BRF SA (BRFS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. (Operator Instructions) I would now like to turn the conference over to Mr. Fabio Cunya (ph) of Financeira Investor Relations Brazil, which as a reminder, is a successor of Thomson Investor Relations Brazil. Please go ahead Mr. Cunya.

Good afternoon ladies and gentlemen and welcome to Sadia's conference call to discuss first quarter 2005 results. I would like to mention that a slide presentation has also been made available on the Company's website at www.sadia.com under financial report section, during this call. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomics conditions, market risks and other factors.

With us today in Sao Paolo at this time is Mr. Luiz Murat, Chief Financial Officer. First, Mr. Murat will comment on the company's first quarter 2005 results. 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.

Thank you very much and good afternoon. Please refer to slide number two and you will see that our gross operational revenue keeps moving up, is 16% higher from the first quarter against last one although we had made major improvement in tons. We are going to touch on that a little bit later.

Next slide please. Number three, is a compilation between first quarter last year, the fourth quarter last year, and the present first quarter. Gross operational revenue again went up 16% and is down 5% regarding to the fourth quarter. (inaudible) information that on the fourth quarter the product portfolio for Sadia has more reach than right now. Sadia is the leader on selling Christmas products like turkey, like pork with pork ham and other plates which are very value added. In any case, gross margin was at 33% on the first quarter and went down to almost 24 on the fourth and now is starting to revert in reaching almost 26% on the first quarter.

Same thing relates to the all the other relations of Sadia. We're starting to get better when we compare with the fourth quarter but all our numbers are in (inaudible) related to the first quarter 2004. On net margin we had reached 6.1 right now. On EBITDA margin we have reached 9%, an increase from 7 from the previous quarter that is almost half of what we had obtained on the first quarter 2004.

First quarter 2004 was very good. At that time prices were fantastic. Our costs were smaller and exchange rate was very favorable. From first quarter 2004 to now, exchange rates in Brazil suffered a gain of 10%. As roughly 50% of our sales is for exports, no doubt this exchange rate variation is hurting us very much. We had made the expenditures on the higher dollar to produce the products and after selling it we are receiving less dollars after the sales and receiving our collections.

We are also investing much more this year than the previous ones, as a consequence our net debt to equity is higher, again, due to the higher investments level, we are going to touch on that later. As our EBITDA is our smaller than forecasted our net debt EBITDA is also a bit higher or is higher than the previous years reaching 0.8 times EBITDA to pay net debt. Please refer to chart number four.

We keep moving Sadia into direction of more further processed, you can see it again on chart number five. Please don't be surprised that the whole poultry is up 2% from 16 to 18 and pork from 6 to 8, that is not only a new strategy but is only that these segments they had suffered a faster growth this quarter than the previous. Don't forget that we acquired So Frango, a company which is a chicken company at the end of December and so on the first quarter this year we have an extra volume of chicken selling in the domestic market and also on exports.

On the swine side, the first quarter last year we had reduced very much our exports to Russia as a factor of the quota system imposed that reduced our sales during the whole year. Right now we are coming back to much higher levels. Please refer to chart number seven.

When we compare what happened in the domestic market for sales, again we had a growth of poultry cuts faster than the other segments for the fact that we had acquired So Frango.

Please go to chart number nine. On such one where you are going to see that as a result of larger exports of whole poultry to Russia and to Venezuela and also to the big growth of exports of pork to Russia, the breakdown of products is a really big difference. In any case the trend is towards the pie to be each time more blue including processed in poultry cuts. In the future we forecast that we are going to be as blue as possible on exports following what had happened on the Brazilian or domestic market.

Please refer to chart number 11. Our biggest market remains Europe on exports followed by the Middle East, our traditional market for whole small) birds. As a consequence of selling more to Russia, Eurasia is increasing very much, now is 20% against 11 from the previous quarter last year. And Americas is growing as an extension of our exports of margarine and poultry to Venezuela.

