BRF SA (BRFS) 2005 Q3 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 Ms. Lydia Ruiz of Financial Investor Relations Brazil. Please go ahead.

Good afternoon ladies and gentlemen and welcome to Sadia's conference call to discuss third quarter 2005 results. I would like to mention that a slide presentation has also been made available on the company's Web site at www.sadia.com under investor relations section during this call. In these proceedings let me mentioned that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.

With that today I introduce this afternoon, Mr. Murat, Chief Financial Officer. First, Mr. Murat will comment on the company's third quarter 2005 results. Afterwards, he will be available for a question and answer session. It's now my pleasure to turn the call over to him. Mr. Murat, you may now begin.

Thank you everyone for being with us today. I'm going to start saying latest developments. Latest news that we have received last week started with the rating in foreign currency last week still enforce (ph) upgraded Sadia one notch over the seven risks of Brazil. This has made us very proud is understanding that the company is in better shape and it make us very happy.

Second thing, we after so many calls from new investors finally we are able to get approval from our - from further shareholders in such a way that we're going to have our board meeting on December 15th to decide for the tag-along rights on the preferred shares. The idea on such meeting is to give tag-along right 80% of the value given to the consumer shareholders in case that the company is sold, we'll be giving to the preferred shares, our shareholders. At the same time there's not going to be anymore - any difference in between dividends from preferred to voting shares.

Members -- also want to say that after September when Sadia became part of the (inaudible) by index, our trading volumes had been going up steady. We're very happy to give you the information on our numbers. So if we please go to the next chart, you'll see that we have - we're able to get almost 50% growth in our gross operational revenue year-against-year nine months ago and roughly half of it on the domestic market and half of it in the general market and the external market.

Next chart shows that our gross operation revenue third quarter against second quarter rose by almost 5%, while our gross profit reached 10% growth. Our gross margin increased one percentage point from 36.5 to 37.6. Our portion of (inaudible) is up 44% third against second quarters. Net income is 23% better reaching a 9.3% net income against source(ph) and it was 8 at the previous quarter. EBITDA finally is 36% better now than it was before and we already reached the level that we are looking for which is a 13% gross EBITDA margin reaching 13.8%. I already mentioned that we are kind of hedged 50/50 on our sales domestically, internationally, although we are investing much more. We're still maintaining a very low net debt to equity on 28% and 80% of a detail to pay net debt. The next chart please.

We know that February is always targeting to get more value-added processed products and that total revenue of the company, 44%, is done with such a product and 33% is poultry cuts. When you compare what had happened on nine months '04, I guess nine months '05, there's no major difference in the total revenue side. There's some difference though when you go to next chart that shows the international and also the domestic market. Let's talk a little bit about the domestic market.

We still remain with 80% of our sales in process products and the other segment very minor oppositions teach part of the pie . When you compare nine months '04 against nine months '05 or export market then there's some difference there to be seen. Please note that pork represents - representing now 16% and it was 12% before. Why? Well, we are recovering market share on the Russian market. Don't forget that at the beginning of 2004 we had reduced our pork production to phase the corporate system established by the Russians and after the solution of the corporate system and now we are speeding up again our pork production. Well, we had that outcome. We're increasing pork production and pork exports.

Please go to chart on export by region. Again, if you compare nine months '05 against nine months '04 you see at this quarter the most important destination is Middle East. Not in that we have reduced the hours but only by they are the face of growth in the Middle East and may have acquired the leadership in this quarter but percentage-wise, the biggest growth was done in Eurasia, again resulting from the larger exports to Russia which represent about 80% of sales in such a region.

Also please bear in mind that other markets that we're representing, 2% of our export sales before was re-divided into other segments. For example, Cuba that was in other markets now is in Americas, Asia that also was in other markets, now is part of Middle East. Just to make our life a little bit easier. With rounding in any case shows that almost in five big regions we have very good balance of all sales of Sadia, reducing the risks of the company.

If we go to next chart here, you already know that the pork is the most consumed meat worldwide. There's a group notation over there. If you go to chart -- next chart is meat percent growth in Brazil. You can see that if you compare to index 195 in both markets from pork and chicken, the growth was up 20% during the speed while it was much higher speed of growth of chicken consumption in Brazil followed by pork also in Brazil. In both cases speed of growth was much faster than the one seen in the beef business. Very likely, we're going to be entering into a new phase of beef growth in the next years due to the growing portals of Brazil to be a reliable supplier which is a much better cost structure than the old-time beef suppliers of such market. So there's a fantastic opportunity there to be seen in the beef market.

Well, Sadia is harvesting all the strength and all the effort that we have put into its operations. We are able to grow our sales nine months again nine months 17% in volumes of which 20% was increased in the international exports and also 11% of sales to the domestic market. On exports, the biggest change was from our increase on pork exports to Russia and also very important is the growth of processed products almost 30% nine months against nine months. Please don't be surprised that there was a reduction in the pork season domestic market. This 8,000 tons are much lesser than have been increased at 23,000 tons which are exported so that is a strategic decision to reduce those in the domestic market exporter much farther.

Also big growth on poultry sales in the domestic market was part of our acquisition of So Frango. That was an industry located in the Brazilian region that was selling to the central and west side of Brazil and only lately we are starting to bring more of such productions to other regions. Therefore on this nine months - starting nine months our write-off of sales was done in the domestic markets.

