BRF SA (BRFS) 2005 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] I would now like to turn the conference over to [Ms. Lydia Bose] of Financial Investor Relations, Brazil. Please go ahead.

Good afternoon, ladies and gentlemen and welcome to Sadia's conference call to discuss fourth 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 Investor Relations section during this call. Before proceeding, let me mention 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 macro economic conditions, market risks, and other factors. With us today, Sao Paulo, this afternoon with me Mr. Luiz Murat, Chief Financial Officer. First Mr. Murat will comment on the company's fourth 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. Luiz Murat, you may now begin.

Thank you, everybody for standing with Sadia today. We are very happy to present fourth quarter and year-end numbers, which show very good improvement on the performance of our company, with record sales, record results, record exports, record dividends. As we start on the first chart, you are going to see that our revenues increased 14% year-against-year, with 51% of sales coming from exports, the same number as in 2004. As you already know, Sadia's idea is to maintain something between 40 to 60% exporting, and the opposite in internal market. This is very important for us to reduce the risks of our business.

On the next chart, please see that in total sales, most important item is process products with 44%, followed by poultry cuts and whole poultry. We are in the process of trying, or we are going to be, having a further chunk of our sales coming from process products in the future. We have already reached a very good level on that on the internal market. As are you going to see later on.

On the next chart, please, you can see a sample of export prices, and also give you an idea of what we define as processed products. From kukugigi, from the left, all these products are non-processed and from breaded chicken, right, all products are processed. Processed in our terms are products which have a grinding or a heating process and encase and most of the case is processed on the right side of the curve with the margin, bigger margins, and lesser margins on the left side with a lot of exceptions. For example, the margin I have in hot dog, which is processed, is much smaller than the margin I have in the boneless chicken breast or kukugigi, for example.

If you go to the next chart please, export prices on pork, you have exactly the same idea, when then you can see that we've started exporting pork sides, at $1,500 per ton, while I can sell a cooked ham at 3,100, and a ham, Parma type without bone, at $7,100. So that shows the aggregate value of the processed products.

On the next chart please, you'll see domestic market. That is the [resume mark] what I said on the beginning. Our idea is for Sadia to have as much process products as possible and now we are at almost the 80% level and that's what we're going to pursue on the export side and finally on the whole company also.

Please refer to the next chart with exports. Again, the most important item is poultry cuts on exports. Five years ago the most important item was whole poultry. We are changing - - already making our distribution of products - - portfolio for exports, with much better margins than before and as a result of this process, processed products already represent 10%. It was something like 2% five years ago, and pork is increasing year-against-year from 12 to 15.

The reason that we are recovering our market, that we had - - we were not able to supply in full last year as a result of the reduction in the pork production after the quota system was established in Russia. I already referred to that thing, one quarter, again I am going to repeat. Unfortunately when - - more than one year ago, when the Russians established the quota system, Sadia was forced to act in our strategic movement at that time, followed by the other four Brazilian companies out of the 10 largest, was to reduce our production. Therefore, we would reduce our losses in case that none of the product would be exported. Pork is the only really good market, 80% of Brazilian export of pork goes to Russia, and in case that these exports were halted, we would have to sell all the merchandise in Brazil. Therefore we decided to reduce our production, not to have to liquidate or to make a sale of pork in the Brazilian market, which would totally destroy our margins. Well, unfortunately, our analysis was wrong.

Two months later, the Russians found a solution for the cost of quota system and today quotas are auctioned in Russia. Therefore, two months after reducing our volumes, we had to re-speed up our exports. Therefore we had had to buy pork carcasses and pork live picks in the market. That tact brought increasing prices in Brazil and increased our costs in such a way - - that's of the most important factor why our margins were so low and were destroyed during several months into 2004. Well, in 2005, we had the opposite side and are going to show later on when we had the increase for margins, as following - - the coming back to the previous full production capacity.

Well, let's go to the next chart, Exports by Region. As a result of the bird flu, we gained even a bigger demand on the Arabian markets, so the Middle East now is back as our most important export region, followed by Europe with 24%. Also see that Eurasia made the - - Russia is more than 80% of the demand on such region, was up also as a result of our coming back to the export of pork. We keep maintaining increase on our exports to Latin America. We call it Americas, mainly Venezuela and Chile. Which has already fixed 13% market share of the total exports.

If we go to next chart and say sales all in total, you see that during the next years - - during the eight latest years, we have been growing from 8 to 11.7% per year, our average growth of sales and processed products in total. So from 2004 to 2005, we had reached a peak of 17.6% and increased of sales of pork related to the previous years, so giving again room for our better productivity as I mentioned before.

Please look at the next chart in domestic. You see that after we had taken the strategic measure of drying the supply of birds to the internal market and exporting, we lately in 2004-2005, we increased 34%, as a result of the acquisition that had been made of SoFrango. The company started operating for us in the first of January of 2005. They are - - were located next to Brazila. Well, in any case, our growth in the domestic market has been impressive, even in the process for 11.3% in the last quarter 2005, which the Brazilian economy is still moving in a very low pace, something like 2.5% on the last quarter, so we are growing more than four times general activity fourth quarter against fourth quarter. Our export market, as I said, as a result of our strategic decision to further export chicken, we had increased our exports frequently from1998 until today, but the biggest growth during all this phase is processed products, with 37% average during the last eight years. 2004 against 2005, the biggest growth was processed - - sorry, was pork, a 34% increase, as I had mentioned before, re-supplying our clients in Russia.

