BRF SA (BRFS) 2008 Q4 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. Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Fabiana Lima, of Financial Investor Relations Brazil. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Sadia's conference call to discuss the fourth quarter 2008 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 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 Ms. Christiane Assis, Investor Relations Manager.

First, they will comment on the Company's fourth quarter 2008 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. Thank you for everybody to attend this fourth quarter conference call of Sadia. Sadia recorded in 2008 the first annual loss in the 64 years of its history, as a consequence of financial loss on derivatives on the impacts caused by the devaluation of the real.

The negative net income for the year announced to BRL2.5 billion. This amount includes the total losses in light of the new Brazilian legislation. These results, however, do not reflect the Company's operating performance. Last year, we made record investments, consolidated the growth strategy for the higher value-added segments and the products and are proceeding with the globalization strategy.

We also recorded the highest-ever recorded revenues, reaching BRL12.2 billion. Sadia ends 2008 with the largest volume in investments ever made in its history, an amount of BRL1.8 billion was designated to the prices which enables us to expand our productivity capacity using new technologies and improving our distribution logistical [infrastructure]. This capital adjustment places us in a pretty leveraged position with installed capacity to support a stronger growth without requiring other major funding in its coming years.

Almost the main price completely in the period before the construction of the first unit in our [distribution] of Brazil with Vitoria de Santo Antao and the largest plant in Brazil in Lucas do Rio Verde. We prioritized growth strategy based on the construction of new plants. The advantage of this strategy is that it will give us more freedom to select the designing of the projects, the site and the technology to be used. This formula has helped us due to the much competitive manufacturing complex, in line with Sadia's strategy in achieving sustainable growth.

In 2008, the annual sales reached BRL12.2 billion, a growth of 20% when compared to 2007. The total volumes sold increased by 8.3%. The domestic market grew 12.2% and the export market grew 5%. In January 2009, [processed] by the new ensured faster decision-making reduced annual costs and preferred [facing] uncertainties post the marketing the Company announced a reduction in year-ago levels. We are optimistic about 2009. We believe we have the capacity to grow sustainably. In spite of the international economic and financial crisis, we view the food industry is a safe harbor, the last to be affected by the crisis and the first to recover.

The rescheduled opening of China to Brazilian poultry is also sign that the perspectives are promising. Now I will pass the call to Christiane to make comments regarding the figures. At the end of the presentation, we are available to Q&A. Thank you.

Good morning to everybody. I would like to go through some of the slides in our presentation. First, we're going to start off with the 2008 results. Then we are going to detail the financial results and the current exposure of the Company, and we are lastly going to give an outlook for 2009 for Sadia.

We start with the highlights for 2008. Sadia posted record revenues of BRL12.2 billion in 2008, and that places the Company among the 20 largest Brazilian companies. We continue our strategy to have focus on processed products, with 13% increases in volumes in the domestic market and 19% in the international market, which gave the Company 26% increase in revenues in the domestic market and 41% increase in revenues in the international market.

Volumes therefore increased almost 2.4 times Brazilian GDP. The Company also was placed among the six largest Brazilian exporters, with $3.1 billion in export revenues. The prices in the domestic market rose twice the inflation index for the period, almost 12%. And we continued to be market leader in the segments where we are, in frozen, in refrigerated and in margarine, and we're going to give more detail on that later in the presentation. BRL1.8 billion in CapEx for 2008, which is the largest amount in the Company's history.

We also have, which represented a growth in terms of total capacity of almost 30%. We also in 2008 started the operations of our largest industrial complex in Lucas do Rio Verde, which is responsible for poultry, the slaughtering of poultry and pork, as well as processed products.

Moving along, the revenues, yearly revenues grew 23%, reaching, as I mentioned, BRL12.2 billion in revenues, and in the quarter they grew 18%, with the breakdown of 57% in the domestic market and 43% in the export market. Next slide.

Highlights of the fourth Q '07 and fourth Q '08, and in this slide I must add that these two quarters have already been accounted for, reflecting the change in Brazilian law, which is the 11638 law, which in relation to Sadia, the main effect for us is the necessity to mark to market the future gains and losses that the Company might have in its financial instruments.

We have also placed a third column in relation to the fourth Q '08, which represents the Company numbers without the reflection of these future mark to markets in terms of the financial instruments. Okay? So you look -- if you consider the gross operating revenue, it would be 3.5 billion, without the law, 3.8 billion, so that the gross margin in the fourth Q '08 of 25.6%, without the 11638, would be 31%. The EBITDA of BRL343 million, again, without the law, would be almost BRL560 million, and the EBITDA margin of 11.2% would reflect 16.9% for the fourth Q.

