BRF SA (BRFS) 2007 Q1 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 Brazil. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Sadia's conference call to discuss the first quarter 2007 results. I would like to mention that a slide presentation is 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 Private Securities Litigation Reform Act of 1995. Actually 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 Paulo are Mr. Welson Teixeira Junior, Investor Relations Director and Miss Christiane Assis, Investor Relations Manager. First, Mr. Teixeira will comment on the company's first quarter 2007 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.

Good morning. In the last results announced we mentioned that we were confident on a recovery over short term. The first quarter results which we present today confirm our business profitability and sustainability expectations. The company margins and profitability are back to expected levels as a consequence of the strategies adopted by the company, in spite of the currency devaluation and the raise in grain costs, especially corn. With our persistence to grow in a firm and sustainable way, we were able to speed up the recovery of our results after the sanitary crisis caused by the Bird Flu and the Russian ban, which pressured our results in 2006.

Internally, we reworked with a growth expectation between 8% to 10% for this year due to the higher local income expectations. We also believe in the export market has advanced and expect to sell 10% to 12% more in 2007, maybe because of the global demand for poultry. These estimates are based on the enlargement of the growth -- of the industrial capacity, operational adjustments that have been made over the last few years on the modernization of the company units beside expectation of the more favorable scenario on the export marketing.

Amongst the first quarter 2007 highlights, we can mention a 14.7% raise in total sales volume, a growth of 6.7% in volume sold in domestic markets, 22% rise in sales of the export market. Growth 23.5% in gross operation revenues when compared to the first quarter in 2006 amount to R$2.2 billion. 180% growth in EBITDA with 12.2% margins, 6.7 percentage points higher than the same period in 2006. And finally, net profit growth of 43.6%, reaching R$96 million.

Besides that, I would like to tell you about the Material Fact that we announced on the way it's submitting the creation of a financial holding under multiple banking should be approved by the Central Bank. Its goal is to spread the company's financial activities carried out by Concórdia Corretora is a broker in Brazil, which has been operating in the market for 21 years and is one of the biggest independent brokers in the Brazilian market. With this we expect to better use the business opportunities and synergies that exist in the value chain of Sadia. The projectstill has to be approved by the Central Bank and we estimate six months to be approved and the more information is available with the Material Fact published yesterday on both CVM and Sadia websites.

Well this was the information I want to give you and to highlight to you. And now Christiane Assis will give future information about our results in first quarter. Thank you.

Good morning to all. I would like to mention a little bit more about Sadia's numbers for the first Q '07 and I am going to be following the presentation which is available on our website. First slide, gross operating revenue, as we had anticipated, Sadia had a strong recovery during this first Q, reaching R$2.2 billion in sales for the 1st Q, a growth of 23.5% in relation to the same quarter of last year. We see a strong recovery in the export market, which represents 46% of our sales. As we had anticipated, we expect moving forward that we will an equilibrium of 50/50 in sales between the domestic and export market.

Next side, as I mentioned before, our net revenues grew 25.8%, net income 43.6% reaching R$96 million and EBITDA grew 180% representing R$230 million. Next slide, I'd also like to mention, and here we put a slide comparing the first Q '07 with the first Q '05. And why did we do that? We had mentioned before that the first semester of '06 had been a very tough semester for the sector. And in that way we would like to step back a little bit and compare our results of this 1st Q with the 1st Q '05. We see an increase in net revenues of 15.6% and an increase in EBITDA of 44.3%.

Next slide, gross operating revenue, again growing 23.5% on a year-to-year basis with our Processed Products segment representing 48%, Beef 4%, Pork 6 and Whole Chicken and Poultry Cuts 38%. Next slide, on the domestic market we see a growth of 13.7% with the continuing growth on the Processed Product segments, which now represent 80% of our sales in the domestic market. Next slide, on the export market we see a strong recovery of 37.2% growth in gross revenues. I'd like to point out the growth in the Beef segment from 5% to 8%. And not only that, the 37.2% in revenues is in Reals growth. If we consider 3.5% devaluation of the Real against the dollar for the period, this is almost more than 40% in terms of gross revenues.

Next slide, exports by region, most of that recovery in the export market came from Europe, so we see a growth from 22% to 24%, and the Middle East, 23% to 26%. These two regions were affected by the bird flu last year for the first time and we saw sales fall last year for these regions. So now during the first Q we already see a recovery in Europe and in the Middle East in relation to demand for Processed Poultry products and Poultry Products as well.