Next chart, please. You can see that what Sadia has been doing the last 15 years is a continuous growth, a continuous supplying for the market. While Brazil was growing at an average 2.5% GDP, the world was growing at 3.5%, and Sadia was able to grow at 8.5% during such a period. Given the priority that we are focusing on the processed products, the growth on this segment was an average 10.5% per year for 15 years in a row. This thing will be continuing in the next year, that's our forecast. So very likely, the next five years, with the growth average Brazil enrolled, something between 4%, very likely Sadia will be growing something like 12 to 15% per year, depending on the market and depending on the year. But nothing before - - nothing smaller than 12% is our forecast of growth for the next five years. Sales volume in thousand tons, I already mentioned that year against year, we increased 14%, and so please look at the next chart.

This 14.2% generated an increase of only 13.8% unfortunately. We're not able to grow our revenues in the same base as our volumes sold in the international market. With an increase of 16% on volume as exported, our increase in revenues was only about 14. That's basically done for the back of the dollar weakening in Brazil, something like more than 17% year-against-year.

Please refer to next chart that compares fourth quarter against fourth quarter. Then here is the highlight, you see that in the domestic market, quarter-against-quarter, we are able to grow 13% with the best start is the processed products with an increase of 17% increase in volumes of sales in the domestic market. Very impressive.

On the next chart, please, you see that there's 7% volume growth of sales in the domestic market, generated 11% increase in revenues. Again, now, we were helped by better export prices, 1.5 increase in volumes generated 8.2 into revenues.

Please refer to the next chart. That is about average price. Most important products sold in domestic market, roughly is processed products were 80% roughly of the share. We were unable to pass along price costs increases. While inflation during this period was of the 5.8%, we are unable to pass along price increases in our average price for processed products. Prices then reduced 2%.

Well, we believe that year 2006, we're going to have a like difference, we forecast that we are going to have a better demand in 2006 than in 2005. It is an election year. A lot of investments done by the public sector and we're going to have increase in the minimum salary over the previous inflation. Therefore, a lot of Brazilians that earn minimum salary will have a real increase on revenue. Our forecast is that this 4 billion extra, 4 billion Reais extra income - - disposable income will be used into consumer products, mainly food. We believe that's a good window for us for increasing our sales in the domestic market in 2006.

Please refer to the next chart, average price in exports. Chicken represents roughly 70% of total exports. And in that case, our average price increased 8.3%, although we had a depreciation of the dollar of 17.3% during the same period. So the consequence is that we had a very big increase in the international prices for poultry. We had had had a record prices in five years. And fortunately, this record will be not maintained for too long, or the prices are not going to be maintained at such standard for too long.

As everything in life, the prices are too high, and they are starting to go down, because they need to come back to the historical average. And unfortunately, this movement is going to be done exactly at the same moment when we are seeing a growing crisis of the bird flu, now sparkling in Italy, among other places. So very soon, we forecast that the volumes are going to start to decrease and also prices in Europe, as a consequence of this bird flu over there.

It is important also to mention that the Asian - - the bird flu is - - has brought different actions in different localities. On the first months of the bird flu in Asia, chicken produce consumption was halted. Now adays, although the bird flu is still there, the population is back eating birds. They learned that as soon as you eat the chicken, you have you no problem consuming it. You don't get sick by eating chicken as soon as it is heated before. So part of that conception, or coming back, very quickly in Asia.

In England, demand patterns have not changed. They also know that they don't get the flu by the eating birds. On the other token, we are receiving news that there is a dramatic drop of demand in Italy, followed by what had happened already in Turkey. So different behaviors, different approaches. The only thing that we believe very seriously is that any action, even those that can be short-term related to demand, do not last too long. Normally, the public return for buying this kind of [propane] very quickly, specifically in the case of chicken, we believe it is going to be even faster than the come back that we had seen on the red meat after the mad cow had hit Europe some years ago.

As you know, today, average consumption of red meat in England and Germany for example is even bigger than average in 2002, prior to the 2001 mad cow strike. We believe that in chicken, the return is going to be even quicker, for the fact that it is even less expensive meat, and for the fact also that the production cycle is much smaller, and so it is easier for the industry to adapt to demand. Therefore, we do not forecast that any crisis in the poultry can last too long.

By the way, any crisis, that this - - in fact in Asia right now, any problem on the chicken supply worldwide, or chicken demand worldwide, would hurt very dramatically the chicken-only producers and we will hurt much less, a company like ourselves, which have a much larger portfolio. If you don't have chicken, we have pork, we have beef, we have pasta, we have margarine, so we have other sources of income that are very different than those companies that in Brazil, for example, are only chicken producers for exports. If - - and most of - - some of them, are only exported to Europe.

