BRF SA (BRFS) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and at this time, all participants are in a listen only mode.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mr. Thomas Karsten of Financial Investor Relations, Brazil. Please go ahead.

Thank you very much ladies and gentlemen and welcome to Sadia's conference call to discuss the first quarter 2006 results. I'd like to mention that a slide presentation has also been made available during the call on the company's website at www.sadia.com under the investor relations section.

Before proceeding, let me mention that forward looking statements are being made under the Safe Harbor of the securities litigation reform act of 1995, therefore, actual performance may differ materially from that anticipated in any forward looking comments, both with macroeconomic conditions, market risks and other factors.

With us today in Sao Paulo is Mr. Luis Murat, the Chief Financial Officer for the company. First Mr. Murat will be commenting on the company's first quarter 2006 results and then afterwards he will be available for a question and answer session. It is now my pleasure to turn the call over to him. Mr. Murat, you may now begin sir.

Thank you very much and good afternoon for everyone. First, the information that we had given right now to the market is not the one we would like to. Performance on the first quarter, very bad, resulting from various conditions on the international market mainly due to the bird flu and restrictions from exports to Russia, imports to Russia from Brazilian products.

But in the first chart, you are going to see quarter against quarter our revenues went down 8% and the result of lesser export than forecasted, 58% of total revenue was coming from the domestic market against 52% in the same quarter last year. This situation is transitory, we forecast on the second semester, things are going to shape up again.

Please proceed to the next chart; I'm going to give you a lot of information on the latest financials. First, we see the gross margin had arrived to a very low 22%, the lower margin that we can recall from several quarters or even several years. On the next chart, please, refer that we had 1.4 EBIT margin, also a very small number related to the previous quarters that we had also seen lately.

Next one is net income, the same thing, 4.4% net income margin. It is as low as the one that we had had in second quarter '04, also again pointed out of the curve]. Please refer to next one in detail, 5.5 EBITDA margin, even lower than that very low one that we had seen in the fourth quarter '04.

And the next one is the net debt as a result of low profitability, lesser revenue than we expected, our net debt has increased to 745 million Reals, is still very low in terms of net debt in terms of equity. Our 745 million net debt is due in 6.8 years in average, which is still very good. If we see the next chart, net debt to equity, we are very below limits established by our board of 50%. Right now we're seeing 33%, and these numbers are still very comfortable.

Please refer to the next one, net debt EBITDA and we need 4.9 EBITDA to pay net debt or is still very comfortable. On the next one [value at] risk with 95% comfortability, we have 5.1% of value at risk, very below the 10% limited established by our board.

Highlights, gross operation revenue debt 8%, gross profit went down 20%, gross margin of 22 against 25, our EBITDA is only 21 million against 110, net income is only 67 against 100. The recovering from EBITDA net income is resulting from a very positive financial result, resulting from the hedges that we had been using lately as you all know.

EBITDA is 82 million, about half of that EBITDA than we had last year and that's all the information we had on this page. Please, next one. Refer to gross operation revenue. And see that Processed Products remain 51% of our total sales. Please note that we increased, we have included this as a new business unit for Sadia from now on.

Next chart please refer to the domestic market. Sales are up 3% quarter against quarter, concentrating 80% of sales into processed products. Same thing related to beef now 2% of total sales in Brazil are related to beef.

Next chart, look at exports, we have a drop of 20% in revenues, mainly caused by reduction in export of poultry and pork to Russia. Note that we also included the beef section in here which already represents 5% top total sales in international market.

Next chart please, export by region you'll see that the most important change was in Eurasia. 80% of Eurasia is represented by Russia and Russian exports dropped very much as resulting by limitations established by Russia into Brazil.

Only production made prior to December 15th were able to be exported, therefore we reduced our exports to Russia, our sales of pork to Russia. Normally Sadia exports 30% of total exports of pork is done by Sadia to Russia. And last quarter, only 10% of the total was represented by Sadia. We're not able to export as some of our competitors have done.