In any case those are very big achievements. International economic cycle and Brazilian economic cycle is much lesser than the 17% average so Sadia again on average has been growing three times, sometimes four times GDP internal or worldwide. And that's something that we are also forecasting to keep that pace in the next years.

The next chart shows volumes in sales revenues. Please note that all the effort on increasing sales under the domestic market, 11% in volume, generating an increase of 14% in revenues. By the other token the 22% decreasing, the portion generated only 16% extra revenues in rise(ph). The most important factor here is the fact that dollar has been - continues weakening. We are going to touch on that a little bit later.

If we jump all the way to average price to something 5 or 6 slides up on the road so let's go to average price domestic market. Please note that in processed products that had an average drop of 0.2% the third quarter '04 against the third quarter '05, please remember that processed products sales is 80% of total revenue in the domestic market. So this is really what is important. So this drop shows how weak has been the domestic market in that tremendous efforts doing as a way to set more in volumes. That's the problem with paying the supplies to doing market shares of maintaining our leadership use to sell from our very weak average domestic price.

The average drop of - in poultry - of almost 9% is derived from a product portfolio, product mix. Again as we acquired So Frango we are sending a lot of whole chicken in much lesser parts, that's why the average price is weaker than the previous one. The net selling affect that also price in general for the same product also went down during this period.

If we move to the international price with the export market that's something very important to look at. Poultry represents something like 70% of total exports and year against year or quarter against quarter the national poultry in reals dropped 4%. Well please note that average dollars in the same period went down 31% related to reals. So relative terms, all the tremendous effort that we had to do of becoming roughly a 18% in dollar terms in our sales was offset by a 21% drop in exchange rate. Therefore our average sales price in reals dropped 4%. Same thing happened in process in pork so all before the bringing prices up was eaten by the valuation of the dollar. Well the size of the valuation that's another important factor. Sadia keeps generating profit and keeps enlarging on its exports. That shows how competitive our industry is and the fantastic opportunities that we have as soon as the dollar gets stronger sometime in the future.

We keep launching a lot of products -- new product release first nine months of the year. We're at 58 products average in the last eight years is to launch 60 products for almost - more than one per week. Typically, we are launching a lot of processed products like different flavor hot dogs, King sausage, Petit Gateaux, Hot Pockets and products without meat - soy-based burgers, pastas and nuggets. Also, we launched mini-pizzas and olive oil.

Statement of income. We had made quarter against quarters third against second, 5% up in revenues and CPZ or cost of products sold is only 4.4% -- sorry, net operation revenue is 6% up increase in net revenue is larger than the increase in costs which is 4.4, therefore gross profit went up 10.2% during this period. Very important is to mention the next line, please. Look at forward expenses. We were able to reduce from 240 million to 198 and even although increasing our volumes we are decreasing expenditures in such segments. What we're doing, well is a (inaudible - accent) effort in terms of sales and distribution. Therefore quarter against quarter we were able to reduce our expenses 5% which now represent something like 15%.

Well, all the other numbers are okay. EBIT which is almost all operational results is now 44% better than the previous quarter. We had reached between R$200 million against R$140 million in the previous quarter. Sadia remains doing a lot of hedge on our currency therefore biggest part of these net financial results is resulting from hedges. Don't forget that we're spending roughly half of our revenue and therefore we're also making hedges of such exports. The result of the hedge is accounted on financial results here. Quarter against quarter instead of having a net of financial expenses related to the net debt we are having a financial gain - again, most of the financial gain is resulting from hedge.

Well income before taxation is 33% better now than it was before. We also had an increase in our percentage of tax to be paid. It was something like 18% before, now it's 24% and end of the day net income has a record in the quarter R$178 million which is 23% related to the other one. EBITDA also is record in a quarter at R$162 million, 35% more than the previous one.

Very quickly some graphs. You see that gross margin is going up steady from 25% for quarter '05 - is 26 and 26.5 and now 27.5. Also -- wait a second.

The same thing with sales expenses and after reaching almost 20% in fourth quarter it dropped to 15% in the third quarter. Well, very likely the number on the next quarters will be below or around 17-something. Very likely in the fourth quarter we're going to have a little increase related to the third for the fact that we have some special sale expenses to do Christmas events and Thanksgiving and also New Year's, but in any case we are forecasting that for the next quarters, sale expenses will be in the highs of the 17% and very far away from 18 or 19 that was the numbers on 2004.

The next chart, please, is profit -- wait a second. My computer is down. It would be the margin, okay. The next one, hold on a second, please. Now I'm at the EBIT. So EBIT that had reached only 4% in the fourth quarter, now is at the 11% level. We are 44% better for the GDP than where we were in the second quarter '05. Please go to next chart, which is the net income. The same trend, please note something important here. Third quarter '05 our net income was - or had reached 9.3% of sales, I guess a 9.1 fantastic first quarter '04. Please remember that in that quarter we had record prices for our raw chicken resulting from the starting of the bird flu in Asia when prices skyrocketed during the first three months of such year.

Well, net income third quarter '05 is better 23% than the same number or than the same net income for second quarter '05.