The same exercise we do for the year, the yearly numbers. Again, the 2007 already contemplates the adjustments for the 11638. We have a 2008 with the adjustments and a 2008 without the adjustments of the law, and we are able to verify that, once again, EBITDA for the year, which was BRL1.164 billion would have been BRL1.4 billion, an EBITDA margin of 10.9%, which is pretty much in line with our guidance for the year of 11% to 12%, would have been 12.8%.

Financial results. Detailing a little bit of the financial results for 2008, we have realized and unrealized gains and losses in relation to 2008, which the main numbers being the exchange variations on derivatives, unrealized, of BRL1.845 billion. We have the exchange variation on derivatives, realized, which were BRL705 million. Exchange currency variation on debt denominated in dollars, net result of investment funds, 480, and interest paid for the year, which brings us to a total of BRL3.8 billion for our net financial results.

It's important to mention that if we would consider fully the cash effects on our third column, the financial net results would have been BRL1 billion. Financial indebtedness. This chart gives us an idea of the short-term and long-term financial assets and liabilities. We mentioned that the financial short-term liabilities are BRL4.16 billion, and we have the breakdown in a chart below, and that breakdown is by quarters and the respective maturities by quarters. We have our long-term financial liabilities of BRL4.3 billion, for a total of BRL8.5 gross liabilities.

We also have financial assets, which amount to BRL3.77 billion, which bring us to a net financial indebtedness of BRL4.7 billion. If we were to consider the 11638 law, we have an additional non-cash posting of an unrealized loss in relation to the mark to market of the derivatives, the future derivatives, of BRL1.963 billion, which would bring our net financial indebtedness to BRL6.733 billion. In the graph below, it's important to say that of the BRL1.434 billion short-term debt which occurred in the first Q, we have practically rolled over the majority of that number.

Okay, so we have during the first Q incurred in a rollover of BRL1.427 billion. It's important to mention that during the second Q we have approximately BRL566 million coming due and our second-largest maturity is in the third Q, which is basically at the end of the third Q, at the end of September, which amounts to BRL1.9 billion. Another important piece of information is that the most part of this debt, of short term, is held with Brazilian banks that are partners of the Company, have been long-term partners, and have been working with Sadia to roll over this debt.

The next chart points out the net debt to EBITDA, which is currently at 5.8. Our next chart gives us an idea of the notional short position in derivatives, the long position, and the net exposure on December, which is 487. It's very important to note that since December, three months have already gone by and approximately an additional 2 billion have come due of this short position, so this gross short position has already reduced a lot.

In terms of the mark-to-market position, again, in December this mark to market was BRL1.9 billion, and we can't forget at the end of the chart that we also have exports for the year which are expected to be around BRL2.5 billion, which would bring us to a net position of $2 billion in terms of dollars.

A little bit on our operational side, which continues to be strong. We continue to see the focus in processed products for the Company, which reached 48% of the total revenues of the Company. In relation to domestic market, 79%, so it continues to be the majority of the domestic market. Next slide. In relation to export markets, we see an important increase of processed products from 10% to 12% in the export market. We also see poultry cuts from 38 to 41, which have additional value added in relation to whole poultry.

In terms of exports by region, we do see some changes here. The Middle East has grown in terms of its participation. On the other hand, Europe has lowered its participation from 28% to 22%. We see an increase in terms of Asia from 15% to 19%. Eurasia, from 21% to 16%, reflecting the difficulties of that region, and Americas growing from 14% to 16%. It's important to see that we continue to be well diversified in terms of our exposure of exports, exporting to more than 100 countries.

The next slide, we've touched base on some of these numbers, but it's important to see that especially in the yearly numbers, the domestic market has grown 12% in volumes and 24% in revenues, so that not only has there been an increase of volumes inside the guidance that we mentioned for the year of 12% to 14%, but we also had an important increase in terms of prices for the domestic market.

Processed products, which is our largest segment, grew 13%, and in revenues grew 25%. In terms of the export market for the year, volume growth was 5% and revenues almost 22%. Poultry, which is the most important segment for the export market, grew 8%, and revenues grew 27%. Next slide.

Here we have an idea of the average prices in the domestic market. Processed products grew 14% and processed is, as you know, the largest segment in terms of our domestic market. In terms of the export markets, poultry is the most important sector. Poultry grew 19.5%, and this is important to say that this is in reals, so it also takes into consideration the devaluation of the real during the period.

In terms of EBITDA for 2008, BRL1.164 billion, 10.9% margin, but important to mention that if we did not have the effects of the 11638 law, our EBITDA would have reached BRL1.404 billion, with a margin of 12.8%. Net income for the year, a loss of BRL2.48 billion. Again, without the law, that loss would have been BRL468 million.

