BRF SA (BRFS) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

[OPERATOR INSTRUCTIONS].

I'd now like to turn the conference over to Ms. [Daniela Urega], Financial Investor Relations, Brazil. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Sadia's conference call to discuss the second quarter 2006 results. I would like to mention that a slide presentation has been also available 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. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors.

With us, today in Sao Paolo is Mr. Luiz Murat, Chief Financial Officer and Investor Relations Officer. First, Mr. Murat will comment on the company's second quarter 2006 results. Afterwards, he will be available for a question-and-answer session. It is now my pleasure to turn the call over to him. Mr. Murat, you may now begin.

Thank you for the presence of everyone and good afternoon. Today, I'm going to make comments on the second quarter. A lot of times, I'm going to be comparing the first semester against the first semester of last year. This is very important because this first semester, we are having an extraordinary different situation than the previous years. As you are all aware, and as we had already anticipated in our previous conversation, we were forecasting that during the whole first semester, we would have tough times resulting from the bird flu and from restrictions imposed by Russia to imports coming from Brazil. As a result of these Russian restrictions to import meat from Brazil, the most important market for the Brazilian export of pork was halted. Therefore, we all were forced to sell this product in the internal market. As a consequence, internal prices for pork went to the drain and as a natural correlation, some processed products also fall to the [drain].

On the bird flu side, although the bird flu had not reached Americas, the fact that it had reached Europe and some Asian countries brought a fantastic reduction in demand of poultry all over the world. As a consequence, we Brazilians, a large exporter of poultry, worldwide, were forced to reduce our exports of poultry, also selling this product in internal market. Repeating the same consequence as with the pork, our chicken prices went also to the drain and we had an excess capacity that had to be offset by a very deep cut on prices. As a consequence of all this, the gross margin of our company, that for several years has been around 30% have reached a bottom of 20% on the second quarter, this year.

Also important is to remember that Sadia has been making [inaudible] process of enhancing its revenues coming from exports. Back in '98, we were exporting 18%. Then, last year, we had reached 50% of our sales coming from exports. Now, on this first semester, only 42% of our revenue was coming from exports. Again, resulting from the two problems as related on pork and on chicken.

As a consequence of such reduction, total revenues, six months of '06 against six months '05 reduced 10% from 3.9 billion to 3.5 billion Reals. I already mentioned to you that the gross margin went down. The most important reason was the problem of exports, the problem of price in both markets, internal and external.

All the effort done by the employees of the company on reducing costs on increasing productivity were not enough to reduce the drop of the gross margin. Even the drop on the grain prices during the last six months was not sufficient to offset the very big drop on prices that affect our revenues.

Well, a secondary effect of reducing our exports is that we had to sell more in the internal market. Well, selling in the internal market requires more sale expenses and more logistical expenses than when you export. When we export, we do not have to pay extra taxes, extra expenses to the supermarkets. We don't have to use people to make a replacement on the shelves in the supermarkets. We don't need to spend so much into a small retail distribution as when we do on exports. Therefore, our sales expenses, although they dropped in normal terms, they maintain high at about 19% of net revenue, much more than our target ceiling of 17% that we had already obtained for several quarters before.

We're very convinced that we are at the beginning of a new cycle. The bad news cycle is over. That's our understanding. The worst part of the game was during the first quarter. On the second quarter, even towards international, it started to go down, prices already started to go up, and demand, mainly in Europe, is back. Some important markets which were closed, like for our exports, for example - like Iraq. They returned to the market again. Egypt just opened the possibility to import again. And all of those markets are very high volume and it will make a big difference on our exports on the next months.

Well, resulting from very low, much lower revenue than expected and lower gross margin, all the other indexes are also worse this time. EBIT, net income, and EBITDA - they all went down on the same pattern. Let me talk about EBITDA for a second.

