BRF SA (BRFS) 2009 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'll 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. Silvia Helena of Financial Investor Relations Brazil.

Please go ahead.

Good afternoon, ladies and gentlemen. And welcome to Sadia's Conference Call to Discuss The Second Quarter 2009 Results. I would like to mention that the 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 Paolo are Mr. Jose Luis Magalhaes Salazar and Ms. Christiane Assis. First, they will comment on the Company's second quarter 2009 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. Salazar, you may now begin.

Thank you.

Good afternoon to all. Welcome and thank you for participating in another conference call to analyze the results of Sadia referring to the second quarter of 2009. The slides to be presented herein as well as the quarterly report published Friday are available in our Investors Relation website at www.ri.sadia.com.br.

For this conference call, I have here with me our Investor Relation Manager Christiane Assis.

Next, let's start the results analysis.

We present in slide two the highlights for the quarter, where we recorded BRL2.9 billion as gross operating revenue, a 2.7% decrease compared to second quarter '08. This quarter, we highlight the 15.5% growth in the domestic market for a total amount of BRL1.7 billion and revenues in the foreign market of BRL1.2 billion, a decrease of 13.9%.

The gross profit totaled BRL571 million, while the gross margin was 22.2%.

Net financial result was BRL607 million for the second quarter. And net profit was BRL346 million, 124.8% above the same period in 2008.

Finally, Sadia's EBITDA in this quarter was BRL248 million with a margin of 9.6%.

We also had the positive effects of some nonrecurrent events of BRL55.5 million in reference to the full credits from the contribution of PIS and COFINS in relation to the acquisition of agricultural inputs for agribusiness in the period between August '04 and April '06.

In June '09, the Company obtained a favorable answer from the Internal Revenue Service to the inquiry allowing it to restate full credit to the cost of products sold. Without this nonrecurrent event, the restated EBITDA margin for second quarter '09 was 7.5%.

Slide three shows gross operating revenues of BRL2.97 billion with a growth of 1.1% in comparison to the same quarter in 2008. Domestic market share in total revenue increased from 51% in the second quarter of 2008 to 58% in the second quarter of 2009 due to the good performance of this market.

In the breakdown of total sales for the first semester of 2009 in slide four, Sadia remains in line with strategy of selling products with higher added value, increasing the market share of the processed products segment to 54% of sales followed by poultry parts with 19%, whole poultry 15%, pork 6%, and beef 3%.

Relating to the domestic market in slide five, we note that the processed products segment remains the most significant with 83% of total sales, 18.9% increase related to the same semester last year.

Regarding the foreign market in slide six, we see that the poultry segment remains the most significant with 72% of total sales divided between poultry parts with 40% of total sales and whole poultry with 32% of the total. This increase in poultry parts is part of Sadia's strategy of increased sales in this segment, which has higher added value than the whole poultry.

In slide seven, we note that the regions with high imports of Sadia products were the Middle East and Europe, which correspond together to 67% of the revenue generated by Sadia. These regions also presented the greatest evolution in volumes and in revenues, due to the increasing exports of whole poultry to the Middle East and sales of 30% to Europe.

Slide eight shows the main variations in volumes and sales for segments in domestic and foreign markets. The highlights are the growth in volumes as well in sales in the segment of processed products in the domestic market and the poultry segment, which increased in sales mainly due to the redirection of the sales of this segment from the foreign market to the domestic market.

Slide nine shows the evolution of the average price in the domestic market with highlights to processed products, which represents 83% of sales in this market. We saw the price in this segment increased 5.9% in the annual comparison to BRL5.97 per kilo. This good performance was due mainly to the capacity of sales in the past two cost increases we had throughout the second quarter.

Relating to other segments, we experienced a price decrease of 1.6% in poultry, 4.4% in pork, and 5.9% in beef.

Slide ten shows the evolution of the average price in the foreign markets in reals with highlights to processed products, which represents 12% of sales in this market. We saw the price in this segment increase 20.9% in reals in our annual comparison to BRL5.84 per kilo.

Relating to other segments, we experienced a price decrease of 5.1% in poultry, 8.4% in pork, and 2.1% in beef.

Going forward to slide 11, we note that the EBITDA totaled BRL248 million in second Q '09 and was slightly lower than the EBITDA in second quarter of '08.

As already pointed, in this quarter, we did not have some of the nonrecurring costs and expenses we had in the first quarter of 2009, such as technical stoppages and readjustment of our supply chain, as well the nonrecurrent events of the PIS and COFINS with an effect in the cost of goods sold of BRL55.5 million.

All these factors as well as the good performance in the domestic market generated a significant increase of EBITDA in this quarter in relation to the first quarter of 2009. It is worth pointing out that this improvement was of seven percentage points.

Moving forward in slide 12, we detail the financial results. For the year, the accumulated financial expenses totaled BRL147.7 million positive, BRL114.6 million higher than the same period in 2008.

