BRF SA (BRFS) 2004 Q4 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. [OPERATOR INSTRUCTIONS]. I would like to now turn the conference over to Mr. Thomas Carston of Financial Investor Relations Brazil. Which, as a reminder, is the successor of Thomas Financial Investor Relations Brazil. Please go ahead.

Good afternoon ladies and gentlemen and welcome to Sadia's Conference Call to discuss the fourth quarter 2004 results. I would like to mention that a slide presentation has also been made available on the Company's website at www.sadia.com in the financial reports section. Before proceeding, let me also mention that comments are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995. Actual performance could, therefore, differ materially from that anticipated in any forward-looking comments, as a result of macroeconomic conditions, market risks and other factors.

With us today in San Paolo is Mr. Luiz Murat, the Chief Financial Officer. First, Mr. Murat will be commenting on the Company's fourth quarter 2004 results, and then afterwards he will 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 sir.

Thank you very much. It is a pleasure to have you with us again. We are happy to give you information on our fourth quarter and annual numbers. Please refer to chart number 2 and you're going to see that our gross operational revenue was up 16% quarter against quarter, and our export had reached 46% after starting from 17% back in fourth quarter '98.

Please go to next slide, number 3. On an annual base our revenue is up 25% related to last year, and we had reached 49% exports for the total sales, against 18% international market in '98. Please also bear in mind, that our target is to maintain roughly half of our sales in domestic, half internationally, as roughly half our costs are hard currency and they are related. So we think we have a natural hedge if we have our revenues 50/50. This is going be a very good challenge to be done as a fact that we do expect international demand to be very strong. So our sales in domestic market will have to work very hard to maintain the same 50/50 distribution of sales.

Please go to slide number 4. Again you can see that gross operating revenue was up 25%, our gross profit 23%, our gross margin 30%, which is a little bit higher than last year. Please also note that apparently that was not true in the fourth quarter. Our fourth quarter was much worse than we thought it should be, and we are going tell you why.

First of all, demand in the Brazilian market was weak but most important, we had an 8% drop on dollar against real during this quarter. As you know, our costs during that period, in terms of grains, the drop is only going to be put into the product in 3 or 4 months. So the grains that were consumed to sell products in the fourth quarter were bought at a much higher price, not only on the grain, but also on the exchange rate. So our margins were weakened due to worse exchange rate and due to weak internal market demand.

As we are going to see during the presentation, we have made some good movements towards increasing our volumes. So if the market's weak and if we are going up with our volumes, no doubt prices cannot go up at the same moment.

As a consequence of all that, we see that our EBIT margin is -- our EBIT went up 62% on the year and only 33.3% quarter against quarter. Net income was almost in line when you see about year against year, but also consider we are paying much more taxes than in previous years, and I'm going touch on that later.

The biggest effect of reduction in profitability was a reduction of profit on the fourth quarter. For years, the fourth quarter was the best quarter for Sadia. We have been achieving that with the increase of exports, but unfortunately, this last fourth quarter results were much weaker than we thought. Also, we have suffered a price pressure from packaging, plastic and hardboard.

EBITDA margin year against year is almost the same, 12.3%, and as a result of weaker operational results we had a worse EBITDA margin for fourth quarter against fourth quarter. I already mentioned the exports gross revenue, and it is important to note also that our net debt to equity in 2004 is much better than in 2003. Same thing on the question net debt to EBITDA.

Please refer to chart number 5. We keep moving the Company towards making more processed products and poultry cuts in our product portfolio. Now reaching something like 70% against 48% some years ago.

On chart number 6, there's a chart that shows how -- what [is this] value added chain. We can see that our chicken at its start is probably worth US$1000 per ton. It's later on you can sell better chicken breast at US$3600 per ton. So that's the aggregation chain that we're talking about, and that's what we're looking for in the future.

Please go to chart 7 and you're going to see that in the domestic market, we had almost reached the limit of sales of processed products and poultry cuts in relation to total; it's roughly 84% of total against 64% back in '98.

Please go to chart number 8; in the export market we keep improving our product portfolio. Processed products and poultry cuts were only 27% in '98 and they do represent today 55% profitability in processed products. And poultry cuts are much better than they are in the other one.

Please refer to chart number 9. Again, the most important market in 2004 for Sadia is Europe. It was Middle East some years ago and also we were very successful in developing the Russian market, which is included in Eurasia. [80%] of Eurasia is Russia. So our distribution of this nation is much better today than it was in the past, so we are distributing our [indiscernible] using different [methods], reducing the Company's risks.

Please go to chart number 10. You already know that the most impressive growth on production of chicken is Brazil, with 49% in reproducing for Brazil and for the world. Different in Mexico, where the growth is basically as a supplier for our captive customer, which is United State. Which by the way, only buys from Canada and Mexico, not from anybody else, and it's a closed market. You can see that the Europeans are losing their [pace] because they already [respond] recognizing that they do not have a competitive advantage to battle against the other producers in the chart.

Please go to chart number 11 and there you're going to see that Sadia is the most important producer, first 1 in Brazil with 14% market share. Very different than the situation that we had in the States and in Europe, where just a few companies control most of the production. In Brazil, the 7 largest producers but it's only 45% of total chicken produced in Brazil.

Next chart please. Number 12 shows our exports. Brazil has arrived to be the first player in this game, with more than 200% growth from '99 in 2004. Please, it's is a natural thing for Thailand to be flat related to the bird flu that they had. And the China reduction is caused by internal demand. Europe is also almost flat, due to the fact they are not competitive. So Brazil is making a very strong position in the international market and Brazilian poultry is already well recognized in terms of quality standards, costs and service supplied by the producers.