Also we were able to export to Americas mainly Venezuela, as a way to sell merchandise that was not able to be exported mainly to Arabian countries like Iraq which ban total export -- total imports of poultry. Also, we redistributed in the domestic market some chicken [inaudible] exported for Europe. The reduction of demand due to the bird flu in Asia and Arabian countries and Europe forced ourselves to sell more in the domestic market than we had planned.

Please refer to the next one, that chart shows that we had 20% of the market share in terms of our exports of pork to Russia, dropping to only 10%. We are very disappointed with this number. The only new thing, new information is that since two weeks ago, Russia admitted that [inaudible] state in Brazil is able to export once again and we have one facility over there. So we're resuming our exports from that plant now on.

Next chart now, you'll see that chicken exports were down since December '05 to now 40%, pork exports went down 32% and beef went up 15%. I'm talking about Brazil as a total. If you see in terms of revenues, chicken was down 38%, beef is up 18 and pork is down 27% in revenues.

Prices, in the next chart and please go straight to Brazilian chicken exports in chart number 20, when you can see what had happened with international prices of poultry. Unfortunately, two things got together at the same time. First, we had in the year 2005, record prices of chicken resulting from the bird flu. Later on, after reaching a peak of record prices, prices normally go down and then this process was helped by bird flu in Europe and Asia and Arabian countries which pushed prices down very quickly.

From an average export price of $1,400 in December, average spot prices of chicken in Brazil was only $1,033, no doubt this reduction in prices has affected all the reduction in demand all over. This process unfortunately is not ended yet. We're going to see that average price in dollars on the second quarter is going to be lesser than average price in dollars for the first one.

Why? Well, although we have seen that the crisis in my point of view that is that the bottom in terms of international demand from now on we believe that trend is going to go up, prices will also go up. The problem is that it takes something like three months for the prices to show on exports.

So merchandise exported in the first quarter is with prices settled in the fourth quarter. Same thing with the second, prices settle in the first. Therefore, we believe that in the second quarter, we're going to have lesser average price for poultry than we're going to have during the whole year 2006.

Please look in chart 31, that our volumes in sales in total went up only 0.6% which for 128,000 tons. We were able to grow 7% sales in the domestic market, while we had a reduction of 5% in the exports. Most important reduction was done in processed, -- sorry in pork in terms of percentage wise, due to the Russia restrictions as I told you.

Processed products reduction was only a fact of change on exports that we have done to Venezuela. And instead of exporting [inaudible] and bologna as we had done previously, we exported more poultry this time. That's why we had this trade off. In terms of revenues, on chart 22, you'll see that we generated around 8% less of revenue than the previous quarter, although we had increased 0.6% our volumes sold.

In domestic market, revenues went up almost 3% against 7 in the volumes. But on exports, only a drop of 20% in sales against 5% volume sales. Average price in the domestic market, the most important products sold here are processed, 80% of the total is processed and prices went down 2.8% first quarter against first quarter. During this period, inflation was almost 6%.

So we were enabled to pass along price increases. On the international market where poultry represents 70% of the total exported, average price went down 19%. It's important to say that during the same period, the dollar devaluated 17%. So quarter against quarter, the most important factor here was not related to the [inaudible] in dollars but the exchange rate.

But when you compared fourth quarter to first quarter, things are different. We had a drop in Real prices of 18% with a dollar drop of only 4. So now we are seeing the dramatic drop in prices as restated [inaudible] behind.

On chart 25, we remain the most important supplier for all segments and we're very happy to say that during this first quarter, Sadia obtained also the leadership in the Sao Paulo region. That was the only region in Brazil where the [inaudible] margarine was not the leader. We were the leader in all other sectors -- in all other states of Brazil, but not Sao Paulo, now we are the leaders here, we're very proud of that.

Chart number 26, we're see a resume of the launches, we had decided to slow down our marketing effort into new products and concentrating our market exports into an existing products lines. Therefore, instead of launching an average of one product per week as we had done in past, since '98, we launched only seven products during the first 14 weeks of the year, 13 weeks of the year.

Chart number 27, it's a resume of all types of products we had launched, there's a new lasagne, three different types of margarine and some special [inaudible] specific for the food service clients.