I had already mentioned, two months ago, that the type of business we are in with the type of products, with the type of clients, with the increase of productivity in production that we were doing, we were convinced that we have Sadia today, is a company that can operate normally at 13% EBITDA margins. That's our normal flying zone. I already mentioned, that our commitment with our Board, that we were targeting and we had made special plans and our feasible, in our point of view, plans to get to the 17 to get the margin by 2010 due to the changes in portfolio, enhancement of processed products related to the total sales, and so on and so forth.

Unfortunately, what we have seen lately is the very opposite. We had reached a ridiculous 4.4% EBITDA margin, the second quarter this year. But, again, we firmly believe that this is over. We are going to have much better results on the next quarters. As a result from worse sales, resulting from worse margins and so on, our net debt is also up. We had reached 1 billion Reals of net debt but is still very comfortable. We have a 45% net debt to equity below the target, a limit established by our Board. Very conservative on 50%. You all know that 50% net debt to equity in our business is a very conservative number and we are still below such level.

Net debt to EBITDA is 1.5 times. Again, it's just this second quarter. We must comment that we have an excess, something like 20% in excess inventories than normally, in several stages of the production and all these inventories will be sold and will be cashed, very soon. Therefore, the turning of inventories to cash and the best productivity, best profitability, no doubt, will enhance EBITDA and no doubt will bring this net debt to EBITDA down very soon.

Commenting on investments, although we had had this very bad two quarters, we have not changed our forecast of our investments until this date. We are firmly convinced that this is a phase that is passing. Alternatives, good opportunities are still there, therefore we maintain the level of investments that we had forecasted, which are forecasted for 850 million Reals this year.

During the last quarter, we already inaugurated a new margarine plant in Uberlandia. You know that this month of late August, we are going to be inaugurating the first stage of construction of Kaliningrad in Russia plant. This is going to be producing processed products for the Russian market. We are keep going with three new process plants established in Mato Grosso, two of which will be using poultry as raw material, and the third one - pork. And we are just finishing, also, a new distribution center, which will enhance our logistic and will save money and give a better service to our clients, also in Uberlandia in the center of Brazil.

Our value at risk, looking ahead during the third period of one year, with a 95% confidence is right now at 2.6% of net worth. Also, very distant from the limit established by our Board of 10%. So, even concerning all the volatility of the market but considering everything else, we still have a very low value at risk.

Our gross operation revenue has reached in this first semester 51% of our sales is done out of processed and our beef is already representing 3%. One year ago, we were not in the beef. We returned to the beef business, last November. The focus on the beef business is on exports.

If we look into the domestic market, 80% of our sales out of processed products and sales in domestic market were up 3.8% first semester against first semester '05. And on this internal market, beef represents only 1% and will always remain a very low number. We only sell some parts of the beef to some institutional buyers, we are not forecasting to be distributing our product all over.

The export market, our sales went down 25% first semester '06 against first semester '05 and the beef representing already 7% of our total exports. No doubt the 7% is a little bit high considering that we had halted our exports of pork and poultry. But in any case, it is quite an achievement already for us to have such percentage on the first year that we are operating.

Also important to note is that for last year, 15% of our sales was in pork. Today is only 8%, again resulting from banning of imports from Russia, which, by the way, are starting to come back. Some four weeks ago, the Russians permitted us to export from Rio Grande do Sul, a sovereign state of Brazil, but just now they are, Russian authorities in Brazil, checking out some other states and are forecasting that they are going to be giving permission to -- for some other states to also exports. As you know, we do have plants in seven states in Brazil, so a next opening of exports from some other states will no doubt favor our increase on exports.

Exports per region, the biggest change this first semester against last year was that Europe remained as the most important destination with 25% of all exports, Eurasia that normally in Russia, normally it was the first one with 27%, now it's only 18%. Also, is important that we are harvesting all the [jobs] that we had planted in Americas during the latest years. Now Americas represent already 19% of our total exports with our exports to Uruguay, Paraguay, Chile and Venezuela. Those places were very important now as a new market to receive products which were exported to Arabia, for example, and now we could export to some of those places, reducing the pressure on sales on the domestic market.