EBITDA, we are now at the level that we believe is the right one for Sadia. We had -- we're already flying at the 13% level, and that's our target for the next quarters. That's a type of structure that - or the type of profitability that we forecast for Sadia for the years to come. We still have a bottom of 13% EBITDA margin.

Next one, please. Look at -- on the right here, you have Brazilian GDP in the last 14 years was 2.5% per year. World GDP was 3.5 during the same period. Sadia's production was up 8.4%. So as you can see, Sadia's growing something like almost 3% in average volume-wise when you compare to net average of Brazil and World GDP. And we forecast that in the next years to come we are going to get going with such a -- three to four times World and Brazilian GDP.

Where Sadia had been growing, I already mentioned to you on Sadia's sales volume total. Biggest growth has been done the latest years in the processed products with almost 18% average. If you go to next chart, you'll see in the domestic market we had made a reduction on the poultry sales resulting from a strategy to export more of such product. And in the meantime, we are growing our sales in the domestic market almost 10% of processed products.

On export, please note on that next one, lately processed products have been growing very steady. They're 42% annual average with 22% on the poultry side. Well, big group sign is that in the terms of structure (ph) we do believe that we are going to keep having our biggest growth, no doubt that we are having a (inaudible) in the short term. I'm going to touch on that on the final, but in terms of structure, Sadia will be very competitive and we will maintain the base of strength growth into processed poultry and pork.

Capital expenditures. I already may have mentioned in the conversation three months ago that Sadia had been entering a new development cycle after being investing something like R$100 million on years 2001, 2, and 3. We were invested to 140 in 2004. And now, this year, although we had started the year forecasting a R$500 million investment for year 2005, now the number will be close to R$600 million. (Inaudible - accent) the sacks (ph) of 100 while we are making some extra investments to adapt our industry to the latest requirements of demand from the market. They are all very productive in initial (ph) investments.

For our year 2006 we don't have a close number yet, but it will be in something in excess of $600 million -- R$600 million. And very soon, in about one or two months, we're going to be able to give the information of what is going to really be the target for next year. But it's just still depending on some things I'm going to mention a little bit later.

Value at risk, you know that we're still maintaining a high cash position, that's very important and key for Brazil, our company to maintain a very high cash position. But in all of our financial assets we have been reducing the value at risk in such a way that during September the value at risk was only 2.5% of our equity, much lesser than the limits established by our board, which is 10%. We are very -- way below that.

Net debt to equity we are able to maintain it low besides the growth of our investments. And as a result of better EBITDA, we were able to reduce our net debt to equity from almost 32% in the second quarter to almost 28 right now. Again, way below the target established by our board, which is not for Sadia to be above 50% of net debt in net debt to equity.

On the net debt to EBITDA, again, we are below the short-term cap. This is our only operational cap decided by our directors, not by our board. These numbers are very small when we compare it to our peers internationally. And we are only 80% of EBITDA to pay our net debt.

Sadia remains being the most important share traded in Bovespa. I do remember that starting September we are part of the Bovespa Index and they have a list of all the recommendations of several investors. Sadia had received several different prices, which you can see on this page, we are very proud of the public acknowledgment of all the effort done by all the Sadia 55,000 employees.

Now very quickly, the perception for the immediate future. First of all, we are not forecasting any possibility of the grains to go up in the next months. There is a very good balance nationally, internationally. The only fact that could bring change in the grain prices would be a real explosion of the bird flu, which could reduce the production of birds, therefore reducing the need for grain, therefore would bring the grain prices down.

We are not counting with this scenario. And whatever token supply and demand are very okay, so we're not forecasting any major changes on the grain prices for the next months. Demand will be strong in our point of view in our Christmas season here in Brazil. We are having a reduction of the (inaudible - accent) activity in Brazil, but -- and therefore we are not forecasting a major explosion of demand into long-term assets. Therefore we do forecast that we're going to have a much better than forecasted Christmas-related what we had forecast six months ago. Six months ago we forecasted we're going to have something like 8% better Christmas related to last year. Today we believe that we're going to have a 12% increase in our volume so this Christmas against a number of last year.

Well, right now the industry into a severe tension from everybody related to the foot-and-mouth and the bird flu. Starting with the foot-and-mouth, it really had appeared in the southern state of Mata (inaudible). Firstedly (ph), it was part of the mugging (ph) process of being (inaudible) from Paraguay, and it was really a lack of patients from farmers, authorities in (inaudible) where the good news is that the -- everybody is acting very speedy and a lot of animals that already circumcised (ph). And we are forecasting that the actions have already been taken and very soon we are going to start seeing that the virus is going to disappear.

There is plenty of regulations related to how do you battle against foot-and-mouth, what procedures you have to follow to liberate the areas which are now not free from trading products. The only state that now is forbidden to export to Russia, for example, is the Mata (inaudible). All the other neighboring states are not. Now let me talk about the bird flu. Bird flu is not a new thing. There is -- there are bird flus for decades and every once in a while there's a new surge of bird flu even in developed countries. We have had bird flus in Italy, in Holland, the States, Canada and Mexico, Columbia in recent past.

The new fact now is that the bird flu that started in Asia this year is a different one that was able to also to attack people. There is no information for the time being that a virus is contaminating person-to-person. It is coming only from a bird to a person. And important to say is that although 60 people were dead worldwide, none of them were dead for except in China where we have the biggest population, we have the biggest concentration of people, and where the virus is already installed.

