BRF SA (BRFS) 2007 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is been recorded.

I would now like to turn the conference over to Ms. Daniela Ueda our Financial Investor Relations, Brazil. Please go ahead.

Good morning ladies and gentlemen and welcome to Sadia's conference call to discuss the second 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. 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 Paulo are Mr. Welson Teixeira Jr. Investor Relations Director and Miss Christiane Assis, Investor Relations Manager. First, Mr. Teixeira will comment on the company's second 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.

I will start talking about the highlights of the second quarter of 2007, where an increase in sales in both domestic and export markets and the recover of the pork prices in the export market to the levels prior to the avian crisis in Europe leading to a share of 47% in export market and of 53% in the domestic market, more inline with the company's strategy to keeping those markets on 50/50 basis.

In the second quarter 2007, gross operating revenues grew 30% over the same period in 2006, driven by the sales of processed products in the domestic market and of poultry in the export markets. Volume sold grew 12% between the second quarter 2007 and the second quarter of 2006. Volumes sold in the domestic market rose by 1.2% in second quarter of 2007, in relation the similar period of 2006.

Revenues from the market in turn, advanced [18.5%] of the in the period, signaling growth of demand for processed products.

In export market average price continued their road to recovery during this second quarter of 2007 in relation to the same period of the last year, when performance was severely hurt, the avian influenza around Russian embargo to Brazilian pork. In the second quarter of 2007, the expert volume grew 20% in relation to same period in 2006.

Sadia's [reiterates] it's commitment with the growth and the expectation at double annual sales in the income five years and the Board of Directors have approved an investment plan of a R$2 billion for the next 18 months, distributed as follow; 720 million to the processed product segments and 640 million to the Lucas do Rio Verde Plant, and 130 million to the beef segment and another 510 million in various expansion plans, IT, infrastructure projects and the breeding stock.

The investment on the processed product segment will be destined to refrigerated products to the domestic market and the baked goods, breaded products to both markets besides order non-meat products.

Lucas do Rio Verde investment includes the construction of new poultry and pork slaughterhouses a feed and a pork processing plant

As for the beef segment, Sadia plans to slaughtering 6000 heads/day by 2009. In order to do so, the company is expanding their slaughtering capacity of Varzea Grande of 1000 heads a day to 2000 heads/day. And by the beginning of 2008, adding a new plant with a larger capacity of 2000 heads a day for the second year.

Now, Christiane will talk more about the other figures.

Good morning to all. I would like to follow the presentation which is available on our website. First slide, gross operating revenues increased 26.6% during the period, with a breakdown of 53% to the domestic market and 47% to the export market, as Welson already mentioned before, more in line with the company's strategy of reaching a 50-50% breakdown.

In terms of highlights, the domestic market grew 18.5% in terms of revenues, while the export market grew 45% from second quarter '07 in relation to the second quarter '06. Net operating revenue grew 31.4%, which translates to an EBITDA of R$229 million at an increase of 236 %.

Next slide. The total gross operating revenues of Sadia reached R$4.5 billion for the semester, and we see a relative increase in the beef segment from 3% to 4%. Processed products continues to be the large number in terms of our product mix, which helps to mitigate sanitary risks, as well as present a better margins.

Next slide the domestic market, increased 16% in terms of gross operating revenues, and again we see processed products as the largest component with 80%. Next slide, export market grew 41%, in terms of revenues, beef increasing in relative terms and absolute terms from 7% to 8%, while we see a decrease in poultry from 71% of our total pie to 69%.

Next slide, our exports by region continue to be well distributed in terms of geographic distributions, with 25% to Europe and 23% to the Middle East. Next slide; sales volumes, its important to mention here that while the total sales volumes for the domestic market was 1.2%, the big increase we can see in processed products was which was a 13.8% and the decrease in poultry of 40% is easily explained by the redirections of the production to the export market. So that, in volumes, so that you see the volumes of poultry to the export market growing 12.5%, okay.

In terms of the export market you also see 56% increase in terms of processed products, which I am going to explain a little bit further. In terms of sales revenues; domestic market 18.5%, export market 45%. Next slide, a total change in terms of volumes for the company is 12.2% in terms of volumes and 29.7% in terms of revenues.