Sales during this first -- during the second quarter '06, we sold 2.8% more volumes than on second quarter '05. We increased 22% the sales in volume in the domestic market where we reduced 11% sales in export market. Unfortunately, a lot of those actions were not forecasted. We didn't increase sales in domestic market on poultry or pork but we are forced to do it, as I said, because we're forced to reduce exports. And the end of the day, we -- this 2.8 increase on sales volumes second quarter '05 against second quarter '05 -- second quarter '06 against second quarter '05 represented a drop of 13% in sales. So this is resulting from a very big drop on prices, as you're going to see next.

On the domestic market, the most important market for us is the processed products, again 80% of our sales done out of processed products. One year ago we were selling at 5 Reals, second quarter the average price was 4.77 Reals, so a drop of 4.8% in the average price for processed product. And also, you need to consider during this period inflation in Brazil by [APCA] was 4%. So, again, this explains why the gross margin went down so fast.

Looking into exports, about 70% of our exports is done out of poultry and on poultry second quarter '05 against second quarter '06 prices went down 22%. This 22% drop in real partly was done out of dollars, part of dollar per kilogram and part of dollar against Reals, which also dropped 10% during such period.

Normally, Sadia releases more than one product a week. During the last -- since '98 until 2005 we had launched an average of 62 products per year, more than one per week. During 2006 we launched only 17. That's a typical example that we are focusing on selling what we already have, saving efforts -- commercial efforts in saving marketing efforts and distribution effort for a better moment.

I think basically these are most important information I have as a starter. The good signs of recovery are already started. The prices are coming back. We forecast during the next three months, very likely, international prices for chicken will come back at historical levels. They had dropped dramatically, but they are going back very speedy.

Consumption in Europe is also expanding, resulting from a very hot summer, which normally requires more white meat. Also, a lot of population that was afraid of eating chicken in some countries like France and even Italy and so on are coming back. On the -- we have the opportunity of exploring new markets, as I said, Egypt and coming back exports to Iraq, as I mentioned already. We forecast that Russia will open new opportunities for us releasing some states to export.

And in internal market, second semester historically is much better than the first. We're going to have elections here in Brazil in October, so we're going to have a lot of events, lot of activities normally demand more products, a lot of festivities and so on. Normally we believe that second semester in Brazil is better and this is going to be a specific better than the first one.

This is the information that I have to start. Please your questions.

[OPERATOR INSTRUCTIONS]

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. Please restrict your questions to two at a time.

Our first question comes from Tufic Salem of Credit Suisse. Please go ahead.

Hello?

Hello, Tufic.

Hi, Murat, how are you?

Fine, thanks.

My question's related continuing on that exports market, if you can comment first of all when you saw the bottom of the prices for the exports market in this quarter and also you mentioned that you should -- that we should see prices coming back rapidly in about three months time to historical levels. Can you describe what levels you mean by that?

And also if you can go into a bit more detail on what you're seeing in different regions in the world in terms of exports, Asia, Middle East and Europe?

Well, rule of thumb, chicken prices of Brazil, you can have this data very easily in the website from our trading department, is something like $1.50 per kilogram roughly, okay. And first quarter this number went down to $1. And prices are coming back. Prices are already over 1.20, so we already have this 20% increase. I'm making a big average of everything. I'm talking about whole poultry, parts, dark, light meat and so on, so forth. I'm giving a general view of that.

And it's everybody expects that if the market confirm the trend that we have seen on the latest three weeks, there's a very big chance that we are going to start the fourth quarter with historical levels of poultry internationally traded. That's the best wish of our crystal ball at this stage.

It varies a lot on the type of client track that you have, it varies a lot on the type of product, the destination and so on. But the fact that some countries are coming back and the fact that also some Asian countries now cannot export again, you know there is new [crisis] in Laos, in Thailand and so on, some new focus of bird flu. Some of these places which were already exporting processed but they were using chicken produced locally to produce. Some of them will have problem to produce, even these processed. So maybe, this will be also opening a new opportunity like the one we had for the strike of the bird flu some time ago.