Chart number 28 please, please note as I had already mentioned the gross operational revenue, 8% down, went down 8%. Gross profit went down 20%, EBIT went down 81%, reaching only 21 million against 111 million in the first quarter. While, the recovering of what has been increased our results was the financial contribution. As you can see here, financial reporting, equity pick up, that was minus 4 million last year, now was a positive 54 million.

Why is so? It is resulting from very positive results of the hedging. We are hedging our exports, where most of our exports are made in dollars or euros and we hedge ourselves against the valuation of such currency. Therefore, we are gaining these financial results. Net income, bottom line is 23% less than last year, reaching 67 million against 100 on first quarter '05.

The expenses, we have been working very much to maintain them although this 19.2% represented now on chart 29, we understand is a point out of the curve, is resulting from lower sales than expectedmaintaining the same structure. We believe that normal [inaudible] pattern for our sales today is something between 17 and 17.5%. That's our forecast for the second semester by the way.

EBIT, already I have shown you, result of 1.4 only on the first quarter '98, we had our worst quarter than the one that we had just now. Same thing on the net income, only before 2003 we had quarters, first quarters which are lesser results than the one we had now. Please refer to chart 32. Only back in 1998 we had a EBITDA quarter worse than the one we had now. After '98, all quarters were much better.

The world keeps consuming pork as the most important meat, on chart 34, you see that Brazil was consuming roughly 50 kilograms on the left part total consumes of proteins, now it's consuming almost 80. And you can see there are some very important opportunities. For example, China that consumers 36 kilograms of pork, 7.6 of chicken and 5.2 kilograms of beef, for example. All together, China consumes to date almost 50 kilograms, almost the same amount as Brazil's consumption per capita back in '86.

So if we please move to chart 36, you'll see that while Brazil was consuming 47 kilograms in '86, back in '04 it is consuming 82. China, in '04 is consuming 48 so if we forecast that in year 2032, China is going to be consuming the same per capita as in Brazil, we are going to have a total -- consumption of 160,000 tons of proteins. Please refer that in this chart it is not tons, it is total tons Okay?

To quantify whether this number represents this 65 million tons that we're going to be needed for the Chinese population in 2032, would represent almost 34% more than the present volume. If we take the 36 million tons required for poultry but would represent the same of today's production in USA, China and Brazil all together.

As you can imagine then, any new done by China, which is 9.5 growth cycle they are having, the demand for protein is increasing very fast and the world must be prepared for such pressure therefore we producers are looking for these new customers in the future.

We have received several different prices this year and let me now give you some information on the short run. We believe that on the second quarter, we are going to be seeing also some very poor numbers resulting from some very low prices negotiated in the first quarter.

It looks like exchange rates is going to maintain as weak as it is right now. We believe that grain prices are going to be steady where they are at right now in the short run. The only thing that is helping us right now is the starting of recovering of the Brazilian [telemarket], resulting from new minimum salary which is paid for most of retired people and almost all of the public servants in the countryside.

This [mass] of salaries will be turned into consumer products comsumption. We also see very positive the [pace] done by Russia allowing production of pork coming from here in Brazil to be entering Russia again. Sadia has a plant over there and therefore we are going to start exporting from such plant and we're going to be realizing production on the other plants into Brazil.

We believe that the battle of the prices has already happened some two weeks ago. We haven't seen any new strikes on bird flu and very unlikely they are going to happen over the next months. Therefore, we believe we are at the end of a bad cycle which are going to start changing in the second. Numbers we believe are going to be much better in the second semester than they were in the first semester.

Resulting from all this scenario let us talk a little bit about volumes. You know that in the last 50 years, while the world was growing at 3.5%, Brazil was growing at an average 2.5. Sadia was able to grow in volumes 8.5% average per year during the last 15 years, of which 11% was average growth of processed products and around 8% for the increase in sales for poultry and pork. Well, some months ago we were forecasting that our growth in 2006 was to be in the 14% range.

Now we are forecasting it is going to be at the 7.5%. We believe that we are going to be growing our volumes on export only 3% last year comparing to last one but we are going to be growing 12% domestically so average in the two markets is going to be 7.5% volume growth '06 against '05.

