BRF SA (BRFS) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Ms. Daniela Ueda of Financial Investor Relations Brasil. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Sadia's conference call to discuss the fourth quarter 2006 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 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 the result of microeconomic conditions, market risks and other factors.

With us this afternoon in Sao Paulo are Mr. Welson Teixeira Jr., Investor Relations Officer and Ms. Christiane Assis, Investor Relations Manager. First, Mr. Teixeira will comment on the company's fourth quarter 2006 results. Afterwards, the executives will be available for a question and answer session. It is now my pleasure to turn the call over to him. Mr. Teixeira, you may now begin.

Okay, thank you. Good afternoon. First of all, I would like to thank everybody for their participation. Now I will make a brief comment on some items of our results. 2006 was a year of great challenges for all of us, and these challenges have made us stronger and more solid, as an organization. We faced an adverse scenario, particularly in the first half of the year, but we expected that the industry would start to react by the middle of the year. Fortunately, our expectations were confirmed, and as from the third quarter of 2006, there was an important improvement in our business. Today, the scenario is much better.

Regard the fourth quarter, the main highlights were growth of 4.3% in sales volume when compared with the fourth quarter of 2005, a growth of 3.8% in net revenues for the period, which reached R$2 billion, a growth of 23% in EBITDA for the period with the margin of 16.8% of the revenue.

It is 2.6 percentage points above that reached in the equal period of 2005 and as a result, the result is encouraging, 75 million of non-recurrent profit regarding a tax credit for COFINS. Excluding this credit, the EBITDA margin was 13.2, which is on line with the company's historical margins.

In the full year, we also had the following highlights. Sales revenue, 7.9 billion for 2006, a growth of 2.1% in sales volume is compared with 2005, totaling 1.9 million tons. In domestic markets, a growth of 12.2% in sales volume, and, finally, a growth of 11.7% in sales of processed products to the domestic market.

Well, these are the information that I want to emphasize and to point out to you. Now, I will ask Christiane to talk about the main numbers of the period. Thank you.

Hello, good afternoon to all. I'm going to follow a little bit of our presentation, which is available on our website. First slide, gross operating revenue, we closed 2006 with R$7.9 billion of revenues, 56% domestic market, 44% in the export market, basically due to a couple of factors that occurred during the first semester.

As you all know, we had a very tough first semester due to fall in demand on chicken products due to the avian flu hitting Europe, smaller exports of pork due to the Russian ban on Brazilian pork, and the third item to affect revenues was the continuing devaluation of the dollar against the real.

We had mentioned that during the second semester, the company would start to see -- the company and the sector would start to see a recovery, and we would like -- I would like to point out that recovery in the next slides. Next slide.

Highlights for 2006. As I mentioned before, we had a fall in gross operating revenue of 4.7%, but managed to close the year with an EBITDA of R$658 million, representing a margin of 9.6%. Next slide.

When we look at our fourth quarter results, a gross operating revenue of R$2.355 billion, we already see an improvement in relation to fourth Q '05 of 5.2%. When we look at the gross margin for the fourth quarter of 28.8%, it is already in line with historical average gross margins of the company of around 29, 30%.

EBITDA of 342 million, which includes the recognition of the COFINS tax credit of R$75 million represented an EBITDA margin of 16.8%. Even if we were to exclude this tax credit, EBITDA margins for the fourth quarter would have been 13.2%, and therefore in line with what we had been mentioning that the company would already, for the fourth quarter '06, be in its natural, its historical levels of margins and results.

Next slide, gross operating revenue totals. It's important to see here that the processed product segment, which represents the largest added value in terms of the segments where the company is present has increased from 44% in 2005 to 49% in 2006. Next slide.

When we look at the domestic market, we see a continuing improvement of this segment, as well. Processed products went from 77% to 79% of total gross operating revenues. Next slide, export markets. It's important to see that processed products, as well, in the export market had an important contribution last year, going from 10% to 11% in the breakdown of the export market.

I would also like to mention the importance that beef played during 2006. As you know, Sadia returned to the beef segment last Q '05, and is currently slaughtering 1,200 heads of cattle per day and intends on reaching 2,000 heads by the end of 2007. This is an important segment for the company, and it worked as an important risk mitigant for the year of 2006.