Please go to chart number 13 and you're going see that Sadia again was the biggest producer and the biggest exporter of chicken, representing 25% of total exports of chicken in the year 2004.

Please, chart number 14. If you compare the competitive advantage of Brazil, we all know that unless the costs of financing and a little bit of labor, where Thailand and China are a little bit smaller than ours, although other costs are much more competitive to Brazil. And in consequence, nobody today can beat the cost structure of Brazilian poultry producers.

By the way, Brazil is the only country worldwide that can expand its agricultural area to 100m hectares without touching Amazon trees. Also, it's important to note that only in the Southern Hemisphere you can have 2 crops of corn in a year. We do have that 30% of Brazilian corn is produced in the winter crop, which is harvested in July. While soya is our summer crop, it's harvested in March.

Please go to chart number 15 and then you'll see a picture of the harvesting machineries in the [indiscernible] region. And first and largely, that's soya harvesting machines, and then the second smaller V are the trucks -- the tractors planting corn in the same day. And in a total flat land. That's a competitive -- very competitive advantage for Brazil.

Now, let's go to chart number 16. And again Brazil is showing a fantastic growth as a producer of pork. Although we'll still a small producer in terms of worldwide production, we are growing very much at 47%. Europe is reducing its [reported] and this will be the trend for the future.

Please go to chart number 17, and again Sadia is the largest producer of pork in Brazil with 10% market share. Again, the 7 largest producers produced only about 45% of total output, so it's a very pragmatic market.

Please, chart number 18, and then you'll see again that Brazil has made a fantastic good job on increasing its exports. A 300% increase during the last 5 years, and out of that - please go to chart number 19.

Sadia again appears as the largest Brazilian pork exporter, with a 23% market share. Our crystal ball shows that in 10 years, everybody's going to be looking at Brazil as the most important supplier for pork. Today we're still having some political restrictions in some countries, there's absolutely no technical reason for them to hold Brazilian exports. We cannot export to Europe, we cannot export to Japan, but it's only a time of -- only a matter of timing. This is going to be lifted some time in the very close future. So in 10 years, we expect to be the first one worldwide.

Well in Brazil, their consumption of chicken is - please, chart number 20. Chicken consumption per capita is already head-to-head to beef, on around 34 and 36kg each. Much more than the Brazilian habit of eating pork, which is very small. That's very different than what happens worldwide, when 50% of the meat consumed worldwide is pork. In Brazil, only a small amount of pork is consumed. The trend will keep going towards consuming more chicken, due to the fact it is a very healthy food and very economical, it's the least expensive meat protein in Brazil.

Please go to chart number 21, where it shows a fantastic opportunity. There, Japan imports 32% of all port meat exported and Sadia doesn't -- or Brazil doesn't export any kilogram today. So that's a fantastic opportunity for Brazil to explore, which we are going to be exploring in the future by sure. Our Government is already in negotiations with the Japanese authorities.

Also, look at the per capita consumption worldwide. You're going to see that Brazil is very far away from the European average and North America, and just a little bit higher than the South American average. So there's a lot of room here to be used by Sadia.

Please go to chart number 22. Quarter against quarter, I told you that it was not so good as we thought it should. Our goal was not so good. We were able to grow 6% [indiscernible] quarter against quarter in the domestic market, against 30% in exports and 18% in the total.

The most important reason why we had exported less is to do with the quota system established by the Russians. Something, by the way, that we as a Company, our association of producers in the Brazilian Government is making a lot of commercial and diplomatic discussions with the Russians to try to reduce the quotas distributed to European states and make it possible to export more.

As you'll see in chart number 23, you're going to see that our 18% increase in volumes generated only a 16% increase in revenues. A very good example is on export markets, increasing 30% in volumes only 20%. Why? It was a dramatic drop in the exchange rate. 8% drop from real quarter against quarter. Also, there was a difference on product mix in the processed products. But specifically in the poultry was a lot of this drop was caused by weaker prices in the European market, resulting from the pressure of supply coming from Thailand of cooked and heated products. As a consequence we cannot export raw. And therefore, in Europe, prices are weaker than expected during the year.

Let's get moving to 24. 24 again, you can see that although Brazil is progressing slowly in terms of GDP, some like 2 to 3% at most in 2004, we were able to grow almost 9% of our volumes in the domestic market, where we see almost 10% of sales of processed products. That was a very good commercial gain made by Sadia, when you consider that the increase of sales in the big supermarkets was only 2.5% year against year. So we are able to grow logically, selling to different customers, which are the smaller supermarkets, convenience stores and institutional buyers and so on.

In the international market, we had grown 30% year against year, with a very impressive 110% growth in processed products exported. Please also note that processed products is more important on exports today than pork - 84,000 tons of processed against 79,000 in pork. And a big increase on exports for birds - 34% in volume - was mainly caused by extra demand caused by the Asian flu. And Sadia was able to develop new customers which, by the way, are long-term customers. We do not sell spot. So we only develop long-term relationships.

Well, the same thing applies to volumes and sales, chart number 25. And there you can see that year against year we were able to grow 19% in volumes with 25% in income. Prices in the first 4 months of the year were very good but after that, prices went down. And most importantly, the exchange rate went down that hurt us so much in the fourth quarter.

Please go to chart number 26, again domestic price movement was very small, but enough to compensate the increase in costs. There a jump of 25% on pork was mainly done for the very small prices during the fourth and first quarter -- fourth quarter '03 and fourth quarter '04. [Indiscernible] had established quarters, which reduce exports, and therefore we had a flood of production of pork sold in the domestic market.