There a lot of ways for you to reduce the risk of further contamination, but the risk is always present. The risk is even better in places that production is very well spreading to small properties and where you have a lot of wild animals integration and so on. Well, that's not the situation presently in Brazil, nor in the States, nor in Europe. I repeat, the risk exists, but there are techniques for you to battle, how do you combat and how do you make the cemetery (ph) cleaning and how -- what kind of procedure you have to follow to bring your country back to the international scenario.

Also important to mention that the present bird flu has a virus that doesn't contaminate when you are eating it. It doesn't hold -- cannot afford high temperatures, any meat suffering a heat process of 60 degrees centigrade exterminates every sign of this virus. Also, the people which were dead, they're only very young or weak or very old people. Very unlikely strong, very well-fed and very good standard self-hygiene people will be contaminated. There is a very key point right now, a very important for the reduction of risk here in Brazil, it cause a rare dramatization, rather visualizations are processed established and recognized by world standards with which you originalize a certain portion of your country in such a way that if you had acquired it in a region, the other next region is not contaminated or is not excluded from trading meats.

For example, Portugal is a region and Spain is another a region. Holland is a region, Belgium another one. Although they are neighbors, it stays in one place in one country, it doesn't interfere with Brazil. Today we have a weird situation that if you have anything here in the southern state of (inaudible), if you have a bird flu there, you would hold Brazil, even anything related in the northern part which is 5,000 miles away. That's insane and it's a process that is underway to public commitment from our (inaudible) minister to install the diversion (ph) opposition in Brazil before December 15. We believe that is a fantastic weapon for us to cope with this threat.

Again, surges of virus existed several times in several countries. I'm knocking wood, it never had happened into Brazil, we have never had any bird flu yet and we hope it's never going to come.

If there's a surge of a disease, Brazil has had some experience in battling against it. For example, we had had foot-and-mouth in the southern state of (inaudible) three years ago. It was -- battle against it and was eradicated and now they are starting again. We had had (inaudible) is a big illness in central Catalina. For a while we could not export, now we are exporting again. So one so far. So the same thing as happening in Holland in Italy and so on. So that's the information. Although the crisis is present, the crisis has an overdose of publicity. It's much more public throughout in terms of media than an actual problem in itself. We must be very careful on taking measures. We may be very careful on deciding things nowadays. Looking only at press can bring fantastic distortions. Basically, I think this is the information I want to give you for the moment. Well, I'm ready for questions, please -- thank you very much.

Thank you, ladies and gentlemen. We will now begin the question and answer session. (Operator instructions.) Our first question comes from Benjamin Aralmarve (ph) of Lucite Research. Please go ahead.

Hey, guys. The first question I have is in regards to gross margins. There's another improvement, and can you please shed some light to where it's coming from?. Is it feed prices? Is it capacity utilization? Is it change in mix?

Well, thank you very much. The costs, they are some of actions done. Remember when I told you in the previous quarters that management of the company was very unhappy with the 8% EBITDA margin in fourth quarter. Remember that at that time I had said that we were 44,000 employees, 1,000 of which were blue collars and we all had to make actions regarding improvement of the EBITDA margin, and everybody in each specific field. So people on the revenue line had made several plans to make better sales. People on the cost line were dealing with a lot of action on such, and the same thing on expenses and so on.

Rule of thumb, what I can tell you right now is that you are correct. We are producing at a much faster speed. We're using our assets much more -- with much more productivity, which no doubt is bringing our costs down. Also we're able to do a lot of renegotiations of some packaging. Don't forget that price on the food sector in Brazil, average prices in the food sector in Brazil was down late this month, was very important to reduce inflation in Brazil due to very low demand. And as a result of that, I already had shown it, we were unable to pass along price increases. Therefore, we haven't make a lot pressure on some of parcel price to reduce the costs. Also, some of the costs went down specifically on packaging from products, which have (inaudible) content on it. Due to the drop of the exchange rate we are also able to bring some of the costs down.

So, trying to resume with everything I said, the best growth profit is a sum of factors in the better volumes, better productivity and a lot of location in the costs.

Looking forward, is there any more low hanging fruit or will growth and margins decelerate from this point?

On the fourth quarter, per se, normally we used to have a better margin with the PDOs due to the type of product breakdown. We have a lot of productivity -- products, which have a much better margin than the normal in the year. But if you take the fourth quarter away, first quarter on very likely we are going to try to repeat margins as the one that we have with the good one. That would be our target, so roughly I'm going to repeat again. Fourth quarter, there's a chance - the gross margin will be a little bit higher and first, second and third, there's a trend to be in line with the third quarter margin. Okay?

Thank you very much for that. The other question I have is in regards to international prices for chicken, chicken parts and pork. What are you guys seeing going forward in U.S. dollar terms?

Thank you for this question also. That's going to give me time to answer you something - hold on a second please. I'm going to make a general comment on the average price. If you look, we have been doing a tremendous effort on bringing our prices up and you can see that in the processed products prices went down 8%, 4 in birds and 1.5 in swine. Please note that the exchange rate was down 21. So if you do a rough calculation, 21 less 8, that means that average price on process went up 13%, 17 up in poultry and 19.5% in swine. So, in fact our commercial people had that been a tremendous effort on increasing prices, but the parting is almost wet dry. Very likely we're going to be able to pass along further price increase. Only such thing will happen in times of a crisis. If a bird flu crisis really appears what we can have is a lot of volatility -- very likely, chicken, poultry prices will slim down and swine prices would go up because people will have to eat something in another way.