So, our vision is that inventories are already very low and there's a very good trend that in about three months, prices should return to historical average level.

And just to confirm that historical average would be maybe 2004 prices that we saw? I mean does it translate to your -- ?

No, take a three years average. Don't use one year alone because you can always have the fact of foot and mouth or the bird flu or the mad cow and so on. So use a three years average and then you know what I'm going to -- what I'm talking about. So that's a basic information you need to make your forecasts.

Okay. And in terms of production, particularly in Europe, some of the countries producing chicken, did you see any dramatic shift in the decrease of production capacity from these countries during this crisis this first semester?

We were informed that we have some shutdowns, a lot of postponing of nesting, a lot of postponing of new herd creations and so on, international. But we only see talk, we don't have the figures yet. You can imagine at this stage it's an information [bell]. Everybody's trying to hide what they have, trying to make the best deal. That's a natural thing at this moment. We don't have still the good statistics on what is really the [inaudible] production capacity in Europe.

But we have some sign of. If we see that Egypt that was not buying for a long time and now is public saying that they are going to be buying, well, some things are changing in the market. So again, what we can say is that we are prepared to increase our production into supply to this demand if confirmed as the way we are seeing for the moment.

Okay, thank you.

You're welcome.

Thank you for your question, Mr. Salem. Our next question is from Victor Galliano of HSBC. Please go ahead.

Thank you. Yes, what I was asking has really largely been answered in terms of more detail on the chicken and pork side. But if I could follow-up with a question on CapEx here. Obviously you're maintaining your commitment to CapEx with 850 million Reals of investment this year. Can you give us an indication of what the CapEx number could be for next year?

We had -- this is too early to give very good detail for next year because we are reviewing everything that have happened this latest six months. We are now in the process of strategic planning for the next year. But I'm going to be just repeating what we said the end of last year, that we are forecasting 1.5 billion Reals in three years investments. That's our forecast.

So that's '06, '07 and '08.

Yes.

Okay.

Okay?

Yes. And on the -- on the embargoes in place with Russia, can you just clarify for me, does this relate specifically and only to pork or does this include other meat products as well?

Well, first, this was related to pork, although, it was taking as a protective measure commercially saying there was -- they knew that pork, some regions were very far away from the foot and mouth in Mato Grosso do Sul where there was the foot and mouth, okay? So it was taking as a decision on the pork and chicken -- hold a second. They have been all kind of meats from Brazil.

So beef and chicken...

Yes.

...pork, everything.

Yes, all kind of meats, yes, for a while, including beef, pork and chicken.

And except for Rio Grande do Sul, that's still --?

And then the -- no, first they banned them all, right?

Right, yes.

And then some, I don't -- three or four weeks ago they opened Rio Grande do Sul.

Yes.

And we expect that they are going to be opening the other states very, very soon. If they're going to close something, they're going to be maintaining, maybe, one state that had the mad cow -- sorry, the foot and mouth but not the others.

I think you made an important comment and I need to outline this. We have seen lately, and this is a critical question, a new perception on how to treat these sanitary problems. For example, at the same time that -- as soon as the foot and mouth was named in Brazil and the whole Brazil was banned, right. Some two months later, there was one strike of foot and mouth in Corrientes in Argentina. By that time, Argentina was not banned as a whole, only the Corrientes county was banned. Why? Because now people are starting to see that there are producers that need to sell, but buyers that need to buy to feed the population, okay.

Second example, we saw that two weeks ago or a month ago there was a chicken fever in Brazil in the state of Rio Grande do Sul and only such county was banned, not the whole state. So what I'm saying here is that the [so said] realization that would affect the contaminated zone only is starting to be a reality, not because we producers want it, but the buyers they want it also. Nobody want this huge volatility and everybody wants to have guarantee of good quality standards.