Sales volume, next slide, in the domestic market we see a growth of 6.7% with special highlight to the Processed Products with 12.9%. I'd also like to mention that the Poultry segment fell 23%, and the reason for that is again the recovery of the export market. We redirected Poultry from the domestic market to the export market. The same thing can be mentioned for Beef. You know that our strategy for Beef is directed towards the export market so that we grew a very healthy 22.5% in the export market, with 16.5% on the Processed Products. The recovery in Poultry 17.4%, Pork 66.7%. Let's not forget that first Q last year was when Russia had banned all of Brazil for Pork and Beef products, so we see a very strong growth, 66.7%, because the base was weaker for the first Q. And Beef we see a growth of 87% following the strategy of the company to grow in this segment.

Next slide, not only do we see, as I mentioned before, growth in volumes but we also see growth in revenues. So the domestic market grew 13.7% while the export market grew 37.2% for a total in Sadia of a 23% growth in revenues. Next slide, average prices, in the domestic market we see a growth year-on-year basis of 1.6%. Processed Products, as you know, represents 80% of our sales in the domestic market. We see Poultry growing 49.4% and Pork on sort of a side-by-side sort of level.

Next slide, average price export market, we see Processed Products growing 5%, this number is growth in Reals. When we consider the 3.5% devaluation of the dollar against the Real for the period, this represents a little bit over 8.5% growth in dollar terms. We see growth on the Poultry side with the recovery, as mentioned before, in the export market of 15% with the devaluation that represents more than 18.5%, and on the Pork side, a growth of 13.2%, a little bit over 16.7% in dollar terms.

Next slide, statement of income, we see the revenues again, net revenues growing 25.8% while we see our costs growing 20%. We also have our net income growing 43.6% and EBITDA 179.9%. Next slide, gross margins increasing in relation to the average of 2006 to 25.8%. We still see some pressure on the grain side for our gross margins. Sales expenses, next slide, falling to our historical levels of 16.8%. Next slide net income, net income reached R$96 million with a net margin of 5.1%. EBITDA, again R$231 million for the 1st Q and 12.2% EBITDA margins, in line with our guidance for the year. Investments breakdown for the 1st Q, R$25 million in Processed Products, R$83 million for Poultry, R$22 million for Pork, R$2 million for Beef and R$44 million for others.

Net debt to equity, next slide, as we had mentioned during the last quarter, we expected this level to return to below the 50% level, which is part of the company's policy. It is now at 46.9% net debt to equity. Next slide, in the same fashion net debt to EBITDA also returned to below the company's policy reaching 1.5. Next slide, market share, we see an evolution of the three main categories inside of Processed Products for the company for the domestic market. These numbers represent 80% of the total sales in the domestic market for the company and we see an increase in our participation in these segments during the last three years.

Next slide, we continue to be ranked number one in all of the segments where we participate in Brazil. Frozen Processed Products with 46.1%, Refrigerated Processed products with 30.8%, and Margarine 36.6%.

New product releases, returned to releasing new products this year, we had taken the foot off the accelerator last year, up until April 11 new products for 2007. Next slide, amongst those products have the various flavors of mousse in our deserts line, in the Miss Daisy line, we have a special line of products for the PAN Olympics that are going to be held in Rio now in July, three new flavors of Hot Pockets as well as the chicken ball nuggets.

Next slide, we continue to grow our exposure in the New York Stock Exchange with trading an average of $3 million per day and representing 28.9% of our outstanding preferred shares. Next slide, the foreign investors continue to participate in our breakdown by investors with 57%.

That's basically what I would like to share with you. We are now open for questions. Thank you.

[OPERATOR INSTRUCTIONS] Our first quarter comes from Alex Robarts with Santander. Please go ahead.

Good morning, everybody, I guess I had a question on exports and I appreciate you describing some of the recovery this quarter from a tough comp in Europe because of the sanitary issues. But it seems to me that the next month in May we have the introduction of these quotas on various products, and I'm hoping you could perhaps help us understand what you think that could to your overall growth in that region. Do you think that perhaps we saw some growth in March or April, some inventory buildup with some of your buyers in Europe, in anticipation of these quotas? And in general, do you think that this is something that could perhaps impact your overall guidance for export volume growth this year?

Alex, thanks for your question. We believe that we have an opportunity to increase the export if we have success in this approval in Europe. But as you know we export to Europe here around 24% of our sales to Europe. We believe that if you increase a lot the opportunity in Europe it's not too much material compared with the total export for us. We don't believe that would be a big impact in the short term.