Internationally, we had almost the same situation. And the prices went down for processed products in '03, mostly caused by 8% again in the quarter, reflecting the exchange rate variation.

Physical sales, Sadia keeps growing. For the last 6 years we are growing on an average 12% in processed and from 7 to 8% into birds and pork. That's annual tons sold.

We could be -- Here is chart number 29. We have been the first more important company in the market share. You can see that also on the chart.

Please, number 30; you'll see our launches. We did 57 launches of new products, which is more than 1 per week.

And on the next chart there are a lot of products -- sorry, the next chart is the EBIT one. But on chart number 31, you can see that although our sales were not the ones we were forecasting in the fourth quarter, our profit, EBIT, was better in the fourth quarter of '04 against '03. Year against year, same thing. We have a growth of 62% in the EBIT year against year. In EBITDA, we had a reduction of 42% quarter against quarter.

And please go to chart number 34. We're going see that we had an increase during the whole year of 20% in EBITDA. Again, we had to pay a toll in the fourth quarter that was -- we had to realize that we are selling in the same dollar terms as during the year. Unfortunately, the dollar went down 8%. Nowadays we discuss with our clients an increase in the dollar price for our exports. In the domestic market, we also were hurt by smaller volumes, as we were putting new price conditions in the domestic market. Which, by the way, prices are much better now during the first 2 months of '05 than they were in '04.

Net income during the fourth quarter was small, please chart number 35, I guess nationwide that happened. But in chart number 36, please note we are almost even now, 1.8% less net income. But please note that we had to pay much more tax this year. We had -- total taxes paid by Sadia in 2004 was roughly BRL850m. No, BRL560m for taxes in the year 2003 against BRL988m in 2004. So it's a growth of almost BRL430m of extra taxes paid by our Company during the year. No doubt, this has eaten a lot of our profitability.

Well, let's get moving; chart number 37 is an important one. After 4 years of flat investment of around BRL120m, roughly US$40m, we doubled our investment in 2004 and we are going to be doubling it again in 2005. We are forecasting expense US$500m -- BRL500m in 2005. None of this money is going to be done in business outside our core, which is frozen protein and refrigerated protein. All of this investment is going to be in Brazil and all of this investment is going to done in existing growth plans that we already have. So this is a very productive investment, which is going to generate a return very quickly. This BRL500m is going to produce roughly 52% more tons than we have today. So again, it's a quick return investment.

Please turn to chart number 38. You'll see that the number of employees has been continuously growing. Year 2003 against 2004 there was a growth of almost 6,000 employees, mostly caused by the hiring of people to cook chicken for the Asian market.

Please, chart number 39. You have the domestic market -- sorry, the quarter against quarter statement of income. Please note that we are going - although we are generating a 60% increase in gross operational revenue, net operational revenue was only 11% higher. That proved that [over there] we already paid an extra 5 percentage points, so it's a hell of a big bite in our revenue, the payment of the taxes.

Unfortunately, results were not as good as we thought, so our gross profit was smaller - 26% against 31% and a bit. But after we made a lot of good efforts in the middle of our balance mainly, we had accounted less employees profit sharing for the fourth quarter. The EBIT number is almost - well, it's a little bit better; it's 4% against 3.4%.

EBITDA was much smaller, almost 7% this year against 13%. Also caused by a major increase in expenditures -- of financial expenditures. Last year we had a 56% help of financial results against financial results in the fourth quarter of '04, we had a 24%. So there was a reduction of almost BRL30m there, it was a contribution of the financial area.

Let's move to the year number, which is chart number 40. The same thing relates to the weight of extra taxes. From a 25% increase in gross revenue, we arrive to a net operational revenue of only 20.5%. So 4.5 percentage points were eaten by taxes. Our gross profit is almost flat year against year, 29% to 30%. We had spent more expenses than forecasted, so from 18% we went to 19%. We had made a much lesser provision for profit sharing. And as a consequence, EBIT year against year is much better this year, 9.4%, against what we had in 2003, which was 7%.

Again, in 2003 we had a financial gain of BRL85m and we have a financial expense of BRL83m in 2004. Why we had a financial expense right now? Our Board had decided we implemented -- we sold all the by-products we had, which were related to the [sovereign] risk of Brazil. Unfortunately, this operation was done during a very volatile moment, during the end of the third quarter.

Remember that Brazil reais was at 470 roughly in December 2003, and reached something like 700 in March or April. And back at that time, the political crisis in Brazil was present, and at that time our Board had decided that we need to reduce our risk of carrying Brazil papers. As a consequence, we sold our papers and therefore we recognize now a loss of -- but a financial loss.

The good sign is that from now on we are not going to have financial variations or big financial variations on our financial assets.

Well, income before taxation was BRL511m now against BRL434m last year, so 18% higher. But please note what had happened with tax and social contribution - a huge payment this year against a credit of last year. Therefore, our net result was a little bit smaller than last year.

Chart number 41. The only comment I'm going to do is on net financial debt, it's only BRL316m, so we keep reducing our net debt. As you can see, now it's 18% as against 24% last year. And also, we need only 0.4 EBITDA to pay that debt against 0.5 1 year ago.

The chart -- the next chart, 42, shows the curve with the good result I just told you. Same thing on the next chart, it's 43.