Please go to chart number 12. Here is an important consideration to be made. Sadia keeps making a lot of effort to supply demand. We're growing very much our production using, with more productivity our existing assets, not forgetting though the fact that we are also investing to further expansion. You know that this year we are going to be investing roughly R$500 million against R$250 million last year and that R$500 million is roughly four times the average of 2001-2003.

In any case on this year, first quarter, we made a growth of 22% expansion on the volumes of sales, of which 28% was the growth resultant from growth in exports and 16% in sales for the domestic market. You all know that this number, 22, is something like five times more GDP on worldwide than Brazil's. So we are growing much faster than the international or world average or Brazilian average.

Please look what happens in chart number 13, sorry, it is chart number 14. Chart number 14. Again, you can see in this middle column that volume is up 22% but in terms of income or revenues, the increase was only 16%.

So look at the export. Although we had an increase of 28% of volumes on the exports, such increase did not generate all the revenues expected. The increase of revenues was only 13%. Look at processed products 41% increase in volumes, only 10%. Poultry 25% increase in volumes, only 9% in poultry. So as you can see most of the effort on the increased volumes is not answering to larger revenues for the fact that prices were almost flat and for the fact that dollar dropped 10% during this period. We had obtained some success into the domestic market with a 16 increase in volume that brought 18% increase in revenues.

Please go to chart number 15 and then you can see how hard it has been our life in the domestic market. You know that demand for food, hygiene and personal care products are very low in Brazil still and as a consequence we are having a very tough time to be able to pass along price increases although we are receiving more costs on raw material to produce our products. You can see that year against year our processed products price was up only 2% much below the actual increasing costs during the same period.

On poultry, prices went down not only due to the fact of excess production and sales in the domestic market from all competitors but also reducing from a very low capacity of the population to buy. And so prices are maintained very low. Pork prices are up due to the fact that after the quota system established in Russia we at Sadia decided to reduce our production as a consequence. We reduce our production in sales in the domestic market and also on exports and as a consequence of such move with the revamp of demand prices started to go up. That's why prices are up in the domestic market.

Let's see in chart number 16 what happened in the exports market. Again, bear in mind that 10% was a drop of the dollar in between first quarter of '04 against '05. So the processed products prices went down 21, again, roughly 10% is resulting from exchange rates, some of it has also resulted from mix. We're exporting more margarine now than we had been exporting last year and margarine prices are much smaller than prices for nuggets, for example. But look at poultry, the drop is almost all tied to the exchange rate. Walking to other side, pork prices are going up for the same reason I told you before. It was bigger demand worldwide in the smaller supply from Sadia which is an important player.

Chart number 17 show that Sadia remains the first player in all segments of business we are in and with the market shares they are represented.

Chart number 18, we keep launching new products. This quarter we launched nine products against an average year launching of 60 products per year during the last six years. Those nine products, some of them are ice cream, chocolates, and spiced cheese, salted parts with yogurt and Texas burger which is mixed meat of chicken burger which are much cheaper priced than a whole beef burger for example.

Chart number 20. On the first quarter '04, our selling expense to net revenue was much as now for fact that at time our revenue was very high. On the next months our structure remained almost the same, unfortunately we were not able to get increasing revenues as expected and as a consequence on the fourth quarter we had reach EBIT of 18.4%. Nowadays, we are working very much into increased revenues towards price increases toward a better product mix, towards better distribution, logistic and also we're reviewing our cost structure on distribution and sales in such a way that we want the percentage to go down on the next quarters.

Please refer to chart number 22. You'll see that quarter against quarter, our debt EBIT has been going down, but we started to revert this trend. First quarter '05 against fourth quarter of last year, EBIT is better 58%. Also consider that EBIT mix of fourth quarter is richer than on the first quarter. So, 58% is even more important.

Next chart please, number 23. You can see that the trend on getting better EBIT had started several years ago and it keeps going up, this 111 is not away from a trend curve. The number which was really out of the curve is the 221 which was the EBIT for first quarter '04 again a fantastic quarter which got to be repeated.

Please go to chart number 25 and you see the same chart for net income, the same explanation as before. Again, we are getting better net income from fifth year in a row with one point out of the curve which was first quarter '04.