Next slide; in terms of average prices in the domestic market on a quarter-by-quarter basis you see a 3% increase in the processed products which again is 80% of our total revenues in the domestic market, and then you see a recovery in the poultry and pork prices in Brazil as well due to the re-direction of these commodities to the export markets.

In terms of average price export markets, when you take in to consideration the currency devaluation of 9.4% of the dollar in relation to the Real. When you see this, when you analyze cost of products 15% falling in terms of Real terms, that is only a 6% fall in terms of dollar terms. This fall in prices can also be explained by a little bit -- a change in mix and some products being sold to Venezuela which have a smaller price.

The poultry price when you see an increase of 25% in Reais represent as almost a 35% increase in terms of dollars, which put the poultry price back in line with the average prices that we saw in 2005, pre-avian flu crisis in Europe. In terms of pork, when we take into consideration the devaluation it almost an increase of 6% in dollar terms and beef when we take into consideration as well, the devaluation of the dollar, this represents almost a 2% increase in terms of beef.

Next slide the statement of the income, for those following the webcast, we are changing the slide on our site this might be wrong if you are following the webcast. Okay. Please look at the gross profit, the gross margin for this quarter 25.7% which is line with our expectations due to the higher prices of grain in relation to the last year. When we look at our component of grain, so soy and corn in relation to last year we were expecting a rise of 20% in grain prices, so this is reflected here in our gross profit.

In relation to sales expenses 17.4% which historically is in line with our average numbers and EBITDA margin of 11.4% for the quarter. Next slide so again our gross margin 25.7% pretty much in line with what we had expected for this second quarter, and again pressured by the grain prices.

Next slide sales expenses again 17.4% and there was some influence here in terms of marketing expenses because of our campaign for the kind of Pan-American Games that are being held now in Rio and as well as some increase in terms of logistics.

Next slide net income reached to R$109 million for a net margin of 5.4%. Next slide, EBITDA reaching for the second quarter R$229 million and a margin of 11.4% pretty much in line with what we have been announcing for the year.

Next slide, capital expenditures R$176 million and as we also mentioned before we will see this number increasing during the next quarters, the next semesters towards reaching the R$2 billion for the next 18 months and in the next slide, we're pretty much break this down. And again this is mentioned before, R$720 million for the processed products line and this processed products are going to be towards the domestic market as well as the export markets, I think 140 million in the Lucas do Rio Verde plant, and here we are going to have a poultry, a pork, a feed plant as well as a processed products of pork products. 130 million in our beef capacity and pretty much 30 million alone this year to increase the capacity of 1000 heads/day in our Varzea Grande unit to 2000 heads/day by the beginning of next year and we have 100 million next year, which we will disclose shortly, where we will be investing the other 100 million. We have510 million here, which is going to contemplate our Russia plant, which is in the final terms of investment. Other expansion in Concordia and Brasilia, we had some infrastructure investments, some IT as well as breeding stock.

In terms of financial indebtedness, we are pretty much in line with what we believe net debt to EBITDA is currently 1.3 times EBITDA, okay. Net debt to EBITDA, we also have recently approved a new indebtedness plan, which basically contemplates that Sadia will necessarily have to be between two ranges. The upper range being two times EBITDA and the lower range one times EBITDA, so net debt will necessarily have to fluctuate in between these ranges, which gives the Executives more flexibility to approve investment plans.

Next slide, in terms of market share, we see frozen processed products increasing from the last semester, pizza increasing 32.7% of market share, margarine to 40% of market share, and refrigerated processed products to 30.2% of market share.

We continue to be ranked number one in all of these categories which I just mentioned. This year we have had until now 11 new product releases, a lot of them concentrated in terms of special products directed towards the Pan-American Games.

To finalize our presentation, we continue to be actively traded both on the New York Stock Exchange with $4 million per day average and on the Brazilian Stock Exchange with R$23 million day average. Foreign investors continue to be the largest portion of our investors with 55%. And at this moment, I would like to open up for questions. Thank you.