It is worth mentioning that the greatest part of the positive impact in this account was in the line of changes on exchange variation of the financial liabilities in the amount of BRL547.2 million, due to the strong appreciation of the real, when the real-dollar fluctuated from 2.31 on March 31st to 1.95 on June 30th, an appreciation of 13.1%.

Regarding the financial income, the major impact was the positive results in the sale of shares in the BMF, a share that we had for at least three, four years, in the amount of BRL130.7 million. The accumulated result of financial expenses and income was BRL347 million, while in the same period of the previous year it was BRL96.6 million. It is worth mentioning that Sadia does not have any more currency derivatives which may influence its results.

We detail the financial data in slide 13. Net debt had a [figures] decrease of BRL749.2 million in comparison to the first quarter of 2009 due mainly to the positive exchange variation of the dollar-denominated debt, which positively influenced the net financial income BRL703 million in the second quarter of 2009. Sadia's total financial liabilities on June 30th were BRL8 billion with financial assets of BRL2 billion, therefore a net debt of BRL6.1 billion.

Coming next in slide 14 represents the consolidated net income of BRL346.6 million in the second quarter of 2009, which was 124.8% higher than the same period in 2008, resulting from the positive financial impact in this quarter of BRL666.5 million and the EBITDA of BRL112.4 million.

Represented in slide 15, a decrease of net debt over EBITDA of 7.2 in March 2009 to 6.5 times in June 2009, which main reasons already mentioned as EBITDA in the positive financial results for the quarter.

Coming next in slide 16 represents the capital expenditures for the first semester of 2009, which totaled BRL302 million with the following major investments -- BRL48 million investment in Lucas do Rio Verde to complete the pork [processing] units, BRL17 million to double Goiaves capacity, BRL38 million investment in Vitoria de Santo Antao to finish the processed products unit in Pernambuco [to attend to] the northeast region, BRL27 million in maintenance and small improvements in all units, and BRL93 million in breeders.

So those are the highlights of our second quarter results. And now I would like to move to your questions. Myself and Christiane, we are here to try to answer them.

Thank you.

Excuse me. Ladies and gentlemen, we will now begin the question-and-answer session.

(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.

Our first question comes from Mr. Alexandre Pizano with Banco Merrill Lynch.

Hi. Thanks for taking the question. My question is actually on the sales in the domestic market.

You had very strong performance on processed products. I was wondering if you have any [insight] if part of this performance was due to the problems that [ST Go] had with their plant and so might be a one-off effect and if you have an estimate of what the recurring sales and volumes would be.

Thank you.

Hi, Alexandre. Thank you.

No, I don't think it has anything to do with the problem that they had with the plant in [Juveria]. I think even though now we actually [have], but that's kind of new.

And Sadia always had a very strong position in the domestic market and its brand. It's a very big asset that's very resilient to any type of prices. And so what I think also -- it's kind of like a proof of that -- it's that they are -- we have -- they have almost full capacity in their plant right now based from other comments that we have heard. And our brand is very resilient. So that's a big asset that Sadia has. So I think it's more really recurring and more on the sales force of Sadia than anything else.

Okay. Thank you.

Excuse me.

(Operator Instructions)

Excuse me. Our next question comes from [Mr. Marcelo Noronha] with Banif.

Hi. Good afternoon. Thanks for taking the question (inaudible).

Just wondering if you guys could share with us data on how close to capacity you're operating in terms of your processed division, also your immature divisions, and then going into the third quarter of 2009 where you're going to be. Do you think you're going to be close to capacity? Or you think you might have to reduce production levels at certain divisions?

And how does -- and what are the implications for let's say your full year guidance? I know that Sadia does not publish guidance, but I'm assuming that Sadia might be lower some of its expectations for full year volumes.

Thank you.

Well, thank you.

We, as you know, pretty much what happened in the market is that internal markets kind of compensated external markets. And the volume there kind of almost like a flat or with a slightly increased from last year. And of course, we have launched or we have initialized the production in many -- in different plants, like Lucas do Rio Verde and Vitoria de Santo Antao.

Having said that, having pretty much the same volumes of last year and two new plants that just entered in production this year, that means that we have some idle capacity that I would say around 20% to 25%. Most of them, of course, is on the processed food segment because Lucas do Rio Verde and Vitoria de Santo Antao, they are specifically for this type of product. So having said that, we still have plenty capacity to be let's say used.

Regarding your question, I think for the second half of the year, we think internal markets will be -- will keep its place, strong. We don't see a lot of surprises coming from that market. It has been a very resilient market. And it seems that the crisis -- there was a crisis. But it was much lower than what everybody had anticipated. And the second quarter, the second half of the year performance, it depends a lot on the external market.

External markets, how fast the economy will recover, of course, there was a recovery from the second quarter to the first quarter of '09. It's low. But there was a recovery. But at the same time, we had a problem of appreciation of the real. So it depends on how fast the economies out there will recover. Second, it depends on the stability of the real currently in order to -- right now, what we need is a little less volatility in the currency. We kind of want to see it kind of stable.