Chart number 26 is copy of the same comments I had made for net income. So we are reverting the profitability on first quarter related to what had happened in the fourth quarter.

Please flip to chart number 27, resume of the same chart from net income, I don't have to comment on that. Capital expenditures, first quarter '05 we had made investments of R$110 million which is almost the same amount that we had invested in average in the whole year of 2001, 2002 and 2003 alone. And with this investment we are going to be able to keep growing on the production to supply other forecasted growth on demand on the next future. As part of our growing process to produce more, we also are hiring more people, we had an increase of 1400 new employees on the first quarter '05 against December 2004.

Please, chart number 30 -- look that first line gross operation revenue was 16%. I already mentioned to you gross profit going from 34% to 25%. We also mentioned to you that EBIT on first quarter was 15% has now reached 7, and look that EBIT was 19 against 9. Now let us compare what had happened with the cost of goods sold and that's important points here. Please note that although our revenues was growing something like 15% and we were very hit by cost of goods sold with increase of 30%. We were hit by increase of costs of our raw material and in this year we were unable to pass along when price increases.

Please refer to chart number 31 that compares fourth quarter '04 against first quarter '05. That chart looked at revenues dropped 5% while cost of goods sold also dropped 5%. So we are already working very much into cost control to manage this awkward situation of weak dollar on 50% of our sales. As a consequence you can see that risk profit now is already better, it's 24 against 26. In the same way EBIT is better, it's 4% against almost 7%. A very good improvement was done in sales expenses. Look, while net operation revenue is down 3%, sale expenses went down 8% and non sales expenses went down 60%. So we are squeezing our belts. It's important for us to get back profitability, cutting cost from everything every -- every point we can.

And also look on the -- after EBIT results that fourth quarter we had positive financial results while this quarter we had expense as a consequence. And also income tax, we had income tax credit in fourth quarter of 38 million against a payment of taxes it the fourth quarter and as a consequence EBITDA in the first quarter is 22% higher than EBITDA on the fourth quarter while net income is 21% smaller.

Well, financial investments as I told you, we are making a R$110 million investment. We are using our cash to make this investment. Right now we are not increasing our total debt. Our total debt remains R$2.9 billion year against year but our financial assets went from R$2.5 million to $2.36 million for investments. So as a consequence net financial debt is up from 422 to 560, again reflecting this increase on investments and increase on working capital are related to expansion of our sales.

That's exactly what this next chart 33 shows, is the trend was on the graphic part of -- the drop on net equity to -- net debt to equity and a little increase now which is not making as any worried at all because actually believe that profitability in generation of cash on the next quarters will bring the net down very soon again.

Please go to chart number 35. You know that Sadia remains with more common shares related to preferred than the Brazilian law permits so we still have room to issue preferred shares if and when needed.

Out of the 40 shares -- chart number 36 please. Out of the total of voting shares, 69% of the shareholders they are signing a shareholders' agreement towards which they maintained control of the voting shares of the company.

Chart 37, Sadia unlike most of Brazilian companies we have a very different portfolio of investors, about 36% of our investors are individuals and 33% are foreign investors. No doubt, foreign investors had dropped to a much lesser percentage before the (inaudible) election in year 2002, when we had reached a floor of around 50% of the shares in the hands of international investors against Brazilians. Right now it's 33%. Please note in chart 38 that Sadia remains the most traded share in the Bovespa stock exchange with a 63% of all shares traded in the food business.

Last Friday we had shareholders assembly where which new management was elected. So our ex-CEO Walter Fontana now is our as Chairman, our last Industrial Director Eduardo Fontana D'Avila is now our Vice Chairman and all the other share members remain in their positions. Here are the names are written on the table. Our new CEO is Gilberto Tomazoni, he is our employee for 22 years. He started as an engineer. He made several important improvements in our plans, remodeling, reorganizing and for the last five years he has been working in the commercial side of Sadia. He is responsible for the very big growth in sales on the domestic market and also on exports. He is going to be the Chief Executive Officer for the company from now on. As starting now, the Chief Financial Officer, Investor Relations functions we will be tied straight to the board and not below the CEO as it was in the past. This was decided to send strategic decisions that need to be done and to the importance of the financial area in the company for the new plans for the company.