Okay, that's fair. I guess the second question was really related the pricing outlook for Processed Products, interested to see that in the first quarter, really on a per kilo basis, you practically got the same price in the seasonally strong fourth quarter. Is this kind of a mix issue? Did you actually take price in the first quarter? And I guess the real question here is how are you looking at your average selling price in Processed Products domestically for the rest of the year?

Hi Alex, it's Chris. Well, you know that Processed Products always has sort of an influence of the mix because the base is still small, it is growing but it is still small. So that we saw all during 2006 the prices on the Processed Products export market growing.

I'm sorry, I was asking about the domestic process.

Oh, I apologize.

That's all right.

I apologize. You are correct. The fourth quarter is seasonably higher. We have been doing a big effort to pass along prices in the domestic market for this segment. Because you know that for the 4th Q, seasonally this number is higher so that, if we look at the 1st Q and the numbers are practically the same, that is a strong evidence that we have been working very hard to pass along these prices.

I guess what I'm getting at really was because we saw a higher than expected, at least in our view, selling price for Processed Products in the first quarter domestically, I'm just curious if that was kind of really a product mix issue. Did you guys actually move up on prices selectively in the quarter? And kind of the more broader question is what's the perspective for your average selling price in Processed domestically for the rest of the year?

Well, we expect these levels to be maintained throughout the year, okay? There is the issue of the pressure on our costs due to grains and we have been again trying to pass along this pressure to our prices in this segment.

Alex, Welson. If you can see that the last quarter the average price was R$5, we was be able to continue to increase our price. Because the last quarter we have a strong influence of the mix of the products because we sell more turkey, the products with the added value more than this quarter because of the seasonality. You can see that we continue to keep the same price that it means that we are increasing our prices because of the pressure of the grains. We believe that to be positive, to continue to increase the next month, but it depends on the demand of the market. But we are confident that it will be possible to increase our prices during this year.

Okay, thank you.

[OPERATOR INSTRUCTIONS] We do have a question from Pedro Herrera from HSBC. Please go ahead.

Please go ahead. Good morning, I have a quick question, you make a statement on your release that you expect grain prices to stabilize or be better basically in the second half of '07. What do you base that on, one? And two is, are you engaged or thinking about any hedging strategies if that is not the case?

Hi, Pedro. Yes we believe that the high on the grains, especially corn, was hit during this first Q and that moving forward, given the good expectation of the harvest in Brazil in the US, that these prices should start to recede.

Thank you.

Excuse me, our next question comes from Ricardo Boiati from Bradesco Corretora.

-- a range between 12 and 13% to 2007, I would like to know if for the next quarters we can expect the EBITDA margin to be inside this range or we can expect some deviation on one quarter another. Can you give us some color on that?

Ricardo, your question got cut off but I believe it was what our expectations for the EBITDA margin was for this year, is that correct?

Yes, I would like to know if we can expect some deviation on the EBITDA margin for the next quarters or it should be inside of the range you gave us.

Our guidance for 2007, our EBITDA margins between 12% and 13% and we expect the margin to be maintained around that, yes we do.

Okay, because --

Pedro, it's Welson, Ricardo, sorry.. Our guidance to all the year. Some quarters we could have some influence more or less in the grains costs and seasonality. But of course the last quarter of the year normally is stronger than the others and we could have some impact in the grains in the next quarter because of the delay of some increased costs in the grains in the first quarter, we could have some impact in the second quarter. But we are very confident that we will be able to deliver 12% for the year.

Okay. So you believe the most part of the effect of the grain prices increase was already felt on first Q?

No, we could have some influence, but I don't believe that will be some material impact.

Okay, thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up from Pedro Herrera of HSBC. Please go ahead.

Yes. I have a quick question on CapEx, can you give us some guidance please on your expectations of CapEx for the rest of '07?

Hi, Pedro.

Hi.

Basically it is R$800 million for '07 and we expect to invest 440 million in our unit in [Bucajuverge], you know that is in Mato Grosso, the new unit that we are constructing in Mato Grosss which will be a poultry and pork facility, which will also process these raw materials. We have the continuing of the investment in our plant in Russia, which for a total of $78 million. $24 million were already invested, so we have almost $50 million this year, 60% of that number is Sadia's investment, 40% is from our partner. We also have others here in Brazil with logistics and IP and further debottling, that's a little bit more of the same.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] This concludes today's question-and-answer session, Mr. Welson, at this time you may proceed with your closing statements.

Thank you, everybody, and we are very confident with our quarter and the all of the year. And thank you for everybody's attendance at this conference.

That does conclude our Sadia's first quarter 2007 earnings results conference for today. Thank you very much for your participation, you may now disconnect.