BRF SA (BRFS) 2010 Q1 法說會逐字稿

Good morning and welcome to BRF Brasil Foods S.A.'s First Quarter 2010 Conference Call. This conference call and the presentation are simultaneously transmitted via webcast in our website, www.brasilfoods.com/ir. At this time, all participants are in a listen-only mode and later, we will conduct a question-and-answer session. Instructions will be given at that time. We appreciate if each participant made only one question. (Operator Instructions).

Forward-looking statements related to the company's businesses, perspectives, projections, results and the company's growth potential are previsions based on the expectation of the management as to the future of the company. These expectations are highly dependent on market changes, economic conditions of the country and the sector and international markets, thus are subject to change. As a reminder, this conference is being recorded.

At this conference are Mr. Jose Antonio Fay, Chief Executive Officer and Mr. Leopoldo Saboya, Chief Financial Officer and Investor Relations Officer. I would now like to turn the call over to Mr. Fay. Please sir, go ahead.

Good morning to everybody. First of all, I would like to thank everybody that is following our call. We will report the first quarter of the company's results, saying that they are online with our expectations of a gradual recuperation recovering of our results. According to our findings, we are now having more normal environment of business, and mostly of our improvement in results are coming from the recovery of some export selected markets, mostly Asia and Eurasia, that are performing good.

We still have some problems in price for Middle East and north of Africa, and we have a positive trend in domestic market, we see the market growing and with a sustainable in more volumes and prices, and then perhaps the main point is the lower cost due to some [operating agencies]. We have small operation cost and we too are having grain cost smaller this year.

This is the FX effect. In one hand, we have less income regarding to FX, and the other hand we have less cost regarding to grain cost. This makes a gradual improvement of our margins. We too have, during this period, concluded our project regarding to the best practices, linked to our merger procedure. We had finished all the planning of this process, and now we are waiting for the antitrust authority's approval.

We expect that this -- today the process is in the instruction to the CADE, which is the government department in charge of the instruction of the process, and it's already one year that they are doing this job. We believe that although this is a complex job, because we are involved in a lot of categories, almost 60 categories that we used to operate, we expect that this process is in the ending procedure, it should be.

We expect that this instruction procedure should, after one year, it's in the end. After that, we have 60 days in the antitrust department, authority's department, which we expect being concluded on time, 60 days, which means that although we are talking about difficult to predict some of the terms, that are always very difficult to predict, we expect to have this approval to the beginning of the next semester.

But 'til there, we'll keep on working; we are not stopping waiting for this approval. We are working in separate companies where we have to do inside the boundaries of the quarter -- the agreement that we signed with the government. But we are working and we are free to go in external markets. We are already working together, we are free to go in supply and purchase departments, we are already merged this, and in commodity products, as cuts and the whole [birds] in internal markets.

So, we will keep on working hard, looking for our results and seeking for the approval, but we will not allow that the -- we will not stay waiting for the approval without doing nothing. So, we are working inside our -- the boundaries that we have. All in all, we are reporting a quarter that we consider a good result, mostly due to -- yes, that is still online with our expectations. Since last year, we have started, and where you can see this recovery in the market, mostly in external markets, we had suffered a lot last year.

Now, I will call Mr. Leopoldo, the CFO, to get into details regarding to the results.

Good morning, everyone. So, let's go straight to the results of the first quarter, highlights of the results on page five, where you can see that the company in this quarter had a pretty much flat gross sales, and zero decrease, 1% lower gross revenues, and the flat net sales. And in the domestic market, it was 4% higher, but in the export 8% lower and basically, as we will understand briefly, it's due to volumes in the export market.

The gross profit has a considerable increase, and the gross margin, 580 basis points growth compared to last quarter. That shows the company's recovery of the majority of the market, but mainly in the export market as we are going to see in detail. So, the EBIT was BRL271 million, compared to BRL61 million losses last year, and the net income of the company, BRL53 million compared to BRL465 million of losses last year. And the EBITDA of BRL447 million compared to BRL180 million last year, and the increase of 530 basis points of margin, and this 8.9% of EBITDA margin is a quite normalized margin for such a quarter.

Just more light on the expenses and financial results, we have also in terms of operating expenses, 50 basis points lower this quarter compared to last quarter, and the financial results of negative BRL155 million due to it's broken down into BRL50 million based on FX fluctuation on the ending -- since the ending of the year to the ending of March over our net short accounting exposure in dollar terms of around $1.2 billion.

And plus BRL80 million of interest rates during this period, this is basically 7% something of interest rates, and or interest rates over net debt at around BRL4.2 billion during this period, and some order expenses like bond issuance, expenses and other expenses, banking expenses and the like. And on top of that, we have also the other results negative of BRL66 million, which is basically the cost of idle capacity due to pre-operational expenses.

So, by saying that, let's move to the next page, that shows that we have no major changes in our breakdown of sales. Just to point here on the breakdown between domestic and export market; because of these reduction of net sales in the export market, the export division now it's 41% of the total sales compared to 42% of last year.