Prospects for the future. We forecast that we are going to be having still difficulties in immediate future, in the present quarter but things are going to be much better on the second semester. Income is still very reduced in Brazil but we believe that with a new increase on the minimal salary which is increasing 10% right now nominal, and 6.5% real that's going to start helping us a little bit. Also the second semester is historically much better than the first one.

We are not counting on any huge change on the -- on the exchange rate policy in Brazil and we are not waiting any more for the dollar to be stronger to get our results back. Instead we are working very much into a better generation in such a way that we are working very much on how to expand our sales towards more volumes and better prices in new channels and new clients; how are we going to start cutting our cost of good sold working very much in process reviewing priorities of production, by reviewing layouts of our plans and product portfolio and also review our SG&A.

One thousand of the employees on the company are receiving their bonus on the tie to generation of EBITDA in such a way that are several projects are under work right now to bring back profitability to much better levels than the present ones. Unfortunately, two scenarios had changes since the beginning of the year. Before we were forecasting for dollar, average dollar to be around 260 during the whole year - sorry, R$3 four months ago and then 2.65 three months ago and now we are seeing that the dollar very unlikely is going to be at that level.

We also forecasted net grains were going to go down in Brazil during this year. Unfortunately, this scenario has changed for the corn position, we still remain believing that for soya, prices will be stable from now on during the whole year but very likely corn prices will go up due to the reduction of productivity on the winter harvest which is now already planted but with the lack of enough rain from the last two months very unlikely we are going to have a good crop in July. Normally winter crop represents 30 percent of total corn consumed in Brazil and this year its going to be a much lesser percentage due to this loss of productivity. These are the comments I had. From now I am open to questions, if you will please. Thank you.

(Operator Instructions) Our first question comes from Margaret Caler (ph) from Harding Loevner (ph) Management.

Hi. I have got two questions for you. The first is connected with your price decline seen in processed products in the domestic market. Was that due to competitive pressure because I believe you had tried to raise prices in the fourth quarter and your competitor did not follow? Did you reduce prices then in this quarter in order to retain market share and then the second question has to do with, if you are ever going to realize any benefit from the decline in grain prices that we did have over a few months ago that should be you know coming through your income statement about now I realize that right now prices are up again but you did have a little bit of a window in there and do you expect to start realizing may be one quarter's worth ofbenefit from that?

Okay. Thanks for both questions. First one, domestic market. If you come back to chart number 15, you will see that in fact we are starting to move up but with a much slower pace than forecasted. You will see that you cannot compare fourth quarter because fourth quarter as I told we always have a very rich portfolio with Christmas products and fish products that when you compare first, second, third and fifth in the first quarter of '05, you see that we are in a trend up. But no doubt this 2% during the whole period is sufficient to pay the improvement in cost that we have. We have the major impact in costs for us was the cost of buying piglets in the market and buying pig legs to produce ham and other products. Why we are suffering so much from that, let me explain.

Last year, in the first quarter, as a result of the Russian crisis in December 2003, Sadia had decided to slow down it's production of pork. We are the leaders in the market and so it is mandatory first to do that otherwise we are going to lose a lot of money if there is going to be excess production. Well, unfortunately, things didn't happen the way we thought. We did something not to lose money, in fact we didn't lose but the other side we were not making profit or making money as some of our competitors did. A lot of our competitors did not reduce their production and they found ways to keep exporting the pigs produced in Brazil.

As a consequence, when Sadia decided to come back and keep improving our exports, we had to buy piglets and to buy pig legs in the market to make processed products. As a consequence of our return, we pressed the market because we are very big we don't have time to produce this paraphernalia on an integrated producers facilities. As a consequence, price of such products in the domestic market went up very much. Well, our competitors received this gift from us because we brought price up for everybody and so those who had this product are drinking pure water.