We're not going to see any pressure on grains on 2006, that's our forecast. Very likely we're going to have pressure on '07 if the forecast of lower acreage planted in Brazil will be true, plantation of the summer crop is going to be done on September of this year. So that's basically the scenario we have.

We have elected two new board members two weeks ago. Now Sadia board had 11 members, seven of them are independent board members and four are family members representing the controlling shareholders. We kept investing at the same pace we had forecasted. We believe that the present price will pass and very good opportunities for Brazil and for Sadia remain in the market, in the region for scenario.

Therefore, we'll remain investments at the same pace as forecasted before. These are all the information I have, I am open to questions right now, thank you.

Thank you, ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the queue, press star two.

I would like to mention that today's conference call is being held exclusively for financial analysts and investors. We kindly ask reporters who may be participating in this conference call to please direct any and all questions to the company's press relations department.

Our first question comes from [Daniella Hower] with Banco Santander.

Well, [inaudible] pretty, pretty straightforward message that you gave us, thank you for that. But I wanted to try and explore some of the things that you presented such as beef exports. You told us that the beef export prices are higher than what you see for pork and poultry. But what about the margins there when compared to poultry and pork and how quickly can you ramp up that export business?

Thank you for the questioning Daniella. We had, we decided to come back to the beef business last year and we got this other [house] back in November. No doubt, it took us three months to settle down and to really start making the moves that we wanted. We can say that right now on the first quarter we haven't been able to make this turnaround the way we want it on such business.

But in the second quarter we are going to see very good numbers on the beef business. I'm going to say something very hard and very straightforward and maybe some guys are not going to like what I'm going to say. But certainly it's been a big business in Brazil. What does make money is the slaughter house, is not the farmers. Production of beef in Brazil is very fragmented.

Regrettably, nowadays the margins for the producers is very reduced. I had been sorry to make this comment again, I don't know big farmers that became rich producing this on the last 20 years, but I know some businessmen who became rich slaughtering beef. So margins are to contained in the slaughtering and commercializing.

Well, there is no, I'm going to rephrase it, the risk to entering this business is very small. Production is all over Brazil, is very easy for you to buy it. You can be very competitive on buying at market price. If you have a very good credit standard, you can have even a more discount because some guys prefer to sell to you at a very small discount but to sleep in peace.

On the other side, international market has discovered Brazil. Prices are very strong. The fact that imported supply market which is [inaudible] our brand on exports remade the fact that place where export are possible like [inaudible], [inaudible], Argentina, and so on, they are all drinking clear water.

So the margins are very good for this water indeed for the slaughterhouse, for the trading. But they are not for the producers. That's why we believe that we are going to be growing very fast on this segment in the next future.

But compared to the rest of your exports, is that going to be higher margins or lower?

We believe that is going to be, in Egypt, future is going to be higher margins. But in the longer term, there is no free lunch. Longer-term margins offset on to the other. So we're going to have a balance. Otherwise everybody's going to be only a beef producer or a chicken or a pork. Now longer-term margins are very, are one like the other. Okay?

And in terms of the weight as a percentage of your total exports, it was only 5% in the first Q '06. What sort of long-term participation can we expect as a percentage of total sales for beef?

This is a decision that we're going to be taking the next months. We, as I told you, we had made a bet. We are starting to harvest the results of this bet. I told you that the first months we're only understanding where the business was before. Now we can see that we're starting to see things running the way we want it. The cuts to be done the way we want it, the deductions be done the way we want it, the markets still be supplied the way it we want it.

So in very soon we are going to make the decision on the right what is going to be the speed that we are going to grow? We don't have the information right now. We have good perspectives. But we don't have the numbers because this is still in discussion with things but madam as I've said later on with our Board.

But I can say speeding up is not a problem on this business. There are a lot of beef available to be bought. And there are a lot of renting capacities ready to be rented or leased into Brazil. You don't need to build a lot of new plants to be big in this business.

Okay and if I may, just ask another question on your export and domestic prices. You mentioned on the domestic prices that you have not been able to pass on any price increases in the domestic market in the first quarter. Do you plan to do so anytime during 2006? And if so, what would be the magnitude of this price increase?

And in the export market you mentioned that prices are still, can still go down further in second Q. How much further are we talking about here?