Suppose that there is a halt or a Benny or anything like that on those guys, they are going to have huge problems what do to do with their companies, because they won't have a lot of room to put their product. That again is not our case. We have a lot of other alternatives and even some opportunities to take advantage of a slow down in demand for chicken, which will increase on the other hand, increase on other proteins like meats, pastas and so on where we are already working.

Please go to next chart, Ranking in Brazil, Sadia remains the first one in market share, with very impressive market share and the first one in all segments that we operate. Our ranking is based on sales and not in volumes for frozen, refrigerated, and margarine.

Please refer to the next chart . You see that Sadia is a very active player, releasing new products in the market. Last year, we had a launch of Sadia-branded 76 new products, more than one per week, and above those 76, we must add another 45 products which we launched for the food service, Rezende brand and SoFrango brands, all segments also explored by Sadia. Rezende and SoFrango today, brands used in a different niche of the market, related to the class A and B brought by Sadia.

Please refer to the next chart, and then you will see some of our launches. The first one shows several dishes where the Vita Soja Line, which are products with pasta, burgers, nuggets, and soya, meat-free, they are all done with soy or protein. We also have light pasta, lasagna, we have a lot of different special beef cuts, now we return to the slaughtering at our product rendering plant and we are already slaughtering more than 1,000 heads of beef per day. Very high quality focus on exports, only some cuts are sold in Brazil. The factories is selling these cuts into exports, mainly Europe.

The second slide of releases shows different flavors of hot dogs, sausages, and so on. The next one, please, give you a good idea of the second tier product that we have. That brand of Rezende, that you're seeing, and then have you the same pizzas, but with a different feelings, and different components. Same thing with chicken bits, or chicken bites, or chicken bits, or hot dogs, and so on. Different presentations and different Roma tiers for using products like Sadia.

The next one, please, shows new ice creams, also launched by our Miss Daisy, Sadia brand. The last one is the hot pocket sandwiches, which are a success among youngsters here in Brazil, which we're launching in 2005 and a new graphic design for the Qualy Margarine we have - - deliver in the market.

The last one is - - we launched several products which are done for the festivity parties, like in the Christmas season, then we;re going to have Easter and so on. So we have some line of products which are traded only specific parts of the year. But a very good success. Those are ready to eat dishes.

Next chart, please, shows the Statement of Income and it is important for you to see something. This compares 2004 to 2005, when you can see in the fourth line that our net operating revenue went up 16%, while our cost of goods sold went up 19%. Unfortunately, during this whole year, the exchange rate has been against Sadia as a big exporter, 50% of our sales is exporting, every time that the dollar gets weaker, it is an operational burden for us. We lose gross profit.

As a consequence of this thing, gross profit in 2004 that was 29.3 dropped to 27.4. But on the other side, we are doing a lot of hedge. We are hedging today, all of our hard currency balance, operational and financial balance. Therefore, what you see in the - - on the last line of financial results and equity pickup, a very big part of it - - the most part of the results there are as a consequence of the hedge that we are doing on the operational hedge. So if I lose money operationally in revenues, due to the drop of the dollar, I gain money financially.

So part of the financial results should be accounted as operational results, adding the gross margin. But as accounting does not allow it, we need to account what is now as financial gains. Well, bottom line, we had reached a 9% net income margin, record after so many years, and we also, if you will see the next chart, which is compares four quarter against four quarter, we have the same record on the quarter, with an 11.9% net income, and again, very good EBITDA for 14.2% during the same months.

Please refer to the next chart. Gross margin, after having suffered a lot during the whole year 2004, starting with almost 34% gross margin and reaching only 25 in the fourth quarter. We revamped this thing during the whole year 2005, reaching 29.6 again on the fourth quarter. Our target was to maintain SG&A operating at a level of 29, 30% average during the next quarters. If you will see, Sadia expenses to net revenue, again is a very good progress during the years '98 to 2002, our average sales expenses were something in between 19 to 20% of sales. Last year was something between 18% and now, in 2005, is less than 17%. We have forecasted the next year's sales expenses will be in line with 17% of sales.

Next chart, please, shows EBIT, earnings before interest and taxes, we had already reached in 2005 a record 641 million.

Please go to the next chart. And then you will see that quarter-against-quarter, we had made a tremendous effort for recovering back profitability, after a dramatic drop from 15 in the first quarter '04, in which only 4% resulting from that wrong decision that we had taken in the pork already admitted this fact and also the dollar that went downward for that period, well in 2005, we're able to bring back our production of pork at good standards, and also we had already harvested good results on our hedging policy. We were disappointed in the fourth quarter that our continuous trend of improvement, was halted, and as a result of big strike that damage the volumes that were forecasted for exports. That was a major strike done by the vets in Brazil, [equivironmental] vets which is an - - made us possible to export all of the volumes that we had forecasted and we had order, all the [claims] we had to order.

Well, if you go to net income, please, you will see that since '98, 2005 is our better result, with 9% net margin over sales.