We believe that the move that we made, right now we can say it was a mistake but when we took the decision, decision was taken not to lose money. Right now if you say we could do it different, sure we could do it different. But that was the decision taken that time and we are harvesting results of such decision until we have 100% of our production in full pace again. But you know it takes time.

Well, again processed products seen in the domestic market which is by the way our most important market, roughly 80% of our sales in Brazil, is done with processed products. Prices went up 42% while some products for example plastic bags during the period they went up almost 50%. Cardboard went up, hardboard went up, packaging material as a result of tape and petroleum prices which went up.

Now let's refer to grains. You are absolutely correct. During our last presentation, we were forecasting that we were going to having a feeding cost in 2005, 3% to 5% less than the cost we had had in 2004. As a result of better grain prices. Unfortunately, the prices went down in January but starting February price in Brazil started to go up for corn although in the international market soya prices went down. In Brazil prices were stable and the corn prices started to go up. The logistic system in Brazil is done in such a way, there is no 100% correlation between internal price for corn and corn in Chicago to a lot of restrains in logistic system. For you to understand, internal prices of corn today are around R$18-20 per bag and if I was going to import corn it would cost me R$28 and 30 from Argentina for example. But in any case, our forecast is that corn prices are going to start going up.

You are correct during January we had smaller prices than forecasted but then in February it started to change, in March it has already higher than what we forecasted, and the impact of our consumption of grains were always a few months after consumptions because it is the time that takes for us to have a cycle for the animal to eat this fodder and to be sold. So we are not going to have a major impact now in the second quarter, but in the third quarter, if prices on the second one confirm to be higher, we are going to have a higher cost of grain and so a higher cost of animals produced in the third.

What's the offset for that? The good news is that where we see the better price in -- in our exports. All Brazilians are buying grains at higher prices right now and everybody is already starting to press the prices for better dollar than dated prices also to offset the drop on the currency against -- the dollar real currency. Does that answer your question?

Yes on the processed products however, I was under the impression that chicken was the more significant input for those than pork. Can you give me breakdown of how much of the processed product input is pork versus chicken?

The biggest raw material for processed is pork, its upside down.

Oh okay.

Okay? Most of the processed products are sausage, ham is pork, sausage are pork, most of the products are pork content.

Okay.

Okay? And that's what is hurting us because as you know, you can see on the same chart 15, I think a part of the answer is in the same chart. If you can see that raw pork is going up, it means that raw material to processed products or a pork is going up. That explains why our cost of production is going up, it is due to the raw material that is -- the raw material contents of the product of processed products. Clear?

So then will margins be going down next quarter in processed because of the increase in pork prices that you see this quarter?

On the second quarter right now, we are having a struggle and that's why we are pressing so much for price increases. We need to have price increases because we all, I am not talking only about Sadia, I am talking about every producer in Brazil, every producer in Brazil needs to put their price of producing ham and sausage and so at market price for pork. If pork prices are going up, it automatically has impact on cost of good sold on processed products produced. So our only way to escape from that is towards having price increase which by the way we believe that we are going to start doing right now. I told you that in international market we already retained price increase in dollars and we believe that from now on we are going to start having that in the Brazilian market. Why? Because minimal salary is going up as I mentioned.

Are you integrated in your production now in pork and do you have any control over supply?

We -- are 60% integrated. We buy something like 40% in the market but what happened is that even pork produced in house is less expensive than outside. The problem is that when I -- last year what I did and for the moment I said, well, I am buying constantly from a supplier, but I took a moment and said, well I am not going to buy from you because I am reducing my production. With happened next day, this guy finds a source of demand for his products and now I have to bring him back. We are doing this, we are almost there. But it takes time for you to come back to the normal situation.

Thank you.

You are welcome.

Our next question comes from Mr. Gilania Hooda (ph) of Banco Pactual.

My question has been answered.

Thank you very much Glen. Next questions please. Hello? Anymore questions?

Hello I have a question, can you hear me?

Yes. Please go ahead.