And of course, the third thing regarding the external markets would be mainly our ability if there is stabilization in the currency, our ability to recover prices, which we have been able to do it. But it's kind of like slower than what we thought. Second quarter was better, like I mentioned before. We think it will be better. But it depends, of course, like I said, in economies out there, our ability to recover price, and a scenario of a more stable currency, real-dollar currency, real-dollar rate.

Thanks so much for that.

So you mentioned that those two new plants, Lucas and Vitoria de Santo Antao, might be operating at -- with 20% to 25% of idle capacity. Does that make sense? Or you're referring to Sadia's consolidated -- ?

I'm referring to Sadia's consolidated, of course. Lucas and Vitoria de Santo Antao, because they are startup and they are in a ramp up right now, of course, at this moment, they will be more than that now, around 40% to 45%.

So Sadia's consolidated capacity utilization in average during the second quarter -- and you're referring to processes foods -- it was around 75% to 80%?

Yes.

How -- and how does that compare to what you're seeing in July-August roughly?

Pretty much kind of like the same. We really need to see the market, mainly the external market recovery in order to have a better tradition of -- a better location of products.

And just a follow up -- and that's my last one. [At least], if -- because I'm assuming that you got a plan for the fourth quarter already -- and I'm just wondering how fast can you ramp up because if at this point you're assuming that demand is going to be made slow, then you're probably going to plan your production. So they're going to be producing at around 80% of capacity utilization in the fourth quarter. Otherwise, you might have to make plans to increase utilization by the end of the year.

So I'm just trying to also understand how -- what you're planning around. And then if the economy recovers faster than what you initially thought, could you ramp up easily?

Yes, we can ramp up easily. And it's important for us to not forget that in the first quarter of the year we made some reduction in [turns] in some factories, exactly to avoid shutting down factories, because if the economy recovered let's say faster than what we thought, instead of having to reopen a factory, we would have to reopen just another line.

So we have planned that. And we are pretty much very confident if the economy, both in external markets and in internal markets, they recover faster than what we thought, it would be kind of easy to have availability in the plant in order to fill that demand.

Great. Thank you so much. That's very helpful.

Excuse me. Our next question comes from [Mr. Gabriel Jaramillo] with Banco Santander.

Hi. Good afternoon. My question refers to the domestic processed performance.

I guess some of the increase as you were talking, Salazar, comes from the processed food capacity increase. So my question is -- could you remind us how much of processed capacity you added year on year on second Q '09 with all the start ups? I think Lucas do Rio Verde is the biggest one. Then, I'd like to have a sense on how much the 15% year-end increase on volumes could be attributed to such startups, please.

I will give you the number we posted on our IR site because I don't have the number here with me. But Christiane will post that on the IR site.

And I think it's not -- I don't think the increase in the market share or the increase in participation of the local markets has to do with those two factors. I think it has to do with the strategy of making sure that we have the right products at the right point of sales and at the right prices. And we think we were -- we have been successful in executing this strategy.

I think even if we didn't have the Lucas do Rio Verde and Vitoria de Santo Antao starting up right now, we would still have the same performance. What you have to understand, though, is that those factors -- they were planned to be entering in a much more favorable environment. Of course, right now, after everything has happened, it's kind of easy to see. But we could do the same strategy without those two factors. At the time right now or because of the whole economic crisis or global crisis, of course, that's why we have this idle capacity because exactly when they were ready to start operations, we had the crisis. So I think what has really done the job for us has been the execution in the point of sales rather than the increase in capacity.

Okay. Got it. And can you give us a sense on how is the capacity utilization at those two startups, Lucas do Rio Verde and Vitoria de Santo Antao, as well as when -- I don't know if you have already mentioned that -- but when you intend to increase such capacity to the average of historical levels, like 90% to 95% of utilization?

I think the capacity right now is ramping up. Like I said, I cannot give you when we're going to be at the average because it depends a lot of how economies will do after in terms of turnaround from the economic crisis.

Of course, the faster the offshore economies start to recover, the better for us and more capacity we will have because then we are going to be able to direct processes to more to Lucas do Rio Verde and to Vitoria de Santo Antao and free up some of the factories in order to export to external markets. Okay?

Regarding the capacity that you asked, it is below -- it should be -- those two factories should be around 40% idle capacity.

Okay. Thanks a lot.

Excuse me.

(Operator Instructions)

This concludes today's question-and-answer session.

Mr. Salazar, at this time, you may proceed with your closing statements.

Thank you once more for participating in conference meeting. Our Investor Relations team is always available to answer further questions. Feel free to keep in touch. Have a nice day. Thank you very much.

That does conclude our Sadia second quarter 2009 earnings results conference for today. Thank you very much for your participation. And have a good day.