Next chart, please, you will see that in the fourth quarter, again we have our record on the last eight quarters, reaching 11.9%, continuous increase from several months, several quarters in a row. EBITDA, unfortunately, we're not able to meet the tier 13% EBITDA margin that we're targeting for 2005. Again, that's a result of the frustration of results on the fourth quarter related to what we had forecasted.

If you see the next chart, please, it is the quarter per quarter, you will see that after losing the profitability from first quarter '04, reaching a ridiculous 8% in the fourth quarter, since then, we have been catching up again, and unfortunately, we are halted that increase in the fourth, as you can see from second to fourth, that increase was more than 3 percentage points. And we thought that we were going to have the same type of growth in the fourth, but we are frustrated by the strike, as I mentioned before.

Please go to the next one, is Capital Expenditures. And after investing something like 100 million Reais in the years 2001 to 2003, roughly the same amount as depreciation, we started a new investment phase in said year, investing 246 in 2004, and more than 600 in 2005. These investments were done primarily on the bottleneck, our plants, in such a way that big increases in production can be done, which are very small amount of investment per unit.

Now, the new phase started in 2006. Starting this year, we are going to make three new greenfield plants, two for poultry and one for pork. The three of them will get in the State of Mato Grosso, in the very center of Brazil where is the place have you the least expensive corn and least expensive grain in all of Brazil, which by the way must be the least cost potential worldwide very likely.

We have plantations, we have already mentioned that to the market, of such construction in the next 2.5 years. This is going to require 1.5 million Reais of investment, which of course 800's going to come from Sadia and 700 will be coming from outgrowers, farmers of the region, which are going to get financing themselves from the banks and build the production houses and produce animals for us. We produced the [one-day pigs] and the 10 kilograms piglets and we supplied to those guy for them to make the animals grow and get fat and then we turn them to the slaughtering in our facilities.

The next chart shows only the growth month per month.

And please go to the next chart. I told you in two charts before that our increase of investment was from 240 to 680. So that makes more than 440 million Reais of the investments. Well all of this investment generated a increase in our net debt of only 100 million Reais from 316 to 417. Very small considering the debt, very small considering our cash enarration

Important to say is that some years ago, during the years 2001 to 2003, our average net debt was around 2,000 - - 900 million Reais, and we reduced it for almost one-third of that number, and 2005 against 2004, we had also obtained a very good victory. Our net debt today is primarily 6.8 years against five years back in 2004. So a much better terms for our financing than before. Our value at risk from our activities is very small, only 3%. Totally in line with our limit of at most 10% serviced by our board.

Next chart, please. You will see that the increase of 100 million in our net debt doesn't cause our numbers any harm. We are still at 18.8% net debt to equity. A very, very comfortable with our international standards. If you can say something right now about this, is that we are under-leveraged. 18.8 in our industry is very under-leveraged compared to our peers wide.

Same thing relates to net debt, EBITDA. Some years ago back in 2000, we had reached a point where we were holding the bags of four times our EBITDA. Today, we need less than half of our EBITDA to pay the net debts.

Well, we're very proud that this year, we obtained approval from the U.N. for our pork. We call it Sustainable Swine Program Sadia, 3S Program, where we are investing into equipment to recuperate the methane gas from the manure of pork, and after burning such gas, we generate carbon credits. This carbon credits are very well looked today, to national companies, many European, Japanese, and Asian companies, which need to be in line with the requests from the KYOTO treaty. Europeans, Asian, on this specific are much more advanced than the Americans related to the protocol. And therefore, they are looking for companies like ourselves that can generate the credits. They buy our credits for them to supply their depth of sustainability in their existing countries.

We have 3,500 pork producers working for us, of which 1,000 are already approved. And they are already in the process of having equipment installed in their properties. This equipment is financed by the banks. Sadia Institute gets - - buys the equipment. They make the investment in the producer property. It is our forecast that in five years time, the credits sold will be enough to pay back the investment done. And from sixth year on, annual income coming from more sales of carbon credits will be used by the outgrowers to make his property even more sustainable, treating the domestic garbage, treating the water fountains, soil erosions and so on and so forth in their properties. So making it a matter of environment for real.

And for the year we obtained a very good achievements this year regarding corporate governance. Since September, Sadia is the only Brazilian company in our sector which is part of the IBOVESPA index. Also in December we received okay from our shareholders and today we have tag-along rights of 80% granted for the preferred shareholders, right to receive 80% of any price in case that the controlling shareholders sell their stake, their controlling in the company.

We also obtained prizes from APAS, Brazilian Association of Supermarkets, as a prize for - - with our year - - awards for our product, which is the smoked bologna. We also received a prize from the Brazilian Association of Sanitary Surveilance Professionals, receiving a highlight in the Consumer Communication Channel for 2005. We received another prize Sao Paulo Association of Supermarkets, the winner in the frozen, refrigerated, perishable segment for best product, service and professionals. We also receive from Radio Bandeirantes, ranked third in quality sector on the brands that most respect consumers. Sadia, there is a lot of orders like that.