In terms of CapEx for the year, again, this is 2008 was the most important year in terms of CapEx for the Company, with a total of BRL1.8 billion spent in CapEx, 650 in processed products, 674 in poultry, 334 in pork. These increases in CapEx have allowed us to expand our installed capacity, so that on average our installed capacity for 2008 in relation to 2007 has grown almost 30%, and this will permit us to continue to grow in 2009 and 2010, with possible demands that might come from the market.

We have enough installed capacity without the necessity to have additional large CapEx plans in the Company, so that in the next slide processed products reached a capacity of 1.450 million tons of processed products per year. Poultry slaughtered reached almost 1 billion heads of capacity in 2008, while pork slaughtering reached 6 million heads in 2008.

The next slides give you an idea of our two large investment programs in 2008. One of them is Vitoria de Santo Antao, which has just been inaugurated, with the presence of the President and the Governor of the state. Total CapEx for the plant was BRL300 million. It is essentially a processed products unit for the northeastern part of Brazil. The total additional revenues that this plant is going to bring is around BRL400 million when it is in full capacity.

The next big investment plant in 2008 was Lucas do Rio Verde. It is a big, very big, complex that has a processing facility with 50,000 tons per year, a capacity to slaughter 114 million head so poultry per year and 1.25 heads of pork per year. It has begun its operation last year and we expect to increase revenues by BRL1.1 billion when it reaches full capacity.

Next slide, in terms of our ranking in Brazil, we continue to be the market leader in the segments where we participate, with 46% of market share in the frozen processed products, almost 32% in refrigerated and almost 48% in margarine. In terms of that evolution of market share, you can see on the next slide, margarine has grown year-on-year almost 6%, going from the 46.8% to the 47.5%. Frozen processed products has grown 2.2% during the year and the largest growth comes from refrigerated processed products, which has a variation of almost 8% year-on-year.

In terms of our breakdown and trading volume by stock market, the Brazilian stock market continues to have the largest trading volume for our stock, with BRL29 million per day. That was average 2008. The New York Stock Exchange, with the $10 million per day average, and LATIBEX with EUR255,000.

Next slide. Bovespa continues to have the largest participation in terms of our stock, with 72%. The New York Stock Exchange, with 26%, and LATIBEX with 2%, and these are all with preferred shares.

We have on the other hand seen a drop in terms of foreign investors, which are now 43.7%, but an increase in terms of Brazilian individuals, which is interesting, and you can see this on the next slide. The number of shareholders has almost doubled from year-on-year, from 17% shareholders in January '08 to almost 32,000 in February '09. So there's been a big increase in terms of individual shareholders in Brazil. In terms of our outlook for 2009, we expect a growth volume for the Company of 5%. We expect an EBITDA margin of around 8% to 10%, and capital expenditures of around 600, which are basically 200 for breeders and 400 in terms of depreciation.

That's what I had to present. I'd like to open the Q&A session now.

(Operator Instructions) Excuse me, our first questions come from Mr. Alex Robarts with Santander.

Hi, everybody. Good morning. I was interested to see the market share numbers in the fourth quarter in Brazil, with the processed products, specifically, the refrigerated products. And I'm wondering, as I look at the course of the year, clearly you have been having some nice gains.

Who do you think you are -- where do you think you're getting these gains and what do you think are driving these share gains? Is it mix, is it price, a combination? It'd be great if you could give a sense of that. And I guess the second question just relates to the asset disposal program that you've talked about, I guess as part of your recapitalization plan. Can we assume that officially as of now the only asset that you've said is for sale is your stake in the Russian joint venture?

And if you feel also kind of confident that during the course of the year you will be able to achieve kind of a BRL500 million to BRL1 billion type of net proceeds from these asset sales, that would be great if you could also comment on that. Thank you.

Hi, Alex. The main reason for refrigerated processed products having grown all during the year, we believe this is from basically a substitution effect from the expensive beef products during the year. So we saw, due to a lack of supply in Brazil, beef prices increase a lot since the beginning of the year and pretty much maintained that high average price during the year, so that there was a certain benefit in terms of what we call the more competitive processed products, sausages, hot dogs, bolognas, hams, okay?

And then basically we saw the participation of these products increasing due to that. In terms of your question on the Russian plant, it has been mentioned that the Company is looking at a series of alternatives in order to lower its current net debt. Russia is one of those alternatives.