This is David Zackett (ph) from Lehman Brothers. Could you just go into a little bit more details as to what happened with your financial results, your net financial result, quarter-over-quarter, it's a very significant change.

Hold on a second please, let me go there. We are going to be talking about page -- one second please.

It's on your page 30, your financial results went from R$70 million to --

Do you mind if you are going through chart 31, right?

Yes, I'm sorry, its 31.

Oh okay, it's all right. What happened here -- hold on a second -- a very important note to mention to you. Sadia is -- is -- has a policy to use hedge on exchange as much as possible. So sometimes - and that's a typical example right now, the hedge that you make into currency if you are loosing money on the revenue side you are gaining on the financial side and that's specific what had happened here. If you make a rule of thumb calculation, suppose that we have R$550 million of net debt and suppose that we would have something like 20% of financial costs, we would have something like R$10 million of financial expenses to cover net debt. Instead of having ten times three which is a quarter, a 30 expenses or financial expenses in the quarter we had only four. Why we had only four because part of the financial expenses was offset by this hedges which is a positive contribution for making hedge against the losses on sales. Over there sales maybe in dollars.

Uh-huh.

Sadia has a policy that during the next three months we try to be as even as possible regards to exchange rate. If we know that we are going to receive a lot or we have to pay a lot, we buy or we sell dollars in such a way that again we try to be even in three months not to be surprised with huge loses, okay?

Uh-huh.

Well, what happened last year is -- hold on a second -- I could still get (inaudible). Last year we had made a lot of hedges during the year and on the fourth quarter specifically we have made a very big gain on this hedges and all these advantage generated this financial gains. Financial gains on hedges on the quarter right now was smaller than at that time. That's what is playing the difference here.

Okay, I understood. It does seem like it's a very big change quarter-over-quarter and then it plans to loosen up your restrictions on hedging or potentially trying find some way to smooth out this -- these gains and loses in financial results?

I got your point, let me think about it.

It just seems to me that it would make it very difficult to plan.

Yes, difficult for you I understand perfectly. Well, the fact is that we are exporting each time more and so each time more and more involved with the currency and each time more we are making more hedge during two months as to cover not to be surprised with loses, what they are surprised is with loses.

Um-hmm.

And because we are loosing money already on the revenue side, right?

Right.

And let me -- that's a hell of a good question. How can we give you information for to make a provision in such a way that could be forecastable that's why you are asking me.

Correct.

At the end of the day, right?

Correct.

Any idea you people? But the problem is as much as exchange rate will be flatter as smaller will be the relativity.

Uh-huh.

But the opposite side, if volatility increases unfortunately volatility will increase also here but again is going to be a offset from loses in the first line and gain here in the financial.

Uh-huh.

That's what we can do at the moment. What could be the counter argument for that? Well, we are not going to do any hedge, okay? So we would have -- we would be presenting only at this quarter for example, we would be presenting only loses on the first quarter because we are going to be selling for last in the first quarter and we are not -- we are going to not be offset by hedge on the other side.

Right, okay.

Also important for you also -- don't forget that quarter against quarter we have increase in the net debt as we are investing a lot right now, we have to finance this growth, right?

Uh-huh, right.

And so we are having extra costs, financial costs for this growth.

Okay.

Go ahead.

Are financing primarily in real's or in US dollar or both?

For the time being we are using the cash that we have --

Uh-huh.

-- financing in real's

Uh-huh.

Most of Sadia debt is generated in dollars but then is swapped to a percentage of CDI but always below CDI. You know what I'm talking about, right?

Yes I do.

Okay. That's -- that's how -- that's how we do it.

Okay.

And no doubt on the next months we are going to be receiving a huge financing from (inaudible) which is a much smaller cost than CDI. You know, CDI today in Brazil is 9 something percent and (inaudible) is 13 something percent.

Uh-huh.

So it's a huge difference in between (inaudible) cost and CDI cost.

Right.

All right.

Okay. Thank you.

Okay. You are welcome.

Our next question comes again from Margaret Caler of Harding Loevner .