The other pending slides refer to the opportunities that Sadia has related to development of our industry. Resuming all the next slides, I am going to say the following. n the last years, Brazil gained the first place, as the most important exporter of chicken, due to very good standard of quality, and good prices of the Brazilian producers. We forecast that the same situation will happen also in the pork production. Brazil is still a very small producer of pork, which by the way is the most consumed niche worldwide, and we look that there is a fantastic opportunity there to be explored.

Also, we forecast that with the increasing fear of the bird flu and so on, some consumers will increase their consumption of beef and pork. Therefore, the fact that Sadia already operates in these segments, will open a big opportunity for us to explore.

We already told everybody, we're very proud about the past, so let me make some comments about the future. Very likely it won't be possible to maintain the same prices international as the ones that we have had, international mainly in the chicken business. Prices normally are adjusted for [reaching] a pig - - and just also due to the supply and demand resulting from the new bird - - bird flu crisis hitting Europe. The other talking we do not forecast problems to sell in the Brazilian market. On the contrary, very likely we're going to have good opportunities mainly in the second semester, very close to elections when the result of new investments done by the public sector, plus new minimum wage greater than inflation during the period, will all enhance demand in the Brazil market. Also, we do not forecast that in the internal market we will have any problem maintaining prices, and it could be that if the demand hits up a little bit, also it will be possible to pass along some price increases, which were retained from last year that we were impossible to pass along the price increases as a result of the inflation as already mentioned.

The present bird flu is a big concern for us. We are not sleeping on the subject. We're working very much to take several measures in the way to discover alternatives that would reduce the impact of the smaller prices and weaker demand for poultry. Again, we are exploring a lot for our processed products, our pork, and our pasta, our margarine, and our cattle production exports. We do not forecast that our most important cost item, which is grain, will have any behavior of inflationary costs in the future.

On the opposite, if we forecast anything different for the present standard of prices for poultry - - for grains would be a small reduction on the standards. If there is a real slow down of chicken production worldwide, Then that would interfere in the lower demand for grains also, therefore, maybe reducing prices for grain. We are bullish on the domestic market, as I mentioned, and we are cautions on the international market. That's the position that we have today.

I am open for questions, please, first question, go ahead please. Thank you.

Thank you ladies and gentlemen. We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Tufic Salem with Credit Suisse. Please go ahead.

Hi Murat, how are you?

Fine, thanks.

My first question is regarding prices. You've mentioned about how you're a bit cautious on the outlook. And can you give comparisons of what you're seeing today and also what you expect for the whole year in terms of prices in dollar terms from what you're seeing today? I know things can move around a bit. But what from what you're seeing today, what would you expect?

It is very difficult for me right now to make any projection on that, or make any forecast, so if you want to have something, please take my historical numbers in the past, take 2004, for example, numbers, and that's a good standard that we could see that could be an end. We don't know how far the level will be. We don't know how speedy the adjustment will be done.

The only thing that we are sure is that the record price obtaining 2005 will not repeat in 2006 internationally. But as you can imagine, we are struggling as much as we can to avoid certain changes on the prices, but there is a limit for that. We also have volumes and we and all the industry, and so we have to keep balancing what we need to sell, in terms of volume versus what our expectations are in terms of price. Sorry, I cannot give you any more than that, but we also don't know. Things are too fresh.

The news are still starting to appear, and the real demand situation in Europe is not clear yet, and also, I want to make a comment, please do not read only one source of information at this stage. When you have a crisis like the one we're going to see right now, if you read just one, maybe you're going to have something out of focus. For example, maybe are you going to see that it says in Europe, demand is going down 50%, just for the heck of it. Maybe in one city in Italy, that is true. But not true for the whole Italy. And it is absolutely not true for England. So please be careful looking for information on the next days, but on the other token, prices are slowing down, but we don't know how far it is going to go, and where it is going to end. Okay?

Okay. And I guess my second question would be, with that more conservative outlook, you've also mentioned - - you've put a more aggressive target of improving your EBITDA margin by about 1 percentage point for the next two years to get to about 17%. Could you please comment on the type of assumptions that you're making to get to those margin?

Okay. Let me come back a little bit. For several years, our EBITDA margin was around 9%. The latest three years average was 13%. y the way, if you see the average, in the U.S. companies in our sector, is something between 8 and 10.

Why our EBITDA margin is already larger than some of our competitors in the states? Well, we have a very different portfolio from a lot of them. We are not a poultry company any more. We are - - poultry is one of our products and one of our raw materials. Hold a second please.

So we made the comment of the 13% bottom limit for the next years. We made that comment back in December. We still refer to that, and we still confirm that looking in a long-term range, I'm talking about the next five years, or - - we still have the target of getting to 17 by the year 2010. How come?

Well, we're making changes in our portfolio to make our portfolio each time more rich. We're making investments in such a way to reduce our fixed costs each time more. We are going to be putting in more processed products in some clients, which given a better margin than some others. So we are cherry picking all the segments, products, and markets, and we are making our expansion plans, and we're making out strategic move, our operational moves, all based on such target of enhancing results.

And the outcome of those thousand different actions done in Sadia results in a long-term planning for the company. It shows feasible for us to get to 17. There is not only one action, as I said, again. There are several actions.