Please go to chart 44. We are happy to see that our foreign investors are back. We had more than 30% investors buying our shares 5 years ago. Just before the [new law] this number went down to 16%, now it's back to 31%. Also important, the 32% of our Preference shares which are holded by individuals. This is not a typical situation in Brazil but we have a very big number of individuals holding our shares. We have been a very strong payer of dividends, much more than our by-laws. Our by-laws require 28% but [in a lot of cases] 25%. We are paying average 34% dividends over net income during the last years, as by chart number 45 there.

If you go to chart number 46, we made an announcement that we just generated Institutio Sadia de Sustentabilidade. This is a sustainable development plan for our Company. We just generated this new Company, 100% subsidized subsidiary of Sadia, and they're going to be in charge of projects oriented to natural resource preservation, technical and scientific research support, nutritional education, environmental, cultural and sports.

Our first project is already in progress. It's called 3S Program, which is a sustainable swine system that we are implementing with our growers. We're going to be using the mechanisms of the Kyoto clean development credits. We're going to sell these credits to generate income to finance all the investment needed to capture the gas generated by these pork producers. This gas is going to be burned, generating electricity or it's going to be burned to generate heat during the winter. So this, we are very bullish on the outcome of this Sadia initiative.

So, this is basic information on the past for the future. What we're looking is that we expect that grain prices are going to be stable for -- during this whole year with the present prices. Present prices are going to be generating average costs of feeding 2005, something like 3 to 5% less than the cost of feeding during 2004.

We do expect that international demand is going to be -- keep being strong. We do expect that internal demand is going to keep recovering. We have seen that also the change on the last 6 weeks from the previous 12 is very big. So the market is starting to buy again our products, something that was much more difficult during the end of 2004.

All this investment that we are going to be doing, BRL500m, is going to be financed by [indiscernible], but it's not going to be hurting at all our net position, our debt position. As you know, we are going to be generating more than BRL100m EBITDA and therefore very clearly we could be financing ourselves with our own money, if necessary, with our own cash. 1 fact - that our cash costs more than the money we can get from a developing agency.

That's the information that I have, then I'm ready to answer your questions. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from Tufic Salem with CS First Boston. Please go ahead.

Good afternoon Luiz, how are you? This is Tufic Salem from CSFB. I have a couple of questions. First on the exports front, if you could speak about your potential price increases in dollar terms, and the timing of the increment and how confident you are that you can negotiate better terms in the international market?

Let's go 1 by 1. Thank you for the questions. You are correct. Nowadays it's absolutely mandatory that you get some price increases. As I mentioned before, relationship of Sadia with our clients is a long-term relationship. We do not sell in the spot market. We develop customers -- long-term customers distribution chains, therefore we believe that we have created a good relationship that we're exploring right now. We are telling them, okay my friends, during the whole year 2004 I kept exporting to you, in volume terms, you were selling in your local currency and you were capturing part of the margin. Now it's my time to buy back a bit of that. I need to get price increases to offset increasing my costs. We expect, want to expect we'll receive the good feedback from some of our clients in some regions and growth in average is going to be from 5 to 8% in dollar terms.

Okay. And I guess following on to that question is, when do you expect to have this negotiations done? And the second, this 5 to 8% how does this translate in your overall market - export market price? Because I note that 20% is in dollar and you said that some of the market are receptive maybe some others aren't?

Yes okay. Well first of all, in the European market we believe that by June, all of our sales are going to done in Euros or Pounds. Let me come back. Out of the total export from Sadia, 70% is done in dollars, 20% in Euro and 10% in Pounds. None are done in the Yen or in any other currency. That situation cannot keep going. We need to change to local currency. In Europe it's specific until the end of this semester we're going to be exporting 100% in local currencies. We're making right now a big discussion with the Japanese customers as to sell in Yen and we're going to keep following the same pattern in other countries.

I'm talking about 5 to 8% is increase in dollar terms in international markets but this number is going to be a total function of the continuous drop of the dollar against Reais. If it keeps going down we will have to keep moving in the price up in dollars, because all our costs are not in dollars. Most of our costs are in Reais and we cannot buy Reais and sell in dollars without a cheaper exchange rate.

Let me talk about Brazil. Just [indiscernible] the international side, we had this talk at this moment, only 4 weeks ago and we are having success well no doubt, is a big bellow -- commercial bellow, but we are having to set some contracts already done with new increases related to the previous of supplying contract. Our contracts are done for 3 months.

Let me talk about Brazil. In Brazil, we had made a very strong move towards passing our costs in November, in December. I can say that right now, our products are much better in line than they were before; therefore our profitability is going to start coming back in internal markets. Also important to say, now we're really going to start to harvest the grains that we bought at a cheaper price 3 or 4 months ago. It always takes 3 to 4 months for the grains to drop or increase get into our bottom line. And that's about time for us to start harvesting the drop that had been occurring in the last 6 weeks.

Before going to our next question, I would like to remind you to please restrict your questions to 2 at a time. Our next question comes from Margaret Kalvar from Harding Loevner.

Hi, I also have 2 questions. The first is, you describe your profit sharing, is there a formula? Is this an amount that is added or deducted determined according to goals - reaching goals? And what do you see for it in '05, relative to performance? That's the first question.

The other is regarding your income or losses from subsidiaries, and how that gets put into the financial results?

Thank you very much for both questions. First of all, let me explain about the profit sharing. Sadia's salary policy is the following. As market leader and the biggest company in our sector, we cannot have salaries paid below market, so we have a panel of companies in the consumer sector, which take this average and that's the base for our salary policy in the company.