Okay, let's talk about total market first and process.

The fact, Daniella, as you saw that we were not able to pass along price increases to very competitive volumes supported by competitive purchasing. Let me address this. Prices of sausage, for example, Daniella, they have suffered a lot competition from very inexpensive chicken offered in the market.

We were obliged to supply more chicken in internal markets because some of the producers that we have produced to sell for, to send to Iraq, for example, could not be sent, instead of holding this for later boat or for overture and so on we decided to sell right now. No doubt that this contaminated the price of some product families in the process, mainly the low end products. Okay?

What we are forecasting that we are not going to have this situation anymore. We are going to start exploiting back the volumes of, increasing volumes of both chicken and pork. Therefore, our supply our pressure on the domestic market is going to be lesser on such, I'd say, raw material. Therefore, we are going to have more room to negotiate price increases on the processed one. We need to increase some prices on the processed to bring profitability back, which was eaten by inflationary costs.

By how much?

That's a very, very difficult question right now to say. We would say that it's very difficult to see the leverage. That you're going to be something over 5 to 10, not more than that at most from now until the end of the year. There's no room for more than that. But as I told you, we're going to try to at least to bring back what was eaten in terms of inflation.

Internationally, that's a hell of a big question mark, the situation is very volatile and is changing very fast. And I can give you the trend but I cannot say the exact number because we don't know.But let me give you a hint.

We believe that in the second semester international prices for chicken will come back to the average '03/ '04 prices. Not '05, which are very high, not '06 first quarter, which are going to - first semester - which are going to be very low. Not the '01, which are very high. Not '02, which were low. '03 and '04 average price for chicken is what we believe is the normal market condition. And that's what we are targeting for.

You can take your data and you can see. You just make a straight quote from now and for the next 12 months. And we believe that in 12 months time we are going to come back not in 3 months, not in 4, but in 12 months time. So in that time that we are going to be able to practicing '03, '04 prices for chicken.

Okay thank you, and good luck.

Thanks very, very much Daniella.

Thank you very much for your questions. Our next question comes from Margaret Kalvar with Harding Loevner Management. Please go ahead.

Yes, hi. Good afternoon. I had a question about first of all the employee profit sharing. I noticed it was down but is that down supposed to be proportionate to any particular benchmark? How is that determined?

And then also, it seems like a very, very large drop in EBIT given the drop in the gross margin. If you could give me a little bit more color on that, I'd be grateful.

Yes. Well, first of all the benefits for employees are fixed and so they are based on the economic value added. We have a formula established. But this formula every once in a while we do some adaptations during the year because sometimes there is some major things happening that cannot be hurting the Company alone. If there's something very strange, let's put it this way.

So for example, last year let me address this point for you. Last year a very important point for the bonus was the EBITDA margin, which was started to be very high. At the end of the year we almost got there. We are only larger than 1% was a port.

On the other side, we had made record EVA within the rate of record dividends. We had achieved a record market share in some segments. So our Board had decided, okay, we are going to compensate part of it. So we adjusted. And an important thing to say right now is that the Board system in Sadia is part of total compensation. But here we do not; we are the leaders in the market. And we do not pay for our employees every month average to quatro. We trained to pay to quatro of our payments in the year. Therefore, the bonus is important part to get there. All right?

So we took managing the payment in terms of incentive and also a way for you to charge and to control what is going on.

In this year, 2006, what we had forecasted, what we have negotiated with our Board, was again something related to EVA. Something related to EBITDA. We are seeing that we are not going to get there. That's why we had to make a reduction on the provision on the bonus from what was forecasted last year at this same time.

And we are discussing right now because we have to get this, we have to adapt the target to what is feasible. Otherwise nobody's going to fight if you see that you have impossible things to deliver. Right? So we are discussing this right now. We'll work with our Board.

Okay.

In any case, and this is absolutely important also, Sadia is not going to be a Company that is going to be surprised that it's going to having absolute and profit bonus suddenly appearing. Because there is not going to be - never going to be higher than 50% of the dividend paid in a certain year. Okay?

Okay.