If you have information giving okay, I have a focus on a certain place that is contained, so the rest is free. And I think this is a very important point for us to remember, Victor.

Yes. Okay, so there has been -- did you just say there has been an incidence of avian flu in s county in Rio Grande do Sul?

Yes, it's a public one, yes.

Okay.

It was a new [cancel], it was given information very openly and et cetera and -- but in a very small property and it was [halted] and everything remained okay.

Okay. So the -- just to clarify, the current situation with Russia is aside from Rio Grande Del Sol where the foot and mouth thing has been lifted? You have embargo from everywhere else in Brazil in the case of pork?

Yes, absolutely.

And then the other meats or not?

Yes, in other meats also.

Pork, beef and chicken.

I'm going to double check that figure. One second.

Okay.

I'm going to double check that question so I don't have -- you can call me later. But...

And you've got -- and you've got the inspectors from Russia at the moment...

Right now, yes. We'll double checking that question. Better for me to say that I don't know by sure than to give you a wrong answer.

Okay.

I'm going to give the answer in some seconds, okay?

Thank you very much.

All right. Next question?

Our next question comes from Daniela Bretthauer with Banco Santander

Hi, Murat.

Hi, Daniela.

Good afternoon.

Good afternoon.

Murat, I don't want to be the devil's advocate here but what if things don't improve and we really going to the worst case scenario. How much worse can things get because 20.6 was like one of the lowest margins that the company posted in the last six years and if things go even worse, what sort of measures would Sadia take to react or to minimize the damage?

Okay, Dani, first of all, Saida is not an island. We are into a market with everybody together. We have several competitors. You can see that what has happened to Sadia is not very different than what is happening with the most important companies worldwide. I can say even better that some companies even bigger than Sadia in the same segments are not even giving any results at all. They present in red ink. We are able to present some results on this reportable condition. So what is the problem that is affecting the whole sector? You all can imagine that if crisis is not going to remain for all because we are not so stupid nor we are not so unrealistic that we all need to take measures. So we are all are going to move taking measures.

I can tell you in our case if things remain bad the first thing I'm going to say well I'm going to cut expenditures. I'm going to stop my investments. I'm going to stop reducing all products which have a lesser margin. I'm only going to produce the good ones. I'm not going to service regions where the logistic costs are expensive and so on. It's going to be a war planning, which by the way we don't look like there's a high percentage to happen. It can happen. Yes, it can happen. But in our segment, this is proved already there's no way for a crisis to be there too long because we work with a cycle that turns itself every 60 to 90 days.

We are seeing a lot of small producers -- we have seen a lot of small producers of poultry here in Brazil shutting down three months ago. Now they are back to business. Why are they back to business? Because now prices are coming back and now is getting profitability. Three months ago you were bleeding with [inaudible-highly accented] because of what they were paying for corn and soy was more than what you were paying for. So there's logic in the process.

As [Pina] can tell you and is important is Sadia is working as speedy as possible to enlarge its portfolio in areas where we can reduce the risk. Not only staying with one product. Not staying with only one client. Not staying with only one region but trying to spread in different baskets. We are enhancing and having already said that, we have made a lot of investments on improving our capacity to convert raw into processed. If a bird flu crisis [explodes] in America tomorrow, America would be banned from exporting raw chicken, something we do today. U.S. exports a lot of dark meat. Brazil exports a lot of whole chicken, dark meat and white meat.

Suppose that tomorrow Americas - I don't know if it's North or South America or both are hit with a bird flu, what we'll have to do is to follow what the Asians had done is to convert into processed and if you see today, most of the Asian producers which were only raw chicken producers they are now process producers and they're living a new life but that's the way it's done.