Second, we also treat that the salary our manner is going to make during the year, part of it is fixed, and part of it is based on a target bonus, so again, the target bonus is mandatory for any employee to get to the well-paid market condition. If there is zero bonus, the employees from Sadia are going to make salaries below market average, which is not good. So there are some companies that they do pay average, and then you have a bonus as a plus. In our case, the target bonus brings us to the good standard. And that forces people doing all the time more than the target bonus to receive an extra.

You are making this question also related to a very big bonus that we paid in 2003. We already explained, and I am going to repeat that. That was one-time only. It was done when we first generated an EVA system program in Sadia. Let me repeat that. During several years before 2003, Sadia had generated a net profit. That was not generating economic value added, so Sadia implemented its own system.

It's not EVA because we had a higher [standard] because of the economic value of Sadia, and since 2003, we had this measure in place. Therefore, we only are going to receive bonus if we do generate Sadia economic value. If we generated net income, profit at bottom-line but no EVA, nor no economic value, managers of Sadia are not going to receive their bonus. Is that clear?

Second, so now we have a policy. For this year, 2005, the biggest chunk of the bonus is based on generation not economic value. And there are some other, smaller targets based on some strategic points. I'm going to give an example. I'm not going to say that's the one, because I cannot say it exactly what it is. So [Franklin, okay] you are going to receive a bonus if you open a certain plant in x months, or if you open a large [Eurotones] x amount, or if you get a certain amount of market share, or if you reduce the fixed costs, x amount. All those are what we call a strategic target, which changes every year. Okay?

In any case, total bonus paid in 2004 can never be higher than 50% of the paid in dividends, okay? That's the first one. Second, let me talk about us. When you see our information, you see that gain and losses in our service areas, they came to Sadia in the - hold on a second - in the equity pick-up. You can see that in the balance sheet. So if you come back to Chart number 40, you are going to see equity pick up. But the important thing to say here is that roughly 80% of results coming from equity pick-up, or more than that, is coming from financial operations offshore.

Brazil has a very weird tax system, so if you generate, for example, a lot of financial gains in Brazil, you have to pay taxes right away. If I got regular financial gains offshore, I do not have to collect taxes right away, only when I [pay it] as dividend. Therefore, we keep generating a lot of gains offshore.

Is this due to hedging activities or is this due to normal operating currency requirements of subsidiaries?

No, we started this thing some years ago, because due to the very big volatility of the Brazilian economy, every once in a while the lines of credit disappeared, evaporated, so if I wanted something, there were no banks there to lend to us. As a consequence you can see that in several Brazilian companies. Most of them are sitting on a lot of liquidity. We borrow when from a bank, and we take out this money and put it in another bank, but in such a way that if I need bank, I get out - I take my assets out of the bank where I am investing, and I can use it to proceed to buy something, to buy inventories, to buy a company or whatever.

This was done for a long period of time when again lines disappeared. We have [subsidies] like that, for example, in the Russian [indiscernible], none of those crises, the lines of credit to Brazil disappeared. Therefore, companies with good current standing like Sadia, we grab financings and we put the proceeds into assets. Please refer to Chart number 6 - not 6, no, hang on a second - 41. If you go to 41, it's going to be easier for you to understand.

Let me get to 2004. We had a gross debt, BRL2.9b, but we have financial debts of BRL2.6b, so the net financial is BRL2.9b less BRL2.6b equals BRL316m. So what do we do? We get money from - on 1 hand, we get our money from a bank, and we get the money from the other hand and give to another bank, in such a way that if we need, we can cash in the money that we had lended, and use the proceeds where we want. That's what we do.

We used to say this is financial arbitrage, but the most important reason to make financial arbitrage is not to gain with the money itself, but mostly to be sitting into liquidity.

Okay, but why was it all booked in '04?

Well, okay, okay. No. Until now I was talking about the normal situation, okay?

Right.

Well, and during a lot of years, including 2003, we were getting financing offshore and also making the investments offshore, so the spread, everything was offshore. As doing such, I didn't have to recognize the profit nor the tax to collect right away, because it was offshore. Brazil law permits that thing.

Well, in 2004, our board had taken the following decision. We cannot maintain -- we are not going to keep having titles of Brazilian sovereign risk, which have daily volatility. Therefore, we have sold all of our titles which were related to that bonus and as doing so, we reduced our volatility of our assets.

Okay, that took place, however, as I remember, in the second quarter, and here what we're seeing is that you took of the entire year of gain/loss from investments and subsidiary, the entire year you were down 50.7 and of that, 46.5 was booked in the fourth quarter. Was that --

No, also, that's a very good point of view. Please also consider something very important. We have all those assets offshore, right?

Right.

And those assets are dollar denominated, also. When I have an 8% evaluation in 1 quarter, you have a hit off all that.

Okay.

Because also, that's also tax planning. If I have a debt in Brazil, I can deduct and if I have an asset offshore, I do not have to collect right away. That's tax planning strictly using the law. Is that clear?

I think so.

Well, if not, you can call me later and I can explain in more detail if that's okay for you.

Okay.

Okay?

That's not, however, just in the financial results. Now, what the other part of the question is what the financial results of 70.6 versus your last quarter's 62, what that represented, because it's not the -- what we just spoke about took place on the next slide, on the gain/loss?

Okay [indiscernible].

It's really those 2 lines that --

Yes, I know. I know your question. The biggest thing is, until last year, until 2003, as a big chunk of our profit was generated offshore, and as until last year, 2003, we had a lot of tax credit from companies that we had bought for [indiscernible], we didn't have a tax expense at the end of the year. We had the opposite. We had a tax credit of BRL11.9m. Can you see it?

Yes - let's see. Yes.