So, everything now is focused on where the bird flu is going to go to. If it's going to stay where it is we're not looking for any change. If it explodes very likely red meats are going to go up and poultry prices are going to go down. Processed product prices will go up, that's our crystal ball.

Thank you very much, gentlemen.

You're welcome.

Our next question come from Mr. Alesandra Foucom (ph) from Banku Etau(ph).

Hi, good afternoon everyone. Actually I have two questions. The first one, I'd like to explore how you will be your costs, actually your cash cogs. It would be great to have a little bit of color what are sustainable levels for cash cogs and cash SG&A and specifically what kind of readjustments are you guys expecting for packaging in fourth quarter? That's the first one.

Hold on a second. You mind rephrasing it again please?

Yes, actually what are the sustainable levels for cash cogs and cash SG&A, that's something I'd like to understand because you had disclosed it with depreciation so I'd like to know the cash extent of that. And specifically regarding packaging, what do you guys expect for fourth quarter? I believe that unless I'm mistaken here, you didn't have any kind of readjustment during third quarter and historically you have the readjustments once a year. So I'd like to know its, is it still, what's going on and - just finish that.

No, I got your point. Now you are coming back, you are putting your memory. Last year, we had a policy towards which some of our suppliers were adjusting prices just once every six months or whatever. And some of those price increases was done in the fourth quarter, therefore the market was very surprised with a sudden increase - big increase of packaging prices in the fourth quarter '04. That's what you're relating to. Well, we had reviewed that contract, we are not going to have major impacts of packaging for the next years. We modeled our contract and to be - rule of thumb, we are not forecasting any major increase of costs for the next quarter. That's the resume of all of this. Neither in the packaging side, neither in the grain portion, which are the most important raw materials for our production.

Okay, prefect. And the second question is regarding -- is in regards to margins. You guys are maintaining the targets for 13.1 for EBITDA margin for the year because actually according to my calculations here's would like to -- you guys would have to report a 17.5 EBITDA margin, fourth quarter in order to achieve this target. Was, what is being - is that answer yes, what is being doing and what can we expect in fourth quarter in order to achieve this target. Thanks.

Well, we are challenged -- no doubt is a tremendous challenge and we are all very focused on increase our profitability in the four quarter to a larger number than the one in the third. You are correct, we are still aiming to a larger number and we know that mathematically, or better - or arithmetically the numbers should be around 17% which would be fantastic number would be to have a fantastic possibility for us to have sales and volumes and dollar, everything favorable, which is a tremendous challenge. Well, we are not defeated yet, we are working on it. If we are going to miss the target, we are going to miss the target even having a much better result than we had on the previous quarters. We don't know if we're going to be able to do the target, something close to 17 as you were saying but we are very convinced that it's going to be over 13 in any case.

Why I'm so certain? Well, there's not only the good things that we have done to obtain good results in the third quarter are still there, but also we're going to have the help of a better public portfolio. A feasts portfolio that bring increasing profitability. So, we do believe that the number is going to be higher, but we are going to be disappointed if the average year is not going to be 13, there is a chance that it's going to not be but we are going to be working for as much as possible over 13, okay?

Okay, perfect, thank you.

You're welcome.

Our next question comes from Miss Sonia Estonslater(ph) from Unibuncoco Headquarter.

Hi, good afternoon. I have two questions, the first one still regarding cost and expenses reductions specifically on sales expenses. I'd like to know if you already bridged the recurring levels for sales expenses -- we saw a significant decrease as you mentioned -- or if you consider that you have additional cost cutting initiatives there in your sales expenses line? And, I was wondering if there was one specific large or any specific large project that led to this 15% reduction in the quarter? This is my first question.

Thank you. First of all, I have already mentioned to you, in previous quarters, that we were targeting for a reduction in our expense for sales. The number that we obtain right now is a function of our action in one side. Using less resources or less costs for selling in Brazil. Also resulting from better volumes, which are, which are we in those - distributing - distributing the costs into further units. You know what I'm talking about? But also, is a function of a very big volume of exports. Exports are consumed less through expenses than sales into Brazil.

Oh, okay.

For example we do not pay marketing on exports. Our marketing expenses are much lesser. We do not have to pay fees to supermarkets to export. That's in one side. Buying the other token the present level of almost 15.5% will be a little bit higher in the fourth quarter because at this quarter, fourth quarter, we need to make some special sale actions in such a way that we have an increase here but to have a better sales in the top line. But, in the first quarter '05 - '06 we believe that our target is to have a sale expenses that focus on net revenue closer to the one that we have in the third one. So again, is going to be from 15.6 to a little bit higher number in four quarter, but below 17. Then again, back to something closer to 15.5 than the first one in the remaining part of the year 2006. Very unlikely we're going to have something like the 19.5% net sales to revenue that we had had in the third quarter when we had the tremendous growth in our volumes, maintaining the fixed costs of our sales structure.