But then our Board, they have the discretionary argument of enlarging or moving the target during the year in such a way to give everybody a good target. But it was something that can be achieved and cannot be disappointed. That is to say I'm not going to fight anymore because it's going to be too far away to get. You know what I'm talking about?

Yes, I do.

That's what I'm talking about.

Okay.

You had asked me something else?

Yes. On the very much larger discrepancy between EBIT and gross margin than had been seeing in other quarters.

Yes. Hold on a second please. First of all ...

Was that all due to scale in terms of the selling expenses?

Absolutely. Bingo. The problem is that Sadia has the largest distribution network in Brazil. And we need, and also sales are normally 50% to exports. If costs of sales in Brazil is larger than cost of sales offshore, we do not pay trading expenses as we do in the domestic market. I don't have to buy shelf space in India or in Arabia, as I have to do pay here for full market and so on.

Okay.

So every time that I need, and right now I have to do it for this. I had to bring some product to sell here, product where we were forecasting exports. This balance was forecasting to export much more chicken than was forecasted. And this chicken not only was not exported, but was served here at the lower price.

And second, we're losing more trading expenses because I need to pay the shelf space. The distribution in Brazil is much more higher. That's why as you can see, the short number. Hold a second. The short number, hold a second.

The short number 29, you see that it's still - let's talk about '98 to 2005. Are you there?

Yes, I'm here. Yes.

So you can see there was a trend going down from 20 to the 17%. Can you see that on the yellow curve?

Yes. Yes.

There's a trend there. So right now if you would ask me 3 months ago or 6 months I would say now we are our numbers flying higher to the 17, 7.5%. This 19% is a point out of the curve.

Right. Okay.

Because I cannot throw all my salespeople through the window. And I need to use more trading. But as soon as I'm going to increase my volumes again and as soon as I'm going to come back to export more volumes in selling percentage sales from last year, this percentage will go down to 17.5% again. That's our forecast.

Okay. Thank you very much.

You're welcome.

Thank you very much for your question. Our next question comes from [Avrena Waschnitz] with T. Rowe Price. Please go ahead.

Thank you. Good afternoon. I have 2 questions. The first one is regarding in terms of your poultry consumption. If you could comment a little bit on what you're currently seeing? And also related to that, whether, I've heard about the Russian ban on chicken imports. What is the impact for you on that? I know it's much less than for international exports, but is there an impact there as well?

And the second question is regarding margins. If you could comment on whether you think margins will decline further in the second quarter? And what do you think they can be for the full year? I know it's still uncertain, but any guidance would be very helpful. Thank you.

Okay. Let's start talk about consumption. Very weird, let's talk about internal market. Our forecast that statistics are going to show that if in the year 2004 average consumption of chicken in Brazil was 34 kilograms. We believe that in first quarter '06, if you do it in annual days, these numbers are going to go up to 40, 4, 0.

Why? Cause we had to sell in the domestic market so much chicken with such a discount that a lot of people, they ate much more than previously.

To give an example, normally whole chicken price in the terms of market in Brazil was 1 real 60 per kilogram. 3 weeks ago we sold at $0.90, so very, very cheap. Therefore, the population bought and ate a lot of chicken during this period. That's why average consumption will go up. In the same period, other consumption of chicken in international markets was reduced.

In Europe it reduced in some places. For example in Italy back in beginning of March consumption went down 50%, 5, 0 percent, up to 30% in France. No change in Holland. No change in India and U.K.

The good news is that it appears the market is coming back for 2 reasons. First reason, summer is there. People eat more chicken. They eat lighter in the summer. So, and chicken is very light. So people are eating more chicken already. Second, with the summer the conditions for spreading of the Bird Flu is much lesser. We haven't seen a new case in Europe lately and very likely is we're going to see. Therefore, the Bird Flu is almost out of the media lately. And therefore consumption is coming back.

Prices is already coming back. And as you can imagine, nowadays we have an enormous battle here. We are trying to bring the prices up. Our distributors are trying to maintain them low. But what we're seeing is that we're already closing deals this week with prices better than the previous one. We believe the next one is going to be even better. And from now on, as I told, prices are going to come back.