All right. Why is that? Because unless the last 2 days of 2003, we generate expense on the payments of dividend. We call it interest on the equity. This is deductible from tax. As a consequence, we had a credit. We accounted a credit of tax. We didn't pay tax in 2003. We received a credit in tax, federal tax in 2003. Is that clear for 2003?

Yes.

And well then, if we go now to 2004, in the opposite side, in 2004, we generated a big loss in our international operations where we had the best credit, and therefore we generated all the taxes, we generated in Brazil on the profitability of our sales, etc, we had to pay. We could not offset with anything. That's why our tax payment increased so much from the credit of BRL12m in 2003 to a debt, or payment of BRL73m in 2004. Is that clear for you?

Yes, I understand that. That wasn't actually what I was asking, though. I was asking on the line right under earnings before interest and taxes, you have the financial result net, and then you have a big swing between '03 and '04 in terms of the calendar year. We're wondering what that contains?

No that's contained, and that was the first part of my response to you.

All right.

As we sold our governmental bonds in the quarter, this was reflected on those lines that we're talking about. And this also generated a second effect. It was the tax burden at the end. Is that clear now?

Okay.

Excuse me. This is the Operator, Miss [Emberon]. Are you ready for your next line of questioning, sir?

Yes. Please remember that you can call me later if you have some more questions, okay? Please, go for the next question.

Our next question comes from [indiscernible] with Santander.

Hi Murat, thank you for your presentation. I'd like to know what is your strategy regarding packaging expenses which are now in a high level and how you are going to reduce this high level of packaging expenses in 2005?

And also some terms of the contract, I think you have like, a 1-year term in packaging expenses and when are you going to reduce prices again in terms of these costs items?

The second question refers to your pricing strategy in the domestic market for 2005. I am afraid that the company may do the same thing as it did in Q4, that is, increase prices on a one-time date and the demand may be low, may reverse, and the volumes should fall again, so this is my second question regarding your pricing strategy in your domestic market.

Well, I hope that we are going to have a very different 2005 year than 2004. First of all, we do expect that the behavior of demand in 2005 is going to be very different. We are already seeing bigger demand for non-variable goods, much better now than it was last year.

Second, we are going to have a minimum salary starting in May because almost $100, more than $100, close to BRL300 is going to be a tremendous increase in income, disposable income. Don't forget - and I think that's something that a lot of analysts are forgetting, that the impact of minimum salary in Brazil is immense in our business. It doesn't interfere with you or with me because I am not get paid more or less if I'm going to receive more or less salary.

But this totally affects the guy that will receive only $120 a month. He is not receiving that today. He is receiving less than $100 today, and he is going to receive more than the $100 starting in May. And this new wave of salaries, will impact, no doubt, demand in Brazil.

Also, we have seen that Brazil is entering, or had entered into a sustainable development cycle. We do believe that this is true. We do not expect 10% growth at all, but we can forecast for the 3 or 5 years growth from 4% to 6%, very predictable. We have the basic ground for that. Well, growth of such scale impacts demand very much, okay? Normally you can see that very easily in our numbers, but this is always growing at least 2 times more GDP.

But let me refer again to your first part of your question. There is something that we have to dance with the music. For the time being, the only weapon that we had to mitigate, or to reduce the impact on packaging costs was to increase prices. There was nothing else for us to do. Well, we expect that packaging prices will not keep going as crazy as they were before.

We do expect that petroleum prices will not keep flying as much as they had done in the past. Very likely, we are receiving signs from our suppliers that they are forecasting themselves for a kind of stable prices of their packaging during the year. Who knows? But if packaging prices do not go stable, there is no way out for us. We will have to increase prices, no doubt. That's it.

If you increase prices, you might demand reversing, go back, as you saw in 4Q '04?

I understand that, my friend, but there is a limit. We have seen that in our situation several times in our history, and every once in a while we had to pay a price for it. But we do not pay for a whole year. We pay for a full month, 3 months, or 4 months, 4 months later, we are the market leaders. The market returns to us. That's what the tradition has shown during decades for Sadia.

Okay, thank you.

You're welcome.

Our next question comes from Ms. Juliana Hosingbam (ph) with Deutsche IXE.

Hi, Murat, it's Juliana from IXE. Going back to the packaging costs, I'm trying to understand the nature of the cost pressures, whether they are recurrent or not? On packaging, why do costs increases that were fully booked in the fourth quarter cannot spread over the quarters as in other companies? And can you isolate how many percentage points in gross margins was lost because of these higher packaging costs?

Sometimes the fact that you are a huge buyer, the biggest and best, sometimes it brings some disadvantages. What had happened to us was that you were correct. We had made some deals with some of our suppliers. During the starting of the inflationary period on packaging, we were able to arrive to our suppliers and say, okay, my friend, my volumes are so big that you are going to have to hold this. Hold, hold, hold. That's a certain timing I said, well, I cannot. Give me [water] please. I knew to increase, and instead of increasing 1 per month, or 2 per month increase, 10%, or 30%, or 50% in the case of some plastic, and 65% in terms of plastics.

So you are correct. We had that. It was kind of an agreement that we had made earlier in that stage, but it took longer than we expected. I'm going to address visually on a very important now. We all are learning how, and I am being very modest on that, please, and consider that. We are trying to learn how to work in an environment where the dollar goes down. That's not a problem in Brazil.

And so the reactions are not in the books, let's put it this way. So sometimes we make right movements. Sometimes we make wrong movements, but we're not going to be making wrong movements every day and all the time. No doubt we are learning different ways to build with a floating exchange rate. Does that answer your question?