Okay, thank you for that. And now my second question regarding the world scenario for chicken considering the recent news on bird flu, you commented on it. I just - I was wondering if you had been noticing very recently any reduction in world demand for chicken and in that case, how does this compare to a possible increase of Brazil's share given the difficulties other exporting countries are facing. And on that sense do you consider that this is actually an opportunity also for processed products, which is the scenario the consumption maybe of processed products internationally could go up and Brazil could enjoy that increase?

Thank you for the question. You are correct in both observations. First of all -- in fact, some places, mainly Europe there was reduction in the consumption of chicken. We were lucky that we have been having problem to expand our production as a way to supply our customers. So what is happening now is that is not reducing our volumes at all but we are being able to service our clients better than before do we have to give the shorten the supply very frequent with lack of production. So I repeat, repeating again, yes, the latest weeks there was a reduction of consumption but it didn't interfere at all with Sadia's exports or Sadia's orders for the time being. And we are not forecasting such reduction in our case. Second, we do believe that if the bird flu do not explode and there is a big chance it doesn't, as some of the more terrorists think, or pessimist are thinking, we could have a quick return for levels of consumption, something that we have seen before in several countries that had had bird flus, that had had mad cows and so on. You know that present consumption of red meat in Germany for example, is larger than the one that they had prior - previous than the mad cow. Just after the mad cow, consumption of beef in Germany disappeared, also in England. Today they are back to regular levels.

Coming back straight to the question. We have not suffered a reduction our orders. Important to say we do not sell spot, normally we sell only to long-term relationship suppliers. And for the time being we're not seeing any signs of our reduction. Opportunities yes, will occur, let me give an example. Lately last week for example there was a big increase in the prices of beef, which by the way we are exporting right now. Price in Europe for a filet mignon that was $8 per kilogram 3 weeks ago now is at 14. (inaudible) filet, which was at $2.50 per kilogram, now is at 5.

So there are some other opportunities yes. And the best way for you to combat a crisis or best ways are first, increase your areas of defense for the virus not to come. Second, if the virus come please have ready to go an action plan to reorganize your production to places where you have other products to sell for buyers that will not buy chicken but will have to buy beef or pasta or pork or processed products. Third, produce a full scale of processed products. We have seen this model in Thailand. Thailand almost is a big chicken supplier on the first quarter '04, now they are back at the same level they were the fourth quarter '03, but with different products. Fourth quarter '03 there were still a lot of raw chicken, now they are only exporting cooked, baked or heated, in any case, meats. There is other ways.

So another good form for you to hedge yourself is to have a very large portfolio, distributed in very different regions and a lot of processed products production capability and last, but not least, it's absolutely necessary that you will retain the regionalization of the (inaudible - accent) production in such a way that if you have that problem in Panama, so (inaudible - accent) will be exported. If you have that problem in Rio, (inaudible - accent) will keep exporting. Something that is feasible to do in Europe and today it's not in Brazil, but we're also having some exceptions.

Let we give an example of the Russian crisis. One year and a half ago when there was a mad cow disease in Panama, the whole Brazil was banned from exporting to Russia. Today, there's mad cow - sorry -- foot in mouth disease - not mad cow, foot in mouth disease. There's a foot in mouth disease in (inaudible - accent) only (inaudible - accent) was banned from exports, all the other states in the country are exporting. Why? Because today Brazil had proved that we have very good sanitary barriers in between states; second we have very important worldwide suppliers. Brazil is already the largest supplier of chicken and beef worldwide. And so there are consumers that need our production. Okay?

Okay. Thank you, Murat.

You're welcome.

And if I may, I just wanted to confirm whether the fourth quarter is going to be the first one where you have the impact of the full recovery of your pork production capacity, internal capacity?

Yes, there's in fourth quarter, the end of the stabilization process on production. Stuck in the fourth one, everything is going to be producing on full speed, in terms -- related to what we have in 2003.

Okay, thank you.

Thank you.

Our next question comes from Mr. Benagu Kenado (ph) with Banku Santon Ebonista (ph).

Hi, Murat. My question is relating to the next seats of negotiations at the DOHA meeting expected in Hong Kong next December where Brazil will negotiate further cuts in subsidiaries from Europe, from U.S. on the exports of agriculture-related produce such as poultry, meat and pork meat. It seems that countries such as Brazil could gain cuts in tariffs and also cuts in subsidiaries farmers from Europe. My question is related to that. I mean, do you expect a major gain from Brazil in this meeting on the DOHA negotiation in Hong Kong? Do you see that Brazil could gain further export triggers for the next month?

We do believe for two questions. First is because it's more economical for you to bring a lot of agri products from Brazil. Second, the developed countries they need Brazilian market to buy their products. If we don't generate income how come we are going to buy their products? So there's a growing concern in developed countries that instead of being - maintaining, for example, in Germany instead of them to maintain their beets sugar, let's improve exports of cars and machinery to Brazil each time more present such kind of argument and their road has discovered to Brazil is very complex in animal protein and that is what we believe is going to happen.

But do you think an outcome is expected right on this meeting in December or for the (inaudible) only?

I don't know. I don't have the crystal ball. Only thing I can say is that barriers are starting to drop we have seen that we are unable to export to China two years ago now we're starting to export case by case to China. We are unable to export to Korea. Now exporting normally to Korea where we were - we had increased taxation into raw chicken to Europe. This tariffs was done by a trade organizations one month ago. We saw that Russia is treating us different than they have treated before in terms of quarters - in terms of volumes and for licenses. Brazil is getting so big that don't you have to think twice if you're going to have another reliable source of animal protein. So we do believe the trend is just to further opening from our source of possibilities to Brazil. That's our belief.