Next slide. Exports by region. It's important to see that the areas in which the company exports to continue to be fully diversified. Sales volume and sales revenues, 2006, 2005. Domestic market, an impressive growth in volume of 12.2%, with a highlight to processed products, 11.7% in growth. Again, this segment is 80% of the revenues in the domestic markets. In the export market, there was a decrease in volume of 6% for the year for those reasons that I had mentioned before, poultry, minus 5.7 and pork, minus 23.

Next slide. When we look at the fourth quarter numbers, we see the improvement that we have been mentioning. For the domestic markets, a growth of volume of 7.1% with a growth in revenues of 7.8%.

In the export market, a growth in volume of 1.8%, while a growth in revenues of 2.1%. It's important to highlight here that processed products growth was substantial in terms of revenues and in the export markets, and poultry has been recovering to the numbers that we saw in late 2005.

Next slide. Average price, domestic markets. We saw a recovery in processed products fourth Q in relation to third Q. Let's not forget that fourth Q prices also are higher due to the seasonality of some of the products that are sold during the festivities of the end of the year. But we still see a 5% fall in relation to fourth Q '05.

Poultry, we see a recovery, an expressive recovery, of 30% in prices. And pork, down 10%. Next slide. Average price, export market. Processed products, prices in reals, had an increase of 29%, which taking into consideration the devaluation of the dollar-real is practically a 34% increase in dollar terms. This increase is due basically to a better mix of these products.

Poultry, down 7% in reals, which represents a fall of 1.7% in dollar terms, so that the average dollar prices in poultry are practically back to the levels that we saw at the end of 2005. Poultry -- excuse me, pork, down 4.5% in reals, which represents a slight increase in dollar terms of 0.7%.

Next slide. Statement of income, '06, '05. I guess what I'd like to point out here is the gross margin for 2006 of 24.6%, and, again, the EBITDA margin of 9.6% for the year.

Next slide. A recovery in our gross margin to 28.8% and, again, EBITDA margin recovering to a 16.8%, and without the COFINS tax credit, 13.2. Next slides are a little bit of what we've already been mentioning, so that we look at next slide is gross margin and we see a recovery in the year hitting 20% in the second Q, returning to historical levels already in the fourth quarter.

Next slide. Sales expenses. We see a start of recovery, as well, to fourth quarter results of 18.3. Moving along two slides to net income, we closed the year with a net income of R$377 million, 223 alone in the fourth Q, which represents an 11% net margin. It's important to say that Sadia is, or will be, one of the company's, even on a global basis, to post some of the better results in the sector.

EBITDA, 658 million for the year, as mentioned before. Next slide, capital expenditures reached R$1.05 billion. We expect 2007 investment numbers to be in the range of 800 million, plus 150 million in investments in the chicken breeders.

Next slide, financial indebtedness. It's important to say that we are -- our net debt has increased during the last year, basically because of the company's confidence in maintaining its investment plans. We did not take our foot off the accelerator. We maintained our investment plans during 2006 and closed the year with net debt of R$1.3 billion, which represents a net debt to equity of 53%, which we can see in the next slide, as well.

We expect that, moving forward, given that we do project 2007 better than our results in 2006, that this level will start to fall to levels below what they have been the last two quarters. The same for net debt to EBITDA, on the next slide, which is already in the 2 level. We expect this to fall as well.

Next slide, financial VAR, still very comfortable levels in terms of our financial value at risk, which takes into consideration our financial assets and liabilities, currently at 3.9% of our net worth, a very comfortable level.

Next slide, a little bit about our products. So here we have a lot of some of our releases for 2006, lasagnas and special margarine flavors. Moving along, a little bit on the capital markets side, we continue to see an improvement in the participation of our ADRs. Currently, our ADRs outstanding represent 16.3% of our total preferred shares, an average of $2 million of liquidity, daily basis, on the New York Stock Exchange. [La Tibex] has also grown, percentagely, to 4%, EUR200,000 daily, and Bovespa, 80% of our preferred shares at approximately 15 million liquidity daily.

Next slide, important participation of the foreign investors in our preferred shares, with 56% and, while we have Brazilian individuals and investment clubs, 21 Brazilian financial institutions, 3%, and pension plans and foundations 18%. I guess I'd like to close the presentation.

We are now open for your questions. Thank you.

Are you ready for questions at this time?