Our forecast is that it's going to take a while for international prices to come back at 2003 or 2004 numbers. Forget '05 numbers. '05 numbers are out of the curve as we believe that were prices on the first quarter right now.

What is your second question, please?

Thanks. The second question was on margins. Whether you think or if you're expecting the really low international prices to impact the second quarter? Whether you were expecting even lower margins then? And what different margins can be in the second half of the year?

We forecast that in the second quarter for the time being, things are changing very fast, we are going to have - in the best scenario we are going to have reserves very close to the first one.

We are starting the first month with very weak numbers. But we believe that in June we are going to have a better month than, maybe better than April or June is going to do better than May. We believe that the bottom was April. That's our forecast.

International prices are coming back. And internal demand is going up due to the new minimal wages. Roughly as we are going to come back starting pork again, our volumes are going to increase related, the second related to the first. Price is not so much another for poultry. But the contribution on revenues for pork will have to offset the reduction on the poultry.Therefore, numbers close to first quarter is what is our best number for now.

On the second semester things will be different. And then we slowly will come back to the part of profitability that we have had in the past years.

All right. Thank you very much.

Thank you.

The next question comes from Juliana Rozenbaum with Deutsche Bank.

Hi, Murat, 2 follow-up questions. You mentioned before the impact of lower cultivated areas of grain and a potential impact on prices. How long into the future do you think that this pressure on grain prices will last?

Thank you for the question on the grain scenario. For this year grains are going to remain very bullish. No forecast for a revamp on year '06.

On year '07 there's a trend that we have, going to start a shift. People are going to start looking but the Brazilians are going to be planting a lesser area than the previous years. Very likely we're going to have smaller harvest on summer '07 that we'll have in the last 3 years. And therefore pressure on grain prices in Brazil are going to start.

Everything is going to depend on how the U.S., which is a major producer, what are they going to do? For the time being international inventories are very high in both grains, soy and corn.

Therefore, only in at least 12 months time we can imagine that we are going to have a new trend on grains. A trend of prices to go up but we don't know how up this will be. There's a lot of things still to go, including what are the prospect of this new discovery of oil coming from soy, which could be rocky. And maybe this could change the grain relative prices in the future and also, the soy meal relative prices, which will go down.

So very likely in our crystal ball at the moment, soy prices, grains, could be going up. But very likely soy and meal prices tend to go down cause we are going to be turning to a by-product instead of being the important product for the grain producer.

Okay. In regards to your exports, what changes in strategy did you have before to sell high volumes of low value-added products to other countries in South America? We saw the opposite this quarter, lower volumes and higher average prices. What was the reason behind that?

Yes. The, we had to make a decision. We don't have too much. We had the same amounts at the same time. And we have decided right now to use the Venezuela market as a way for us to consume a lot of our poultry.

So we exsported less, belonging in less moderate than we had exported before. That was our tactical decision for this moment. But looking to longer term, we are only going to repeat what we have learned with the Asian producers. The way for you to reduce your risks into this new environment of sanitary risks is for you to produce further processed.

Until some years ago in that important stage you'll see our charts on the past. You know that back in '98 we're not producing as much process as today. We have been growing very much every year. You know we have been growing at 11% volumes for processed and only 8 in for pork and chicken.

Why? Cause we are forecasting that the trend for demand was to buy more processed and less commoditized products.

Well, if we still believe that it's true, now there's one more additional reason for this. Now a lot of people are going to start consuming processed products because they are more, they are less risky than raw products. As soon as you heat, as you do the heating process, you kill a lot of virus. So we believe that the world will start changing towards buying more processed.

By the way, that's in the interest of everybody present. When I sell more processed and the buyers will want it because it's practical and it's less risky.

As a follow-up question. Could you help us understand a little bit the financial results at the top of the year? How is the strategy working? But is that a strike price or any, I mean in light of the ad facts that I could use as a base to kind of forecast your earnings on the outline going forward?

What we can say is that if exchange rate doesn't fluctuate, we are very likely; you will not see moves in the financial line. The financial expenses tend to be the cost of carrying our net debt. But as soon as you have volatility, you're going to have 2 movements. You're going to have financial gains every time that the dollar depreciates. And you're going to have financial losses every time that the dollar appreciates.