In short sentence, we are making our product portfolio more profitable than it is today, with clients and channels much more profitable today, with costs reduced per ton as they are today. Due to the much larger volumes that you're going to have. That's the name of the game. Okay?

Okay. And just regarding that same question. Is there like any specific targets in terms of how much is going to be processed versus commodity type product that you want to get to 2010?

No, we don't - - sorry, let me answer one by one, because I'm getting older and forget questions at the same time, okay? We don't have a specific target. The target is we want our pizza to be as much as[blue] as possible. You know what 'm talking about.

Mm-hmm.

In terms of revenues. If we would, - - the target would be - - if we - - at a certain point we would have 80% of the Sadia sales would be out of processed products, that's fantastic. Very unlikely it is going to be 100 ever in life because there is always going to have some products that will have to sell without being processed, okay? Don't forget we are an dis-assembling company and so when you slaughter an animal, sometimes you have some cuts or some parts which we are not going to transform into processed, and so they must be sold as they are.

Well, we don't have a time frame for targeting 80, but we're aiming 80 as soon as possible. And as you can imagine, in specific phases, like this year, we are going to have a lot of effort, a lot of forecast on this segment, because selling for the process right now is a very good hedge, a very good answer for the years against raw chicken, okay?

We have already seen this game done by the Asians. When they had the bird flu, the first month, they had halted the exports. Today, they're exporting the same amount that they had before, with a different product. They are not raw chicken anymore. They are all baked and once sold, they are processed, in one way or another. That's why we're looking so much. And that's why we also not only are looking for process, but looking for different segments. We're giving a lot of forecast into pork and as I said margarine and beef to reduce our risk in the future.

Okay. And just to make sure I got it right, you said that without pointing to specific years, shooting to about 80% processed, 20% potentially other commodity products, right?

Yes. What I'm saying it is not commodity, but it is leftovers, not leftovers is not the right word, but it's components which were not transformed into processed. For example, if I have pork tail, I cannot transform all pork tail into something, I have to sell for those guys that eat fish items in Brazil and they are traded such, as pork tails and they are raw, so it is a raw item, not processed.

For a long time, the - - our Asian countries will keep consuming raw one kilogram bird, which is almost half of the typical bird that we eat, well, that's cultural thing for them to eat small birds whole, and they like to have it raw, because they want to do it their way, the cooking, the barbecuing, and so on, so therefore, we are always going to have products which are not going to be processed. All right?

I understand. Thank you.

Very welcome.

Thank you for your question, Mr. Salem. Just as a reminder, please limit yourself to two questions only. Our next question comes from Margaret Kalvar of Harding Loevner Management. Please go ahead.

Hi, good afternoon.

Hi.

Hi. Two quick questions. Hopefully quick. First one is, do you see yourself as capacity constrained anywhere in the next two years while you're in the process of doing these additions? Do you expect that you will have lost sales as a result of not having capacity come up quick enough? And then if you could also comment on something that you said regarding domestic companies that were purely chicken producers and had exported, now may be having to turn inwards more towards the domestic market, do you see this as a threat, and are you taking any action to enhance your competitive position?

Okay, let's start from the end. Okay, in fact if - - and there are some small companies in Brazil, small chicken producers only that are exporting. They already sell in the domestic market. And they export also. Some of them had increased a lot of their export activities.

Well, if there is a halt in Europe for imports, and that could happen, well, those guys would have to sell into the domestic market. So no doubt, they would reduce the price of chicken in the domestic market. Again, and for us, it doesn't hurt too much because we are not a big seller of chicken in the domestic market anymore. The chickens that we sell here are processed chicken. We sell nuggets, breaded and so on and so forth, so it doesn't hurt us too much.

And by the way, that was one strategic decision we have taken some years ago. Back in '98, we were selling 300,000 tons of chicken in the domestic market. Last year, we were selling something like 100-something. Why? Because during all these year, we decided to dry out sales of chicken in domestic market, and rather export them due to the fact that we could not compete with a lot of producers selling chicken here without invoicing, without good standard of quality, and having 20% water content on the frozen chicken, while we have 6 to 8. So it was a non-fair competition, which forced us to find new way for our products.

Therefore, if tomorrow they have problems on exporting, they will have to turn in and sure, they will damage the domestic price for chicken. No doubt. The argument I put here is that they - - if they lose one month or two months, they will not lose more than two months in a row. Because very quickly, they are just themselves surprised by the demand.

The chicken industry is very quick, don't forget we produce one day chicken to Arabia in 37 days, we produce 47 birds to Europe in 47 days. So any change in demand, we can very quickly adjust ourselves.

Okay.

And we forecast that the independent producer will do the same - -

Okay.

- - as a consequence. If they reduce, and the market catches up, then it is going to be a good opportunity. But if they keep reduce reducing, then they are going to be bleeding like crazy and some of them will be having to close their doors. If the crisis, the chicken crisis enhances and gets to big, the chicken producers only will be in harm.

Okay.

Yourself first question, can you repeat it again, please? I forgot it.