So what we can say Dani is that at this stage, we are not looking for any nightmare in front of us. Very differently, we are absolute convinced - I think the question was made by Victor and I forgot to tell him that we forecast that the bottom -- our perception is that the bottom was reached someplace in March or April. After that, prices start to go up. You can see that the bird flu is not in the press as it use to be anymore. Population are coming back consuming poultry even in places where there was no bird flu but people were afraid only for the fact that who knows if one day is going to get here. Those guys are coming back.

So Dani, we believe that Sadia had shown that even in a very difficult moment we can react. We can maintain profitability very, very, very far away from what would be good but it's still generating profit, different than some big companies much larger than ourselves which are losing money at this stage.

Okay, Murat, thank you and you know that I expect nothing less from you guys.

Thank you very much and I know how much you cheer for us. We are very glad to have all your support and understanding. You are a person I know very much and somebody I respect very much, Dani.

Okay, thank you.

Our next question comes from Tania Sztamfater with Unibanco.

Hi, Murat. I wanted to explore a little bit more the domestic market. When we see this recovery that we were until now talking about how do you see things going back to normal in the domestic market? Do you see both mix and prices going back to what we saw in 2005 or do you believe that other exporters with less strength than you are not going to be exporting anymore? Do you see more supply in the domestic market, meaning that maybe prices are not going to fully recover? Do you see any structural change in the domestic market lead by what is happening worldwide?

Tania, this is a very smart question and is very difficult to answer. Let me try to I can help you on that. First of all, no doubt crisis are difficult to face and crisis they bring a new reality when they are over. No doubt some relations that we have prior to our crisis will be different than the ones before it. And no doubt some tactics before crisis will different than before. Some guys which are exporting very heavily will think twice if this is the right tactics. The same way as we have said in certain time, hey, I cannot be only in the domestic market what happened to me? So it's a natural thing that all players at this moment will evaluate the risks and opportunities of this new environment saying that it's very easy for you to have a better next quarter after having such a [abnormal] quarter the previous one.

That's not the issue. The issue is when we will return to the normal level of operation which would be 2005. 2006 second or first quarter in any case were two abnormal quarters. Since the first quarter we are selling pigs in the market in a amount that we have not forecasted. We haven't sold whole chicken in the market for years and then we were forced to do so. Well, we are not going to be -- some guys that bought our chicken we'll not have our chicken on the next month only because we were selling not to lose more money because to sell whole chicken in the fair market for us you know is uneconomical. There's some small producers that can do it better than ourselves with some different tax system and so on and I'm not going to have to go to different that you know what I'm talking about.

So what I can forecast is going to take a while for us to come back to normal. We believe that maybe fourth quarter there's a very good chance that would be leveling at the same flying level as 2005. That doesn't mean in 2000 -- the fourth quarter we're going to recuperate all the results and we have the same final results. That's not what I'm saying. I'm saying that we're going to be operating with the same profitability margins on such period. That's our target. I'm going to repeat again. We are absolutely convinced that even now after this 4% EBITDA margin, that normal pattern for Sadia is at least 13% EBITDA margin per year. So it will recuperate very quickly. That's our idea.

Okay, thanks Murat and you already anticipated actually my next question. I just wanted to make sure I understand. Looking at the scenario you were giving us of both domestic and export markets, you expect a recovery to historical levels of margins by next year let's say--

Oh, absolutely, absolutely. By the way, we had taken -- we opened opportunities like I said and during all this crisis we're opening new opportunities. We were not exporting to Russia before the Russian crisis. We only started exporting to Russia after that, after they had the payment - you know what I'm talking about. The block on payments. Well that's means typical business example. In '99 we exported $25 million to Russia. Okay, last year we exported more than $150 million to Russia.

So things change very fast. We were exporting 10% of our total exports to America Sul in 2000. In 2002, we dropped Argentina you remember then was forced - Latin America went down to 2% of total exports. Today, America represents already 10%. We open a new channels in Venezuel, for example, that were not here. So what I'm trying to say to you guys is that we are looking ahead. We believe that this crisis is here to reinforce - it is mandatory for us to open new markets, new products and new channels. That's the end of the learning period. That's our learning.