Thank you. Ladies and gentlemen we now begin the question-and-answer session. [OPERATOR INSTRUCTIONS]. I would like to mention that today's conference is being held exclusively for Financial Analyst 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 [Eric Allman] from ING, please go ahead.

Hi, good morning everybody and congratulations on the good results. My question has to do with your feed prices and hedging policies. Could you just tell us how much of that has been hedged out for 2007 and if any for 2008? And then just sort of secondarily on your beef sector build out going to 6000 heads per day, do you contemplate any sort of M&A activity in that space or is it all going to be organic construction? Thank you.

Well Eric in terms of grain, we have been alerting our analysts during the quarter that we still expected some pressure in terms of grains. We saw the highest prices in grains especially in terms of corn. Brazil reached the highest in December and January. In terms of Sadia the reason we see this impact in the second Q still is because there is some delay in terms of, when you stock this and when you this actually appears on your card [vine], okay. So we still did see some impact.

In terms of hedging this risk, we don't do any hedging in terms of financial instruments in Chicago. In terms of Brazil the market is still too small for us to hedge this risk via financial instruments. So that we hedge this risk via stock if it's a physical hedging. Okay. When we believe the market is going to go up, we buy more. When we it's going down, we basically use what we have in stock. Okay.

So that moving forward third Q should have less of an impact of those higher grain prices that we saw in the beginning of the year. Okay. In terms of beef, as I mentioned, we are currently spending R$30 million to increase our 1,000 heads per day capacity to 2,000 heads per day capacity in Varzea Grande, and as of next year we plan an additional 100 million which will either be directed towards an acquisition or construction of an additional plant which will contemplate 2000 heads per day. In 2009, as Welson mentioned, we plan an additional 2000 heads, so that by the end of 2009, Sadia will reach a 6000 heads per day capacity in beef. Okay.

Okay. Thank you.

Thank you.

Our next question comes from Alex Robarts with Santander. Please go ahead.

Good morning everybody. I wanted to start out first on the CapEx program, and the announcement of the R$2 billion. If I am doing my math right, I mean I am just trying to kind of figure what we are looking really for next year. If we stick with the 950 that you guys were talking about including the breeding stock for 2007, it would seem that now we could be looking for total CapEx for '08 kind of close to the 1.4 billion mark and I wanted to, first of all confirm it, if that's in the ballpark with how you are looking at it between '07 and '08 and the second part of this is really this is a definitely a change to what we've been hearing and I'm wondering the motivation behind the aggressive CapEx for next year, is it on a processed products and a desired or get that more as a percentage of total sales or is it related to the various expansions in the Lucas build out, if you could give us some color that would be great.

Alex, you are right. The investment in 2008 is around the 1 billion or R$1,000 million, and we are looking for processed products they in fact will be processed products. Because we believe that Brazil has that capacity increasing a lot and we are focused on our producing add value for the company.

As well, additional here not only as Welson mentioned in the process for Brazil, but it's also the company's focus to continue it's investments in processed towards the export market, to what we are as mentioned, the breaded, the grilled towards the export market. So that, if you look at our export volumes in terms of processed they grew a lot, they grew 56% of course there is a part there which is towards Venezuela, but if you exclude that Venezuela your increase in processed is around 30% so that we are managing to grow our processed products, our poultry processed products as well as our pork processed products in 30, 35%. Okay and I guess the other thing that you mentioned was Lucas. Lucas is going to be a poultry, a pork and a processing unit. Okay, so that it's going to produce the raw material that we need in order to process these products.

And just a clarification on the processed products build out, are you seeing kind of equal opportunities in the export market or and in the domestic or is the motivation to ramp up the CapEx in process more of a function of just trying to get into just more [under the aid] in Brazil?

Both of them. Our [aid] our revenues in Brazil they are 80% processed, but we still see a huge opportunity to sell to lower classes as well, okay so we are ramping up that opportunity. Okay and since the processed is only 11% of our export market we see a lot of opportunity there as well. And it has been the company's focus to increase that segment which also presents better margins and the company would be free of certain sanitary risks.