Okay, thanks. My second question is related to guidance on export volume growth and domestic volume growth. We see that Brazilian market is lagging behind boasting annual growth of roughly 8 to 9%, while export volume continues to grow much faster between 13 to 16% per year. What's your view on 2006 and 2007, the next two years? What kind of growth can we expect for both the domestic market and export volume growth?

Sadia's crystal ball forecast for very good - way for (inaudible - accent) is look what economists are looking for GDP in Brazil. GDP is right, we're growing to grow three times average for the GDPs. If you do that you're not going to be too far away from what we are expecting to be. Three times GDPs on Brazil and two times GDP in Europe for the next three years.

This is for domestic market?

Domestic three, internationally three also. The national growth and Brazilian grow. If you work with three times GDPs, you are not wrong.

Okay, thanks.

You're welcome.

Thank you for your question. Our next question comes from Victor Galliano of HSBC. Please go ahead.

Hello. Yes, I have one of my questions is already answered but the other one I have is really more an issue of how can you reassure us in terms of the security that you have in your plants, in your facilities - in your poultry facilities that you have in fact strengthened these and that you have made a special effort shall we say to ensure that there is a very reduced risk of any avian flu affecting you. I know that it is far from Brazil. I know that there are no migratory birds in any of your plants but if you can just tell us what sort of measures you've taken just to reassure investors.

The only thing I can say for the moment is that nobody worldwide in any industry would be saying to guarantee that everything was made enough. But in fact there's a lot of things which are not over our control. What we can say that we are using all of the better techniques used in the most developed companies and countries worldwide. We're following 100% our operating regulations established by OEI which is an organization for international (inaudible) following all the standards on prevention and to the spread of the virus. What I can say by sure is that some countries have a much lesser possibility of getting this virus for environmental conditions like temperature, animal migration, type of production and so on.

For example, most of birds raised in Asia are raised in a backyard home. Over in Brazil the production is in the estry (ph). If you go into Asia most of the birds are traded in the streets live. They go to the flea market. Those which are sold are sold, those which are not returned to the farm on the same day with a change of virus between one bird to another very easily but absolutely not true in Brazil. We have much, much more stricter governmental attention right now when we having the best. No doubt sometimes it escapes.

For example we all know that foot in mouth is bad. Nobody wants it. All Brazilians do vaccination but just one guy doing (inaudible) cattle from Paraguay to Brazil was able to bring in a disease and we all suffer from it. It could happen. Yes, it can happen but now we know that it is in that region, is not going to the other one. We have those (inaudible) just for understanding is we had the Army - the federal Army was requested by the governor to be on the border of Catalina state is a state free of the vaccination. We don't need the vaccinate because there's is no foot in mouth at all out of there and so actions are taken. If you want to visit any of the plants, nobody's going to allow any visitor right now. There's a lot of actions taken and that's all I can say for the moment.

That's helpful. Thank you.

You're welcome.

(Operator Instructions). Our next question comes from Mr. Jeremy Ahooda (ph) from Banco Patoile (ph).

Hi Murat. I'd like to know if you could comment a little bit on the price environment in Brazil and if there's any impact from the foot in mouth disease cases?

You say the price increase. What was second now?

Yes, in the price environments in the domestic markets.

Well, we believe that in the fourth quarter we are going to be able to get increase in our product prices due to the fact that again is good portfolio or good demand, we believe we are going to be able to get something like a 5% increase up to 7% increase now but during this third quarter on average prices in reals. That's our forecast. Costs -- I already told you about grains, about packaging in - internationally, we're not forecasting any changes in dollar terms. We are (inaudible-highly accented) what is going to happen if the dollar is going to go up or down then you're going to have a down or up in our revenue in reals.

Okay.

Our next question comes from Mr. Gustav Ungrea (ph) from Banco Patoile (ph).

Hi, Murat. Just had one question about your financial results. Actually, you've been quite consistent in posting positive financial figures and financial results over the past few quarters and in the third Q of (inaudible). I'd just like to get more detail on how you have been able to deliver those results and how current they are so we're looking forward if you believe this is a sustainable trend. This is my first question. Thank you.

We don't believe in sustainable. What we're doing is something very stable. What we're doing is that we keep having R$4 billion of total debt which are roughly R$2.5 billion of total assets. We know that we do a little bit of financial between those two in such a way that our net expense is almost nil. But on the other we're having a very big contribution of a hedge taking over our net dollar balance. I have already mentioned to you that everyday the U.S. follow a hedge position of our exchange rate for the next 90 days. If I'm receiving in terms of operations and in terms of financing, anything that comes in and out of our cash flow in 90 days we are hedged.

So if we are long we sell in advance to be hedged. If we are short we buy in advance as to be hedged. Well anytime that I have a reduction of the exchange rate as we have lately we have been having reduction of the gross profits that is now -- there's now counter-balance here in net financials. The good thing would be if our accounting principles would allow us to take part of this financial income and put it back to operational income but in fact a big portion of the financial results is not financial (inaudible) is hedged - operational hedge so the right hedge should be over there in the gross profit not only because the accounting GAAP doesn't permit it. Next question please.