This is actually Rusty Johnson from Harding Loevner. The question goes back to your core competitive advantage which supposedly was low fee cost and low input cost for your raw materials.

Yes.

But if we find out now that the bulky processed products which is pretty much all of your domestic sales are really pork, and pork price have gone to the roof and you are not even very integrated then have you guys considered the degree of integration you are getting --

Yes, that's -- that's --

-- on the pork side? You seem to be -- you are expanding aggressively, yet your integration exposure is weakest in this key section.

Rusty that's --

(Inaudible).

You got to the right point. You are a 100% correct. Our integrated produced pork is much cheaper than pork that we buy in the market, and normally we are fully supplied by pork produced in our integrated facilities with our outgrowers. Fortunately, we had made that decision one year ago. I repeat, that's the first decision, tried to reduce our production. As a result we asked our outgrowers, hey you guys you also reduce your production because I'm not going to consume your pigs.

What happened is that now that I need to produce again and not to lose my market share, not to lose my clients I was forced to do something. I'm going to lose my clients and leave room for our competitors or I'm going to give up some profitability for a while, buy these pigs in the market, pigs being even piglets or pig legs in the market, while I equilibrate my production again.

How we are going to equilibrate or re-level our productions while we had already asked our out-growers, hey you, return to full speed. I'm not going to reduce anymore. And second, we are growing our investment in the animal production again. Something that we had not been doing for several years. We already mentioned this last year that part of our pork investment done in Berlândia is made by our out-growers they -- we're going to make -- we are making investment in Berlândia of R$185 million. Our out-growers by themselves are making investment of 150 by their own means financed by a Brazilian corporation -- Brazilian bank. The only thing is that they have a contract, they securitize their contract of the our growers with us in such a way that our growers can get a financing. To guarantee full supply for us, you are absolutely correct using same for a process company like us to be buying pigs in the market at market price constantly because we just proved this statement right now with very poor results resultant from the need we had to buy pigs. Does that explain to you?

Yes, but it doesn't explain why somebody that supposedly is running an integrated operation lifts their hedges and opens their exposures presumably to induce profits, I mean --

Well --

-- is business strategy and discipline here or are you guys just speculating --

No, no. I think I was not clear. Let me repeat it again. First quarter 2004, we were forecasting that we would have a smash in pork prices due to the establishment of quotas by the Russians that was done in December. So back in December, I'm talking about fourth quarter 2003, we had made a decision to reduce our own production of pork and to ask our out-growers to reduce their production also because we didn't want to receive that pork because we wanted to reduce the production of pork because we don't want to supply them because otherwise we are going to pressing very much the price down, all right?

Today, it's easy to see that we had made the wrong decision because the prices did not occur. The other Brazilian competitors, they found ways to keep exporting the pigs without smashing the prices in Brazil. So, things occurred differently than we had forecasted. We do recognize that right now we need to come back 15 months before we're the largest producer in Brazil. We are the largest exporter for that region. We could not run the risk of keep on sagging production for a market that was not going to be closed -- that would be closed in that what would be the -- the outcome? I would have to sell this product in the internal market. I would bring the whole market melting down in the market where I am leader. So it would have double effect, not only losing my market offshore but destroying my internal market. So, that was a great -- bad decision for us to make, we had made, I tell you. It was a wrong decision we recognize right now. But at that time it looks like correct. I wouldn't do it again right now but at that time it looked correct. And we are harvesting right now effects of such decision.

During the years 2003-2004 production of pigs - sales of pigs in Sadia was much higher. We have sold 150 million tons in 2002, 250 million tons in 2003 and only 128 million tons in 2004. That shows for you that we already had capability, we already had the pigs, we already had the plans. We reduced our production in the whole system. Again, we are an integrated system. When it stops like a vessel it takes me time to stop and then takes me time to speed up. And now we are at the ending of a cycle of the speedy, we had already passed the worst movement when we had -- to speed up the history to buy products in the market. We are not going to do that in the future, we are going to be fully integrated again. Obviously, all the benefits of being fully integrated because it's less costly than buying in the market. That explains to you?