Yes, we are.

[OPERATOR INSTRUCTIONS]

Our first question is from Alex Robarts of Santander. Please state your name -- I'm sorry, please state your question.

Right, that's from Santander. Thank you. Hi, everybody. Two questions on exports. I guess I wanted to clarify something. I know earlier today you talked a little bit about the Japanese market, and I guess there is a potential chance that for the imported products there there could actually be some price increases.

I wondered if you could kind of talk a little bit about that and the timing of this and, kind of related to that, and kind of the same issue with Egypt. I mean, do you think we understand that perhaps in the next couple of months that quota might be up for review and kind of just your general sense of where that would go. So that's kind of the first one.

The second question is on the beef prices, in the export market, interestingly, I'm noticing that the 4Q price per ton in beef really has been increasing both on an average year basis from '06, but also on the quarterly basis. Where is this price going? Do you think there's room for further increases in the short term in this segment?

Hi, Alex. Well, let's start out with your Japan question. Was that related to poultry, correct?

Yes.

Poultry has returned -- fourth Q prices have returned to the levels that we saw at the end of '05. Those levels were already historically pretty high. So we don't see, moving forward, a lot of room for those prices to increase in dollar terms, okay? They might be slightly up, but we're not talking about double digits here.

In terms of Egypt and the quotas, it's -- the Egyptian market is opened now until the end of March, when they will have a definition on whether this market will continue to be open without import quotas. It is hard to believe at this moment that they will be able to adjust the local market and -- adjust their local market and take care of all the issues that have been happening internally, all of the sanitary issues. So that our expectation is that this market will still continue to be open for poultry imports. Okay.

In terms of your last question, the beef prices, moving forward, 2007, we don't expect beef prices to go much higher than where they are right now.

Okay, but just to understand, I'm sorry, clarify on Japan, you're seeing domestic consumption for the domestic products of poultry down because of these avian flu outbreaks. But you have not seen the imported demand change? Is that safe to assume?

Basically, in Japan, the fresh demand, the demand for fresh poultry, will lower, and the demand for frozen poultry will improve.

We believe that could be an opportunity for us to increase the marketing in Japan, because the reduction of the consumer in fresh products and it is an opportunity to sell more frozen chicken.

Okay, so perhaps there's a volume opportunity, as opposed to a pricing opportunity, is what you're saying.

Yes.

Exactly.

Okay, thank you.

Thank you, sir.

Our next question is from Pedro Herrera of HSBC. Please go ahead.

Thank you. Hi, I have a couple of small questions. One is what is the status of the Russian ban on the exporting of pork into the Russian markets, one, and the second question is could you break down your margins, your gross margin, on the processed products versus non-processed?

Hi, Pedro. In terms of the Russian ban, the last news we have is that the Russian government has been requesting information from the Brazilian government in relation to some states. We still do not have a firm position on when the Russian government will open for Brazilian states. It is much more a political issue than an economical issue.

For instance, we, the state of Santa Catarina, is a state free of vaccination for foot and mouth for the last 10 years, so it would make sense for Santa Catarina to be closed while the state of, for example, Mato Grosso is open for Brazilian pork exports to Russia. So, again, since Russia is not part of the international organization of commerce, it does not have to follow certain rules. So that the decision to open up these Brazilian states, again, is much more political than following sanitary reasons or sanitary procedures, so that it is very hard for us to try and define a date for you.

I think I can complement this information. The good news regards that is that the authorities of Russiaask some information about the Santa Catarina state. They ask for the Brazilian government some information. It could be a good movement, but it's too hard for us to know some thing, when it would happen, we open this market in the future.

Okay, and your second, question, Pedro, was about the margins and the breakdown in margins in processed and non-processed.

Exactly.

I can give you an idea. Basically, when the more commodity -- like a full chicken gross margin is around 20%. When you cut the chicken, maybe add a little bit of spice to it, around 30, and when you move further down the line, processed chicken, baked or breaded or something more sophisticated, would be something around 40%.

Okay, thank you.

Okay.

[OPERATOR INSTRUCTIONS].

This concludes today's question and answer session. Mr. Teixeira, would you like to proceed with any closing statements?

Okay, thank you very much for everybody to attend this conference, and we'll be available for you if you have some additional information. Please send us by mail or call for us. Thank you.

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