We have this policy done for the next 3 months. Our policy is we see everyday that we have to pay in receiving in terms of hard questions for the next 2 months must be net. So if we are long, we sell. If we are short, we buy. In such a way that where everyday if we have a loss on selling in an exports and the dollar weakens, we are going to be making a gain in the financials and vice versa.

We don't have this forecast that you're asking now. The only thing I can say is how we do, what is our policy. But we don't have this forecast unfortunately.

Okay, that's it. Thank you.

You're welcome.

Thank you very much for your question. Our next question comes once again from Margaret Kalvar with Harding Loevner Management. Please go ahead.

Hi, again, 1 follow-up on the export pricing. On your report you had said that in dollar terms export prices were almost flat and that the decline was due to the foreign exchange situation. But now it seems as though you're saying that they had started to deteriorate and will continue to because there's a lag between the domestic pricing and the export pricing. Is that a fair description of the dynamic?

You're absolutely correct. The fact is that during the first quarter we had been exporting merchandise, which was negotiated in the fourth quarter. And the big drop was not in the first. Well it was in the first, not in the third or the fourth but the first really took to the fourth. So you are seeing this drop in dollars. Yes, when converts to reals in the second if reals remain without change. If there is a further depreciation of the dollar, there's going to be even worse.

Worse. Right, okay.

And the opposite if we have our big wish of our reals. Who know it could even compensate it? Now we are into a question mark situation. But in any case what I can tell you is that this situation is absolutely transitory. It is equal to everyone in the market. And every, the only thing we know is everybody needs to eat.

And prices, it is our understanding that it will go down, will come back to the average prices expected in year '03, '04. That's our forecast.

Okay. Thank you very much.

Thank you very much for your answers. That's all I think, right? Operator?

Yes, we do have another question.

Okay.

And that question comes from again, Avrena Waschnitz with T. Rowe Price.

Hi, thanks, just a quick question. You mentioned in the past that one of the potential benefits longer term from this crisis now is that production might actually lead the market and not return, especially in Europe. Have you seen this and is this something that can help you with the immediate or longer?

Hold a second. Would you please repeat? For some reason your voice was kind of cut here. Can you please repeat the question?

Yes. Sure. Sorry. I was wondering whether you saw some producers leaving the market, especially in Europe? That's something that has been mentioned in the past as a potential positive for the supply demand that can leave from one situation that this time crisis can relate.

Yes, no. I think we are twice as cool as you are on this. We have already asked our people to be our Sherlock Holmes, to give you this information because this is not released yet.

It was our belief that this thing would happen, that some producers in Europe would shut down, take advantage of the problems right now and change their business. Something that is rubbed down already with the sugar cane, for example, producers, which are shutting down rapidly.

But we, unfortunately we don't have this information yet. We noticed that production was down in Europe. That's a taste we already have. We don't have confirmation yet if it will go - how much this will go back to the normal previous standard. That's something that we are very intrigued. But we don't have that answer yet.

In any case, independent of if they come back right now; we firmly believe that we will be transitory. They will go out of the business one of these days. It's only a matter of timing because they cannot economically compete with Americas. I'm not talking - I'm talking about Argentina. I'm talking about Brazil. I'm talking about States. No way for the Europeans to compete with Americans in general. That's our point of view.

It's one of these days going to happen with the chicken and pork production in Europe, the same thing that has already happened with cotton, same thing that is already happening in sugar cane, and so on.

Right. Thank you very much.

You're welcome.

At this time there are no further questions. This concludes today's question and answer session. Mr. Murat, at this time you may precede with your closing statement.

My closing statement is to publicly say thank you to all of our international investors and analyst, which gave their firm support to the Company in our last general assembly.

As resulting from the action, Sadia now has 11 Board members. We have 7 independent Board members, which is the first time in all of the history of the Company. Only 4 Board members are from members of the controlling family.

The 7 other Board members are very important, independent professionals in market, which no doubt are going to help very much Sadia to enhance our corporate governance.

Thank you very much for you all and see you next quarter. Bye.

That does conclude our Sadia first quarter 2006-result conference for today. Thank you very much for your participation. You may now disconnect.