Yes. Do you so see any prospect of being capacity constrained over the next few years as you are in the process of building the new plants?

Yes, thank you for the question. No, - - well, this can always be possible, but we don't see that with a lot of possibilities. Probably each of that could be a big - - not supplying of our customers is not foreseeable for us at the moment.

Okay.

Don't forget, the last two years, we had been investing and we had been investing in the bottleneck of some of our plants so a lot of our plants are already enhancing their production capacities. In the old factories, the bottlenecks, and then they will be increasing from 15 and sometimes 20% of their capacity. And then after that, we are going to have the entrance of the new investment, and so when I'm going to be reaching full capacity on this existing bottleneck process, then I'm going to start producing in the new greenfield plants. Unless there is a major mis-balance of the market, which by the way can happen.

I'm going to address that again. Suppose that the bird flu in Europe gets very strong. So what's going to happen is that the industry in Europe will have to reduce dramatic their production.

Mm-hmm.

But at a certain date, the virus is going to be over. They're going to clean. And then the market, the customers are going to start buying chicken again. We forecast that in Europe as a specific, a lot of producers, which will shut down, will not come out.

Mm-hmm.

Because a lot of them are not economical anymore. They were producing only because, well if they're in the business, let me keep going, but their margin is so low, they're going to have such a hit on margins right now, that we forecast that a major hit of Asian flu in Europe will reduce even further the European production on the next year's.

Mm-hmm. Okay.

Opening new opportunities for us.

Okay.

Sorry, I'm going to be aggressive right now. The Europeans know already, they do know that the bird industry in Europe has no future. They cannot compete with countries like Brazil where they have grains, labor and energy units per ton much lesser than in Europe. Our winter is much milder. Brazil is a large exporter of grain and so on and so forth. So it is only timing when they're going to be excluded from being a chicken producer.

Mm-hmm.

They very likely will be maintained as a niche. Maybe a specific bird for a specific region, a specific cut, or something like that, but very bulk, we don't believe that it is going to maintain. It has already happened on exports, okay?

Okay.

They are out of the export market already.

Okay.

Okay. Thank you.

Thank you for your question, Ms. Kalvar. Our next question comes from [Alvara Grussman] with Investment Asset Management. management. Please go ahead.

Two quick questions too hopefully. The first one is in relation to you being able to actually pass inflation in your process products, say in Brazil. One tends to think, without knowing the condition of the country and looking at it from abroad, that with such a big market share and being such a duopoly between you guys and [Predigow] that you must be able to, let's say, maybe not in a concrete quarter, but in a year-by-year with the system, to pass on the inflation, what's your take on this?

You're absolutely correct. You're very precise in your impression.

Okay. And the second question is [grammos one] let's say, about the tax rate. I think that the tax rate is pretty low, actually. Would it be the sustainable tax rate looking five years from now?

The fact that Sadia takes advantage of a lot of tax planning, would take advantage of the fact that we are - - all of our hedging is done for example in offshore Brazil, and so results of hedging are not taxable. They are occurring in places where we don't have it. We also take advantage of Brazilian law, that says that when you pay interest on capital, you deduct that interest from your tax base.

That's why in the fourth quarter, we see our equity, the Brazilian law permits to you calculate what was the historical correction on such number and you can deduct that from your income tax. So we take advantage of these. Also in - - so we pay as interest on equity, we don't pay as a dividend, part of the dividend, we pay out as interest on equity, because doing such, the Brazil law permits you to have this tax grant that are you using.

Third, and very important fact, the legal - - the tax system in Brazil is wild, crazy, absurd and illogical. I don't think I forget any other adjective, Okay? Therefore when you have all of those things, you have people who are smart, intelligent, who work hard to try to find windows in all of those things, right? And we take advantage - - we take advantage of a tremendous tax war in between states.

For example, if you produce, or sell into Brazil, you have a bigger taxation than if you produce to exports. But if are you making a brand new plant in a country, in a state, the governor can give exemption of tax when you're selling in Brazil. So I think you got my message.

Okay.

When do you a new investment, do you for selling in Brazil and then you get old plants and you export everything, so you get relief on one tax and you don't pay the other one. So there are all those windows that we take advantage again, due to the huge amount of operation that we do in this crazy tax system established in Brazil.

Okay. Thank you.

You're welcome.

Currently, our final question is from Benjamin [Abromoff] with Leucite Please go ahead.

Hey there. There my question is in regards to cost of goods sold. Cost of goods as a percentage of sales has gone down tremendously in the fourth quarter. How much of it is a result of the cost-cutting measures, how much of it is as a result of grains being costing less in Brazil, or buying less live hogs on the market?

You mentioned on the fourth quarter you mean?

Yes.

Hold on a second, please. Important, very important item, on the fourth quarter, we didn't have any more. The very negative impact of having to buy pork at very expensive prices, as we have done in the previous quarters, you know what I'm talking about?

Yes, I am.

So as we get rid of that thing of buying in the market, it has helped us to maintain prices down. Second, we've managed with great success the grain situation. We had forecasted that the grains were going down, so we maintained very low inventories. And we were able to buy each month at a lower cost related to the previous one.