Great. Okay now that's helpful. And the last question is just on the Russia project, are you guys on schedule to finish and this and get actual sales out of this unit in the second half of this year and what do you think we can be looking for as far as just incremental growth that would be helpful with any guidance?

Alex, we're having a little bit -- a little delay in our schedule but we believe that we will start the production in the first month of the next year. We will actually inform it before that we if it could happen in this year, but the delay of the constructions we believe that we will be, will happen in the first months of the next year we start to save from that plan.

And have you given us a sense of the capacity there or what the slot -- what kind of size we are talking about in terms of production?

Sure, basically the plant at the first moment we will have a capacity for 50,000 tonnes.

Thank you very much, thank you.

Okay.

[OPERATOR INSTRUCTIONS]. We have a question from Katie Blacklock from Nevsky Capital, please go ahead.

Hello I just have a question on pricing of processed products in the export market. Can you explain the reason for the fall in the quarter 106% in dollars and obviously a larger fall in reais. It's just that looking at your pricing now industrial lines products are selling at a discount in the export market relative to the domestic market both in Q1 and in Q2, in fact that discounts widened out now to 18%. I just wondered, is there a mix issue on the export side or are you trying to push your market share by discounting prices. Thank you.

Hi Katie. You are absolutely right. It is a mix issue. If you look at our volume levels, they were up 56%. So lot of -- not a lot of that, but part of that is explained by a couple of shipment to Venezuela and to Venezuela -- not necessarily are they the higher margin products. Okay. So they are the lower margin products, so anything from sausages to bolognas to margarine. Okay. So it is basically a -- this 14.8% in Reais I mean as you mentioned the 6% fall in dollar term is mix.

If we excluded the impact from Venezuela, the 56% increase in volumes would probably breed around 30% and you would not have seen this decrease in average prices.

So what would have happened to average price, they would have been flat year-on-year?

Probably yes.

Okay. How come you expect for that mix going forward then?

We do expect the mix in terms of processed and poultry products to continued increasing around 20% - 30%, okay. The company has a large, big focus in terms of increasing its processed products towards the export market. So we will see that increase. And Venezuela is a market that -- it is a very -- it is case by case. So in one quarter you might see a big sale and maybe in the next quarter you don't, okay. But in terms of processed, we will continue to see the sales of poultry processed products increase to Europe, to the Middle East and to Russia.

Okay. And in terms of full year guidance for pricing on the export side for the processed products specifically. Would say a decline of 5% in dollar terms?

If we excluded Venezuela, I would say that it's flat to rising. Okay. When we include Venezuela it's probably declining a little bit.

Okay. And can I just check that you are maintaining your guidance in terms of EBITDA margin of 12% to 13%?

Yes we'll still do maintain our annual EBITDA margin 12% to 13%.

And do you give revenue guidance?

No we give volume guidance.

Okay. That's great, thank you very much.

Okay. Thank you.

Our next question comes from Mr. [Roger Oye with Spanish Bank].

Hi, good morning. My question is first on strategic and growth outside Brazil. Would you be willing to consider companies in a soybean segment outside Brazil, and how is the strategy to acquire anything outside the Brazil? How is the strategy which is distribution or focused on certain segments? And my second question is regarding the debt. I see that you have a very ambitious plan on CapEx and expansion. Are you willing to issue debt or even make a capital increase going forward?

Okay. I will start with the second question. We have internal policy that we invest in the range between one EBITDA and 2 EBITDA level. And we believe that the generation of cash in the company's EBITDA will be enough to financing our investments for the next years, actually one or two years. And -- but we don't have any intention to increase the capital at this moment. And regarding the first question, please could you repeat it?

Okay, if you are willing to make a acquisition outside Brazil, would you consider buying to any company in the soybean segment?

No.

And if not, how -- what can we expect in terms of if there is any acquisition target outside Brazil?

It is not our intention to acquire this kind of companies outside of Brazil. Our strategy is to increase our capacity and sales in processed products and distribution in the retail in the case of the -- what [something can] help us to distribute our processed products outside of Brazil.

Okay, thank you.

Okay.

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

Thank you for everybody to attending our conference call and I thank you for everybody.

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