Thank you. [OPERATOR INSTRUCTIONS]. We have a question from Tufic Salem from CS First Boston. Please go ahead.

Yes, Luiz, how are you? Just a follow-up here, first on the strategy of increasing prices during the fourth quarter, to offset the higher raw material costs, how much did you see an impact in terms of mix and do you expect this mix to improve and in turn, average price for processed foods to improve, let's say in the first quarter, or second quarter of this year? And then the second question is more on your selling expenses which also increased in the fourth quarter and how do you see that in 2005?

Okay, thanks for the questions. Let me answer the second question first. Let me refer to saleable expenses. So if you go to Chart number 39, you're going to see that saleable expenses, which out of line in fourth quarter related to what happened in fourth quarter '03, was 20.3% against 18.4%, so we did something wrong. We know we did it, and what we did was we spent much more on distribution and marketing for the volumes of sales that we were able to get.

So if we did a lot of effort to sell and finally, we didn't sell, the percentage goes up. That's what had happened in 2004. And why did that happen? Because we were trying to sell more. At the same time, we were putting price increases at the end of the year, because we want to start 2005 with a better line level of prices.

If you go to the next chart, which is Chart number 40, then you're going to see that on a year base, the number is also bigger, but the difference is smaller. Instead of 2 points, it is 1.3 points, 17.8% up to 19.1%. But we are convinced that the 19.1% number for Sadia is still too high. We are targeting saleable expenses to be in the 17% to 18%, not more than 18%, so 19% was already too much, and again it was too much because we used a lot of expenses mixed with expectation to sell. You have to do 2 things. Even if you have to sell, or you have to have less expenses. What we cannot have is expenses without sales. A mistake was done, but we are going to solve it.

What was your first question again, please?

Yes, the first question is more related on the actual mix during the fourth quarter. How did that behave, and is that going to improve in the first and second quarter of this year? The average price, are we going to see that improve as mix improves in the first half of the year, or how do you see that?

It is going to improve, no doubt. We expect - we are putting our company, each time, and I'm talking about internal market first. We are putting our company each time more into further processed. As I mentioned in the beginning, processed products in the internal market represents already 79%. In poultry parts, it's 5%.

What had happened is that that was not exactly the sales that we had done in the fourth quarter. Therefore, we are going to sell this merchandise in the first quarter which, by the way, we are selling. So we are going to have a better result in the first quarter, no doubt related in the fourth quarter.

Okay, thank you.

You're welcome.

Our next question comes from Margaret Kalvar with Harding Loevner. Please go ahead.

Hi, this is Rusty Johnson, I work with Margaret. My question relates to your exports, and a reference to whether, with the passing of the avian flu whether your volumes and your pricing would be negatively affected as you move into '05? I think already prices are heading down sharply in the export market, but they're trending up domestically, if you could talk about that?

And the second question does refer to raw material pass-through timing, but discuss the exports first please.

Okay. On exports, your question is very good related to the Asian flu. Well, the Asian flu had changed a little bit of scenario. First, we received a premium to sell raw frozen meat in the Asian market. We gained that market and the [net] marketing was given to the Brazilians for the reason that the local producers cannot trade among themselves raw, frozen meat, so this was "given" to the Brazilians and for Sadia. And this will last for a long time. That's what our [indiscernible] says. No tax [emissions] worldwide, they have any clue if the bird flu will disappear from Asia at any time at all.

For the specific conditions of the region, in terms of [Murgatory] ducks, or whether it's type of climate, and types of [indiscernible] used, and how they treat the birds. You know that a lot of Asian households, they have birds they have as pets. So it's a difficult market for you to battle against Asian flu, very different from every place else. That's specific for Asia.

Also, there is a very big threat, that the market is so spread in China, in some remote regions where the bird will not - the flu is not going to be killed, and there is a threat also that they are going to start vaccination. If they start vaccination, then there is going to be a definite problem. So then the virus is going to be hidden in the birds. So in short-term consequence, nobody knows if and when the bird flu is going to end. Therefore, we are not forecasting to stop exports to the Asian producers.

Third, we had established low relationships with buyers. We are not selling in spots. We do not have cases in terms of Sadia to lose customers for the time being. We only gain new customers, and we only enlarge our volumes. Why? It is not a commodity. When you start producing for somebody, it is not only a grain which is equal to another grain. The structure, the [indiscernible], the cord, packaging, the service and so there are a lot of things included.

Therefore, we are not forecasting that we are going to lose our stake in that market, or in the orders taken. The bird flu in Asia had caused prices in Europe and some other places to go down, for the reason that as the Thai and Chinese could not export raw they are cooking, baking, and so on, or heating the product and sending this product to Europe, for example. As a consequence, prices for such products in that region were very weak in 2004.

Suppose that I get to your suggestion? Well, suppose that tomorrow the bird flu is gone? Well, we are going to start trying to export again. Well, if they start exporting, they are going to have to choose what they are going to do, export raw or frozen. They cannot keep going forever. They do not have all their capacity of growth as Brazil. Nobody has 100m hectares worldwide as Brazil has to produce grain to be competitive and so on and so forth. So in our forecast, Brazil is here to stay. The production in Brazil for grains and animal protein will be each time bigger, and that's the way we see it.

That's the first question of your question. What's your second? Is that the third, or do you have any more? What's your second question?

Just, in closing, if you could clarify 1 more. As narrated, some of them have switched from selling raw and fresh into cooked, so why can't they just cook it? I mean, maybe it's not that simple but they've obviously learned that they can cook it too, and put pressure, presumably, in your premium product line?