You know, by the way that presently, there is a big discussion in Brazil because most of the farmers are having problems, because they are not having flexibility on planting. And well, bad luck for them, and lucky for us at this moment, we are able to buy at low prices, lower prices in the fourth quarter than we had in the third quarter.

So that combination of less buying, where we stop buying expensive pork in the market, then the pork slaughter was produced by ourselves ,which are much lesser costs. And second, we are able to buy grains which are lesser costs than previously.

On the revenue side, we were - - we had the effect of better process - - better product mix, resulting from sales of party products that we do and we have a much greater margin, also.

Thank you. In regards to pork, can you guys meet your meat production in the future with your current capacity?

For the existing Sadia, we are already balanced. For the new Sadia, which is a resulting from the investment that we're doing month gross with the three new plants, we are making a project count which a 100% supply from out-growers. They are already being searched. They're already being listed. And they are already in the process of getting financing from banks. They are going to be the producer for us.

We are going to be supplying the [one-day pig], or the 10 kilograms piglet and they are going to do the growing and the feeding of the animals, 100%. On Mato Grosso, we are not going to be forecasting buying anything. And there is no buffer for catches for the market in Mato Grosso. It is going to be everything supplied by ourselves.

Also, is it safe to assume that pork exports will be one of the best growing segments for Sadia in the coming year?

Absolutely correct and thank you very much for this question. Let me address, this is one of the hiding jewels that we have in Sadia. We forecast in the next years to come, especially in Brazil, we explode as an important supplier of pork worldwide. Today Brazil is a very small producer. We produce only 2.5 million tons, while the states produce 9 million tons, Europe 24 million tons, and China 47 million tons per year.

Well, the fact is that we forecast that Brazil will grow very quickly for the fact that nobody can beat our cost of production, because the same advantage that we have for chicken, we have for pork, also. You know that Brazil is already the largest exporter of soy worldwide, and piglets are -- or pigs, as chicken, are fed with corn and soya. And all of those products have a very competitive advantage of producing in Brazil. Therefore, we do believe you're correct that not only that we have the costs, the structure, the geographic capability, we don't have any environmental problems, as you have, for example, in the Holland and Benelux region, we don't have any problems to concentrate on big production in Brazil, but in the other token, our crystal ball shows that in the next future, we will have expansion of eating of other meats. Also giving ground for any time that a bird flu strikes, the guy will move to this order, and this order will be beef and pork again. So that's what we are looking for. You are absolutely correct. Pork will be a good alternative for Sadia and Brazil as a whole.

Last quick question. Did you give any guidance for CapEx for the next year?

850 million.

Thank you very much.

Thank you very much.

Thank you for your question, Mr. [Arbamoff] Our final question comes from Marcella Newman with BEA securities. Please go ahead.

My question is regarding the gross revenue deductions which is the difference between gross and net revenues, which have been falling constantly. It average around 14% of revenues. In the last three quarters, it was something like 12%. [Inaudible] deduction recurrence. Could you elaborate a little bit more on that?

Can you please repeat your question. We had a problem understanding what you are saying.

Yes. My question is regarding the gross revenue deduction which is the difference between the gross and net revenues.

Oh, okay. Let me understand. What you are saying, that for example, in 2005, net operational has increased of 16%, was gross operation was 13%. Therefore, we had a reduction on the deductions that we're talking about, right?

Yes, exactly. Well, it was very low. And I was wondering if there was something about it.

I'm going to refer again to the same argument I said two questions ago. I don't remember who did it. We are rationalizing our tax system.

Okay.

We are avoiding paying some tax that we used too, and we are doing this rationalizing where we produce, and we are transporting or not transporting some items in such a way that the net effect is less tax.

Okay.

I repeat for you, you know that, suppose that I have a company that is only sells to Brazil.

Quantication, yes.

We pay average 12% of EVA, value-added tax, right? If two company, exactly the same product buy from the same producer, et cetera, doesn't sell anything and exports everything, he doesn't pay a peanut.

Oh, okay.

So that's what I'm talking about. It depends on your break down of how much to export. And more. From which plant you're exporting. If you are in - - let me elaborate just for a second. If are you in the state that you buy everything, all your raw materials, and you are only exporter, you sit on a lot of credits that you cannot use them because have you no way to pass along the credits that you receive on value added. On the other token, if you don't buy too much, but you generate production in one state, and you sell a lot, then you generate this value-added. So the art here is for you to make your production in such a way that it can match your credits which are debt off EVA. Is that clear?

Yes, Okay. So we could assume that the current level's recurring.

Say it again.

So we could assume that the current level, low level of gross revenue deduction is recurring and we should expect the same level for the next few years.

Yes, yes, the present level is the same for the next.

Okay, thank you.

Thank you for your question.

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

Okay, we thank everybody for all your attention. Our [inaudible] is ready for any more [inaudible] if anyone wants so, Thank you for your attention and good-bye.

That does conclude our session of fourth quarter 2005 results conference for today. Thank you very much for your participation. You may now disconnect.