by us, but by somebody else using our recipe. So, this kind of agreements we are going to be storing each time more. Okay.

So, we don't forecast what capacity will be a limitation for the revenues growth for Sadia.

Okay, but would you consider making an acquisition on one of those companies that you could rent from capacity or would you acquire one of them?

Well, we never can say no, but I can say that, for the moment, it's not in our target to invest in hardware in our companies that produce for us for the moment.

Okay. Thank you.

Your welcome.

This concludes today's question and answer session. Mr. Murat at this time you may proceed with your closing statement.

Well, thank you for everybody's attention for the time being. I hope you investors are now so happy, as all the 34,000 employees of Sadia, which have worked very tough and present very good results. Thank you and good afternoon.