No, that's a specific one they have done, so I'll repeat it again. The Thais, they are not exporting raw any more. They are exporting cooked, or baked and so on. Okay, but I haven't lost any of my clients for the Thais, any at all. All the cooked, baked and so on that I was selling, I keep selling. Why? Don't forget today, also, after the 2001 Mad Cow and after also the Foot and Mouth crisis and now the Asian flu, each time more the big corporations, the biggest [exporters] are trying to sell 1 or more than 1 source of supply. And this had opened new windows for Sadia and for Brazil, and so, a lot of the distributors in England which were buying only from Brazil, they are buying from Thailand also.

A lot of which are buying only from Thailand are buying from Brazil also. It's very unlikely they are going to drop 1 of them, because if there is a problem with a certain supply, they will have no way to fill himself because the only reliable, long-term suppliers worldwide for poultry will be the Asians and Brazil, period. That's our crystal ball.

Excellent. And the second question related to this raw material pricing structure, and it wasn't clear when in fact your contracts were averted. I believe it was some time in the actual fourth quarter when you actually picked up higher prices. Your long-term contracts moved up to the higher price, and whether that's been fully reflected in the current trading conditions, or whether you're still going to have higher raw material price increases as other contracts in packaging, plastic resins increase in the first quarter? So roughly, when has the hit been taken and will it be contained for roughly a year on long-term supply contracts, as you've mentioned in the past?

Congratulations, you're a good observer. That's correct. Our contract with the supplier ended in the third quarter, so we had new prices for packaging in the fourth quarter. But again, our conversation with the supplier right now, we've mutually forecast that the price is going to be changing for the next year. It only will change if there is any crisis with petroleum, which, by the way, it's what is forecast today. If petroleum prices remain what they are today, or they go down, they go down. If they go up, we are going to have to pay up. All right?

But presumably the big increase, as stated in your results, has already been felt in terms of your higher raw material costs in your packaging mix?

Yes, so what we're forecasting right now, the biggest impact in costs was already done. The impacts that we are forecasting to see in the next months is the cost going down, to the lesser costs of grains related to the total. So we expect that our margins tend to be better in the next month than they were in the fourth quarter.

When you say margins, which 1 of the many are you actually looking at?

Well, I'm talking about gross margin. That's what we say.

Very good.

The gross margin now on products, I'm sorry. All right?

Okay, yes, thank you.

Okay.

Our next question comes from [indiscernible] with [indiscernible].

Hi, Mr. Murat, this is [Io]. I just want to get a little more clarification on the increase of your selling expenses. Are you therefore saying that they were kind of a one-time fourth quarter experience, and you won't have them in the next quarter and going forward?

You are correct. We made some extra [effort]. We prepared ourselves to sell more than we have done. So it's a fixed cost. It was not consumed by extra sales. So now we are putting things in the right point again.

Okay. So that was just related to just the fourth quarter and you'll go back to your 17% to 18% target?

Yes. That's exactly what we're targeting for.

Okay, and another question is you compared yourselves to [indiscernible], we heard that their plastic costs were only up 11%, and packaging costs, and yours are up 65%. Do you know what the discrepancy would be?

As your previous colleague was asking, we had made an agreement with a supplier which was different than the agreement they had. Very likely they had - I don't know what was the zero base. My zero base was longer than his. He has been having increases in many more months in smaller amounts, and for me, it was frozen for a certain time and then it boosted suddenly. That's what happened to us.

And how long were these contracts you renewed, how long are they for?

No, this was 1 contract specifically, that was 1 negotiation in a certain moment. We don't know if we're going to have a new 1 like that or not. We are still discussing this, but normally, we do not operate in that way. We did that caused by a high increase of petroleum. It was a very high pressure, at the same moment when we were increasing a lot of our volumes. So we were able to halt the increase for a while, based on the higher volumes that we are buying, but definitely civilized. But for the time being we are going to start a new construction level.

As I mentioned to you, we are going to be spending our BRL500m of investment. That's going to be expanding our tonnage roughly by 15%. Logically, this is going to be using more packaging. So all I can say is that we are going to have to trade that. We are going to have to negotiate, and it's very unlikely we are going to have the same negotiation that we had last year.

But the thing I don't understand is related to the FX on your costs is that although crude prices have increased, your currency has strengthened, and since crude is dollar based, why would you have such an increase in your costs, in real based?

Well, let me put it this way - I had a contract with - let's suppose that I had one with my plastic, I was buying plastic in the States in December 2003. Well, in 2004 we had several petroleum increases and [indiscernible] increases during the year. And at a certain time, this was converted into reais, which are much less, or should have to be paid a much higher number. But actually I know I am not going to do it.

At a certain moment, I said, well, I cannot survive any more, please pay me. But then they say, well, now that you're paid, he is going to have a reduction in his costs. We are aware of that, and so at a certain time we are going to have to negotiate. What I can tell you is that the negotiations move. We did 1 negotiation for a certain moment. We don't have the same negotiation right now. We have different parameters.

At that time, petroleum was going up, and in dollar terms they were up, they were high. The next step, dollar terms start going down, but petroleum kept going up. At a certain moment, both start going down, petroleum and dollar. So you are correct. There is a window to negotiate. We can't say everything that we are doing, but sure, there is room to negotiate there.

Okay, thank you.

You're welcome.

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

Well, Sadia is very happy with all the figures that we have today. Please, call us at any time or via the website. We are here at your service. Thank you very much, and have a nice 2005. Goodbye.

That does conclude our Sadia fourth quarter results 2004 conference for today. Thank you very much for your participation. You may now disconnect.