Okay, thanks Murat and a finally in this sense. How do you see - just to compare margins of the beef segment that is growing rapidly and where you can still use your distribution to further improve the penetration. How is margin of that segment compared to your other segments on normalized terms let's say?

Can you rephrase that and see if I can understand what you said Tania please.

I wanted to compare levels of profitability of beef sales with your other more mature segments since this is one segment that will certainly represent more of your sales going forward. But on normalized terms considering the current chicken prices and pork prices? Just compare profitability levels of each one of these segments.

We are convinced that all the portfolio that Sadia has at the moment is good for Sadia and in a certain period a certain product is better than an other one then the other one is better than the other and so one and so forth. There are also some products that even if I do not like it, I need to produce it because they are produced with productions from these assembly line of our animal production.

So what I'm saying is that the present portfolio that we have it's all good. If you ask me what is a priority, the priority is processed products. Beef is good. We do believe is a good promise. The results that we have until now the first six months are good but you can imagine for a company they're talking in terms of 10 years, and 20 years. I only have six months of results of which the first three months we're still learning whether the gate's open and the window's shut because we're learning now to get back to the business, right?

Right.

We do believe and let me be specific with you. We do believe that Sadia has a very strong opportunity in beef all exports period and we are going to grow ahead of that. It doesn't mean that we need to make huge investments to get on that business.

Second, we do believe that processed is the only way out not because the population wants more for the modern way of living but now there's a new factor. A lot of people will start buying more processed because buying processed is safer than for him to buy raw and having to manipulate and then maybe he can be sick. Some people is already starting to buy more processed in the most developed countries as a way to reduce the sanitary risks, okay?

Okay.

Margarine is a good business yes. We made a new plant. Pork is a good business and if you tell what is in my crystal ball the one that we would have the most potential we and all think everybody in our sector everybody's dreaming with the pork business in Brazil because it was already the biggest exporter of chicken, biggest exporter of beef. There is no reason why we wouldn't be the biggest exporter of pork. The competitive advantage of producing pork in Brazil against the competitors is equal or the same than producing chicken because they are heavy - [gringko] consumers.

Right. Thanks Murat.

Your welcome. Sorry. Do you mind if I interrupt you for a second and then we come back to Victor just to be specific I'm going to correct the banning was in pork. No banning on the other products unless on the states where there was involved where you could not export beef. But there is no banning on chicken or on poultry for Russia. Okay, Victor. Next question please.

Our next question comes from Juliana Rozenbaum with Deutsche Bank.

Hi, good afternoon. You'd just mentioned a 20% recover in prices in the last three weeks. Is this because we also happening along the recovery of volumes or it's only prices?

Volumes will come [suit]. We are having in some places of Arabia already this increase. As I said certainly the Arabian countries are the ones that are returning faster to the market followed by the European community. The recovering is coming first from Arabian countries from those places where we're not exporting Iraq and some environment in the neighboring countries where prices went up to 20%.

But given the recoveries been on prices and not volumes with what you expect that all those producers that were out of the business because their margins are pretty much negative because of prices now, wouldn't they come back to the market and does the actual end recovery -- the final recovery that is in size is actually smaller than this 20% that you're adding right now?

This could be to if everybody was selling at spot and if they were selling for new customers. That's not the fact. We do not sell, as I already mentioned to you, all the time. We do not sale to traders. We do not sell spot in the market. We only sell to our long term buyers and distributors and they know that is not only price that matters, price, trustability, level of service, a lot of credit. There's a lot of things involved and at this stage we're receiving orders from our existing clients. Some of them we're not buying for a period. Not because we were buying from somebody else because they were not buying at all because the market was not requiring. Now they need products. They are calling us again, okay? So we are not forecasting such kind of problem that you had envisioned Juliana.