It is important to mention that we do not have the intention of exiting the Russian market. We are at this moment looking at the possibility or there are studies in relation to selling the Russian assets, but, again, the participation in the Russian market, the brand that we have constructed for the last 15 years in the Russian market is not something that we plan on leaving.

And just to understand, Chris, sorry, but do you think during the course of this year your studies that are looking at some of these non-strategic assets, do you feel confident that you can get toward the numbers that we've kind of been seeing and hearing about, kind of the BRL500 million in net proceeds? Is that something that still Sadia is hoping and aiming for during the course of this year?

Absolutely. Actually, there area a number of operational assets and non-operational assets the Company is currently looking at, to dispose. The number ranges from 1 billion to 1.5 billion. It's important to note, it's important to say that every asset that we're looking at is not important towards the production of the product. So, as I mentioned, giving the example of the Russian plants, we can continue to supply Russia in processed products from Brazil.

And, as I mentioned in my presentation, the BRL650 million in CapEx in processed, the 30% increase in our capacity in processed for 2008 is more than enough to supply this potential demand for Russia. We can't forget that the Russian market has changed a lot in the last couple of months and we don't expect a short-term turnaround in relation to this market, so that at this point we believe that the best alternative is to continue to supply that market with processed products from Brazil, and that's the rationale behind the studies on selling the Russian plant.

Okay, thank you very much.

(Operator Instructions) Excuse me, our next question comes from Ms. [Tyce Penno] with Credit Suisse.

Hi, [Christiane and Welson]. Just a quick question. I would like to know how do you break down the 5% fall in growth in 2009 between domestic and international markets. I would like to know about international demand. Do you see any pickup, for instance, in the Middle East, Japan? I would like a quick outlook on that, please.

Hello, Tyce. As I mentioned, the volume growth for 2009, we expect 5%. We expect a single-digit, but a little bit higher for the domestic market, and we expect a lower single digit for the export market. We might see the first Q still on a recovery basis in terms of the export market, with lower volumes.

We see the sector as a whole readjusting its supply, so we've seen a lot of stops in the industry, and the industry as a whole readjusting its supply, so that we expect the volume in the export market to start to pick up towards the second Q and especially during the second semester.

In terms of regions, the most difficult regions continue to be Eurasian, which is basically Ukraine, Russia and the countries around the Caucasus region, and Europe continues to be difficult as well in terms of demand, okay? On the good side, we see an increase -- a slight increase in terms of prices in the Middle East, and we start to see a slight increase in terms of prices, as well, in Japan.

Okay. And just another quick question is just to clarify. If I'm not mistaken, you said in your press release that in your operating cost increase in 4Q, especially because of soybeans, higher soybean prices, is related to those contracts at [feedlots], when you established those contracts at higher soybean prices. Does that relate to that? Just because you mentioned the [causation] in the Brazilian market.

No, basically, we did see in terms of the second semester of '08 in Brazil a decrease in terms of corn costs. On the other hand, we saw an increase in terms of soy costs in Brazil in the second semester.

Okay, but don't you buy the most part of it from feedlots in the export markets?

No, no, no. The main price in terms of index grain prices for us is Brazilian prices.

Okay, thank you very much.

(Operator Instructions) Excuse me, our next question comes from Mr. [Zebil Nau] with Standard New York Securities.

Hello, good morning, everybody. I have a follow-up question on the Russian operations. I was wondering if most of the revenues, the Russian revenues, come from the plant that you have over there or a significant portion come from the Brazilian operation export to Russia. Thank you.

Hello. Yes, it's important to mention that we initiated the Russian plant during the basically first semester '08, and the revenues from that plant have been very small since then. So that basically for the year of 2008, we continued to export from Brazil processed products, so that there won't be a big impact in terms of the selldown of our participation in the plants. We can't forget that it's 60% Sadia and 40% [Mirapau], and basically what we're looking at selling is the participation. Okay?

And, again, just to reinforce, we will continue -- in the eventuality that this happens -- continue to supply the Russian market from Brazil, as we have during 2008.

Okay, and can you just give me an idea, gross idea, of how much of the Russian export revenues represent of the total revenues, [hectare] revenues?

To give you an idea, we break it down by Eurasia, and Eurasia represents currently 16% of our export revenues, and by Eurasia the main number there is Russia, and then we also have Ukraine, Pakistan and other countries in the Caucasus region, but the main one there is Russia, so we're looking at under 16% export revenues, and that is basically processed pork and poultry. Those are the three segments, the largest one being pork.

Okay, thank you.

Okay.

Excuse me, our next question comes from Mr. [Alexander Zinn] with Merrill Lynch.