Right. But now that you are going to spend R$500 million in CapEx by way of production, what happens in a year of time you get nervous about another export market or --

No, this is 150. It was not us selling again. This was investment made by out-growers and independent producers, they do the investment. You know how the out-growers system is the following. The producer, the farmer gets financing in the bank, they do the investment in hardware. Later I do make much a smaller investment to produce the maximum of profits. No, the piglets' mothers, forgot the name of it, well the piglets' mothers and than we -- they produce the piglets and than we supply the piglets for the out growers. Then the out growers, they take care of -- take care of the animals on -- on the support.

This is the less cost situation because I don't carry the fixed assets of maintaining these animals there. I don't carry the cost of maintaining labor, energy and so on as everything is on the card for the outgrower. What I'm telling you is that the investment that we are doing right now in Berlândia is in the industry side. We do R$180 million investment in Berlândia in the expansion our chicken, turkey, pork and margarine factories, plants outgrowers do the investment in production. All right?

Okay. The one last comment I have is I believe that you have told people extensively they have a deep competitive advantage in pork more than in chicken. So, if you are a low cost producer, I'm just baffled by the fact that if you really are cost producer why can't you sell that pork relative to markets that are giant like China or anywhere else? If you really a low cost producer why couldn't you have sold it?

Well, also there are political reasons not for. We are not allowed to sell pork to Japan, for example, who buys 25% of all pork traded worldwide and they buy from Canadians and US. We cannot sell pork to Europe. That's because we are not allowed and you are allowed only for protectionism, there is absolutely no reason for it. And again, this will change. Right now Brazil is already opening Korea and China and very soon we are going to be opening in Japan. When that happens that's going to be a tremendous advantage because nobody, I do repeat that please. Nobody will be able to compete with Brazilians in a general way to produce pork for the fact that we are very competitive cost wise, okay? Okay, if you need to discuss some more on these items I'm very happy for you to call me later and we can discuss much further competitive adventures of producing pork in Brazil if you will, okay? Any more questions?

Our next question comes from Mr. Sessor Baima (ph) with Merger Market (ph).

Hello?

Hello.

Hello, Mr. Murat. I would like to know first over the announcement of the liquidation of Shopico (ph). If there is some -- any interest from Sadia to get any of the plants from Shopico and --

No. Shopicoa (ph) is a soap item. Shopico is a company that was already (inaudible) some time ago, the units were leased to producers and two of these producers are producing for us. Two plants are already producing in full speed for Sadia, they were rented by some individuals who were producing a 100% for Sadia but we are not interested in buying the assets at all.

Okay and also on the beef side, you reached an agreement with Friboi and I would like to know -- what are the plans for Sadia on increasing it's presence on beef products?

Sadia was the largest slaughterer of beef until '97, we decided to get out of the market due to a tremendous tax evasion since then no -- at that time no other international company remained in the system specific because it was a lot of non-official market developed in Brazil but with the exports a new scenario had arrived. We Sadia, are in the market, we are buying beef from third parties. We are not only buying from a single producer we buy from different producers, they do slaughter cattle and we buy meat and we export them under our brand, Sadia brand. This is something that Sadia is already doing. We don't have to own a slaughterhouse, we buy meat and export.

The agreement that we have with Friboi is that they -- we sold the two units, two of our plants to Friboi in the past, the third unit was rented to Friboi for a while then as of today the unit is operated by Friboi but a 100% of the carcass belongs to Sadia and we are exporting carcass as Sadia brand already with a service supplied by - with slaughtering service supplied by Friboi not with commercial or logistic process all -- everything done by Sadia, that's where we stand on the cattle business.

Okay, thank you.

Uh-huh.

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

Well, I thank you very much everybody for the attention and we are available for anybody that still has any questions, so please call us. We'll be glad to discuss all items. Thank you very much and good afternoon.

And that concludes Sadia's first quarter result 2005 conference for the day. Thank you very much for your participation. You may now disconnect.