Okay thank you. My next question is just regarding the strategies going forth to produce and export beef. How you seen to put them on if you change or how are your views on that?

No the opposite. We are taking advantage of this situation right now. We started slaughtering beef in October. We asked our slaughterhouse back. It was rented for several years. During this period we were receiving the front cuts of (inaudible) to produce our processed products and at the time it was (inaudible) was exporting the butt part of the carcass. Today we are doing that thing. We are exporting the back part and as I told you three weeks ago we're exporting $8 per kilogram of filet and today we are exporting at $14. And we operating at full scale for the (inaudible) we are permitted to export and take advantage of the fact and that's it.

Thank you.

Our next question comes from Juliana Hovingbaum from Deutsche Bank.

Hi everyone. Are you talking about usually add the potential demand for pork as a result of lower demand for chicken from (inaudible) but your additional capacity for pork should only be right in about a couple of years. So what would be your short term strategy if you're right and we do see some lower poultry demand and higher pork demand. I mean could that be a short term problem even though a great long term scenario.

No it would be a good opportunity for both we have pork and sell to bigger prices but it is going to be even better you're going to sell for a bigger price we'll have a rate increase capacity. You know we are making investments increase production. Some of it will be done in medium term and in six months we're going to have some new capacity typing in the stream part of the 2005 investment I have a mentioned to you guys and we already have said that for example (inaudible) during 2006 our biggest plant overall in (inaudible) and they have these investments for increasing in pork, chicken turkey and even margarine over there so final of the day that I'm going to say is that we are enlarging our production. We are increasing our production. Those who have incapacity will have even greater profit than those that don't have it but in any case even though they cannot increase in the short term we get the benefit of better prices because again prices will go up very much at pork and also beef if the big flu explodes.

Okay, second question. Did you achieve your target - your 30% target for management in spite of this. I mean if you are going to achieve it who does the revision of expenses already provisioned in each one of the quarters this year? Can you give us the amount that will already be provisioned so far this year or what would be the charge to the fourth quarter if do achieve it?

The numbers are already provision is in the balance sheet today. If you at today it's already provisioned there. Wait a second. What is already provisioned in our bonus that you can see in our balance sheet is related to 5% and is going to be disputed, 5% over the net profit which is going to be (inaudible) 44,000 like the blue collars. The - what should be paid for the blue collars are not year accounted because until today we are not entitled to receive it. We're only going to - if we (inaudible) which we have not had a chance time being. So if we don't get it what can change because they watching those accountings, so it's going to be zero, zero and net of place. Here in my pocket and zero in my company's pocket.

Perfect. Would you have an estimate of the amount if you do achieve your target?

That's a tough one. Rule of thumb. If we do achieve it would be the same number as last year. Get last year's because it going to be - it would be as 2004 not 2003, okay, the 2004 number. If we do achieve the target roughly that would be -

Okay, perfect. And -

- roughly that would be R$25 million roughly.

Perfect. And just as a quick question. What are you seeing in terms of prices for cooked poultry in export markets compared to raw poultry in the sense that is Thailand kind of dumping the market kind of already ended or is this still going on?

Yes, it had dumped - it had fought down very much during 2004. The Asian guys pressing the few markets(ph) very much but we forecast that this number will go up again but for the time being the absolute no way for you to get price along - price increasing to processed in Europe for the time being.

Would it be fair to assume that generally a cooked poultry and raw poultry is more like in the same price level?

It was like that. Today is not anymore but I don't know the spread. There is a spread but I don't have it by heart but I know that the spread is opening again as far as rate goes - cooked breasts where price was very closed to raw price but today is widening again the spread. But I don't know by heart I have to check it.

Okay, perfect. Thank you so much.

You're welcome.

(Operator Instructions). Our next question comes from Victor Galliano of HSBC. Please go ahead.

Yes just a quick follow-up on the CAPEX. You're talking about R$600 million reals. Can you give us a bit more sort of color in terms of where the expansions are going to be focused? Which business areas are you talking about processed pork? Can you give us some idea where the incremental expenditure is being focused?

On 2005?

Yes on 2005 and any sort of - any indication you can give us on 2006 would be great.

In 2005 roughly 40% was going to poultry production 20 into animal production, 15 into -hold on a second -- 13 into pasta and margarine and so on and the remaining which will be something like 5% in the swine. That's roughly.

Okay sorry. So let me see if I've got this right. 40% poultry; 20% animal production; 30% plus in pasta, margarine and 5% swine?

Roughly. It should be around 100 okay?

Okay. So animal production is both poultry and beef -- sorry, pork and beef.

Yes, right.

Thank you.

You're welcome.

That does conclude today's question and answer session. Mr. Murat at this time you may now proceed with your closing statements.

Well, I thank you very much for your attention and please be present at our shareholders meeting on December 15th. Those that cannot, please if you can send a representative we would very much appreciate it because we want to be sure that we're going to have 50 plus one percent present so shareholder meeting can be held and can occur and while you have to make another call and postpone the decision. Thank you very much and good afternoon. Bye.

That does conclude our Sadia's conference third quarter 2005 results conference for today. Thank you very much for your participation. You may now disconnect.