Good morning, everyone. Actually, this is Juan Carlos Saenz. Thanks for the call. I have two questions. The first one is with regards to the EBITDA margin guidance for 2009. It's to 10%. How much from that reduction in EBITDA margin comes from the changes in the way that you book the effect derivatives on your sales? What would be a good approximate metric for us to try forecast what would be the impact in our financial results, for instance, let's say, the impact of the variation on FX during the quarter, over 100% of your export sales, or maybe a good estimation here for us to use as a metric going forward?

And the second question is with regards to the derivative losses, I understand that in the analyst meeting that you just had here in Brazil, Salazar was commenting that you already have all the long contracts until the end of -- derivative contracts into September. I was wondering if you could disclose for us what would be the average spot rate for those contracts, if it's in line with what we have been experiencing in the market these days? Thank you.

Okay, Sean. Basically, the law, the change in law in Brazil, the 11638, it obliges the Company to state all its future gain and losses as of the fourth Q '08, okay? And that's what I tried to point out in my presentation, that if we did not have that law our results for the fourth Q would have been very different and those gains and losses due to those derivative contracts would be broken down until their maturities in September '09.

With the law, those mark to market of those future positions are anticipated for the fourth Q, so that in the future quarters there is basically very little impact of those derivatives.

Absolutely, yes. And it's positive that you have all the long contracts for each and every month already stated.

And that's what Salazar mentioned here, that the long contracts are now tied up with the short contracts, so that there is no change in terms of the maturities of those contracts. And, therefore, no variations in terms of gains and losses in those derivative contracts.

Sure, Chris, but also he mentioned in the meeting that it was done in the past few weeks, so there might be a difference in the spot rate from the way that you book the mark to market by December the 30th. That's the date you have fixed the long contract. It's important just to have the number, but we can get this number later, then.

You're aware that we don't disclose the average spot price of those long contracts, but I guess it's important to see that the spot currency in December has not changed a lot since -- for the last three months, right? It's been around BRL2.30 to dollar. The other important thing is that during the last three months we had almost 2 billion of the short positions maturing. So now, actually, tomorrow, on the 31st of March, we should be around 2 billion growth, short position.

Sure.

Okay? So the exposure has lowered a lot since the end of the year.

Sure, sure. And just consuming the money that was on the margin calls.

Exactly.

And about the EBITDA margin, from the effects variation on the revenues that that was going to come on your financial results?

If I understood correctly, it's pretty much in line with the 11638, so there isn't going to be an impact. I'm not sure if I understand your question.

Well, the question is, we are seeing a major reduction in your EBITDA margin expectation for 2009, part of it coming from a much challenging environment, and part of it would also come from you were having better top-line results without considering the change in the legislation, because you were booking the FX gains in the contracts for the exports as top line, and now this result, either positive or negative, cannot come in your financial line.

I was just wondering, is there a way that we could -- a metric for us that we could -- I mean, a metric for us to try to forecast what would be the impact. Would it be to assume the FX variation on 100% of your export revenues? Is that an unreasonable assumption?

Okay, I understand. Basically, and you're correct, if in the past we had operational hedges, now the exports are indexed to the current spot market currency exchange, so that they're still comparable, Juan. That's the whole point. Now our exports are being exported at 2.3, and the future losses have already all been accounted for in the fourth Q. So that when we look at 2009, we have turned the page and we're looking at exclusively the operational side of the Company, where exports are going to be accounted for at the current export rates.

Sure. Got your point. Thanks, Chris.

Excuse me. Our next question comes from Mr. [Diego Maya] with HSBC.

Hi, Chris. Hi, Welson. Thanks a lot for the conference call. Actually, I have two questions. The first one is regarding the short term that you guys have recently rolled over. I just wanted to have an idea of the average cost of this debt. And the second question is regarding the grains hedging. I just wanted to understand if you guys continue to do grains physical hedging, or if you guys are not doing it anymore. Thank you.

Hi, Diego. In terms of net debt, our new debt that we've acquired in the last six months has been basically in line with market values, which have gone around from 115% to 125% of the CDI rate when this is in reals. And when it's dollar-denominated debt, has been around 6% to 9%?

Okay, thanks a lot. And on the grains side?

Oh, on the grains side, we currently have no futures contracts in terms of grains, but we continue to manage our grain exposure via physical buying and selling of our grains.

All right, so you continue to do that. Okay.

As we have in the past, yes.

Thanks a lot.

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

Okay. I would like to thank you for attending our conference and to comment that we are very confident with the next few months in the Company. We are confident with the 2009 for our kind of industry. Thank you very much.

That does conclude our Sadia fourth quarter 2008 earnings results conference for today. Thank you very much for your participation, and have a good day.