And also going back to the 13% EBITDA margins that you just gave it. Where do you see the biggest benefits to be able to achieve those margins? I mean in terms of revenues that shouldn't be the case and even in 2005 you had other issues then, but even with high prices we didn't see your margins going to that level so where would you see the biggest potential for margins?

We got to the 13 margin on the fourth quarter of '05, yes. We got there. Even higher on the fourth quarter. The problem is that in fourth quarter we had reached 14.2. It was 13.8 on the third quarter so as I said, we had a problem on the fourth quarter '04. I told you already. It was 8 but then it was 10, 11, 13.8, 14.2, and again, it was 13% roughly the last two years '05, '04 and '03. I'm not inventing the 13 is there. So that's what we are so confident that we're are going to be there. Why will we be there Juliana, please remember. What have we done the latest two years. We have invested in the bottleneck. That means that we had invested on equipment to enlarge our production without making too much more fixed assets which were not producing themselves.

So if you ask me what is more productive normally if you can expand your industry is better than if you can do a new industry. We have done that several times but there's a limit. We have therefore two years '04 - 05 and now we say well there's a limit. We're still expanding a little bit [inaudible], a little bit in Uberlandia, but is not enough. Then we decided to make this three new plants greenfields, but repeating again the fact that we had enlarged our production and is just about in the right moment to expand it then we will catch the moment when the market didn't want the product but by sure this will - the lines will be full during the second quarter - sorry, during the second semester. That's our belief. Our firm belief. Therefore, we will come back to the 13% leveling EBITDA margin. We believe we will get there. I repeat not in the year '06, because that's impossible to get, okay? But we're going to be flying close to it on the fourth quarter it's possible. It's possible. Okay? Any question.

Sir, would you like me to re-prompt for you?

I want to know if there is any other question.

I don't have any questions right now sir and we're not getting a response from the line in Brazil. Do you want me to check on it for you?

Hold on a second. We lost the connection or what?

Checking on that right now. One moment.

Thank you.

Juliana disconnected sir. That's why you're not getting a response from her.

Okay, so is there anybody else?

I do have one more question that just dialed in and it's from Mr. Galliano of HSBC. Please go ahead.

Yes, just changing tacks at the moment. The Perdigao bid. Is there something even in this environment that you would reconsider and would you see the current environment as an opportunity to consolidate given the state of the global industry?

The action taken by Saida doing a voluntary offer two weeks ago was public done, very, very spread and it was also publicly spread that on the 21st of July after the second refusal of our bid we took our offer down. So this is not an issue anymore. It's done. We are not being patient to this matter anymore. We keep looking for the growth of Sadia for the expansion on different areas as I just mentioned to you in several different projects already public. There are some other ideas but the issue Perdigao is something already solved and ended.

Okay. So you consider but you would consider perhaps other opportunities on the acquisition front that would fit well--?

We can never say yes. We can never say no. We are in the market. We are analyzing everything everyday. Our priority is to grow and we receive and get calls everyday.

Okay.

Okay.

Okay. Thank you.

Thank you very much.

Our next question comes from Juliana Rozenbaum Deutsche Bank.

Hi. I was disconnected before answering to me question, sorry. I mean just going back - I missed the very last part of it. But so can we assume that improvements in EBITDA margin will come out of gross margin improvement?

Absolutely and it will come from gross margin because we firmly believe as I said that on the latest months we were losing money to supply to our clients because we're forced to sell at market price internationally even for those long term clients and pigs now are shaking up because prices are coming back and the margins will go up very quickly as I said.

What would you say is a long term number for your gross margins?

This is different to say. Again, I think the less information I give you is - it could be feasible that by fourth quarter or by the end of the fourth quarter we could be working on the leveling to 13 margin on a 12-month base from thereon, not there back all right, because it's impossible for us to get. That's the idea. All right?

Okay, thank you very much.

Okay, thank you.

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

I thank everyone all the attention that you have had with Sadia. We're always available for answering your questions. Thank you again and good afternoon. Bye.

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