Going forward, now a little more color about our performance and now starting to understand where we got this better result compared to last quarter. And now, also compared to the immediately last quarter, which is the fourth last year. First of all, when we compare to the first quarter '09, in Meats, we had a 3.3% higher gross sales, major due to volumes, because it was flat prices, but a very good enhancement of our operational performance.

And taking into consideration that last year we had to sell much more in [tura] products in the domestic market, so there is also a mixed enhancement here, and also issue of overall performances due to much more normalized mix of sales in the domestic market. I would like just to highlight the Processed Foods segment, which encompasses meat and non-meat products that grew 6.1% in volumes, and 4.6% in revenues.

So, we can see a little reduction of prices quarter-over-quarter, but in spite of that, we had a much better operating results because of cost, and also much more lined up SG&A and operating expenses, because we are having a much more accurate distribution or much more normalized business environment in this quarter compared to last year.

In the Dairy segment on the other hand, we got a 6.3% increase in revenues, 2.7% being volumes, and 3.6% prices. Although we got this increase in revenues, we are facing a challenging supply scenario, this higher revenues but lower profitability compared to last year. It's lower than last year, but it's pretty much inline with historical first quarter levels. It's lower than last year, because last year we had a much more positive scenario, especially in the UHD segment, but we are positive going forward.

Now, let's focus on the export market. Despite the fact that we had 7.8% lower revenues, we could grow prices almost 20% in dollar terms, showing the great recovery of the international market. But as we faced a 28% of US dollar devaluation, the prices in reais terms reduced to 6.6% debt. Plus, the 1.1% reduction volumes resulted in this, almost 8% lower revenue.

But again, the majority of this bad performance, let's say, in terms of volumes was due to the negative impacts of January, which was the month that we stayed there at very far away from our plan or our budget, but we are now ending this quarter pretty much inline with our budget, and we are now catching up both volumes and prices in the majority of the markets. I'll give more details what's performing well and what's not. But in terms of EBIT results of the export market, we are back to the positive side compared to a very negative scenario last year, where the first quarter was probably the most dramatic quarter of the year to the export division.

So, going forward, here in page eight, just this sum-up of the very important reduction on costs and expenses, and this is pretty much inline with what we have been saying to you, that after this pretty much stable FX scenario, we have been able to absorb in our cost structure the benefits of this low FX in our cost now being really priced in.

It's important to highlight here that out of these 580 bps of reduction, there is 170 bps due to the new accounting rules of the depreciation. So, you need to take in consideration, because in the first quarter last year, we didn't have such a rule. Basically, there is a better result when you compare it to the past, a better gross margin, a better EBIT margin, but a neutral effect on the EBITDA margin.

So, the EBITDA margin reflects, in the comparison with last year, the full recovery when you compare quarters, okay? And on top of that, also the 70 bps of better operating expenses; due to several things, but in summary because we are having a much more normalized supply chain of the company after a disruption of the system last quarter.

Now, taking a look of the evolution of our results, it is again inline, absolutely inline with -- we have been saying to you, this is a gradual but consistent recovery of our performance. We are satisfied with the current performance, EBITDA performance, where as you know, it is still away from our aim and are still away from the potential that this company can give after all the gains with the merger and all the potential that we have going forward.

Now, moving to the company's performance by markets; last quarter, take a look of the panel -- the scenario of our main EBIT costs and FX. So, first of all, in the top left, we have the Protein prices exported by Brazil, and we can see clearly that the Chicken market is pretty much flat compared to the fourth quarter, but 19% higher than the first quarter '09. And these flat prices being because of basically one market, which is the Middle East, where we have not been able to increase prices, and the other selected countries, we -- on the other hand we have been able to set on prices.

Look to the Pork market, it's a little different. We had a little lower recovery compared to last year, but an important recovery compared to the fourth quarter, which is the market the Brazilian exporters could get a 9% higher prices driven by Russian market. And below, on the left we have the Grain, which they are performing quite stable in dollar terms, but of course in real terms in the domestic market they are quite below last year levels. In average, if we take according to [something] average, we are running basically 20% lower according to prices compared to last year.

The scenario is quite positive. We are seeing USDA just released the first prospectus for 2010 and '11, crops in the world, which is pretty much positive in terms of supply and [80 stocks] and everything. Brazilian harvesting has been very good, South America in the whole, but remarkably Brazil is harvesting the biggest corn crop every, so the supply scenario for the mid-term is quite positive for the industry.

Looking to the Milk on top right, traditional seasonal movement, but this year it begins a little earlier, and we can see this in sharp increase on prices, on prices paid to producers, which is as it's happening a little earlier than more traditional or normalized years. It's pressuring our margins in the Food and Milk market, but we are entering now in quarters more positive, like the second and the third quarters for the Milk division. US dollar, as I mentioned before, after this big volatility, we are at least seeing a more stable scenario, and the dollar is running around this range of $1.70 until $1.85, $1.83, which is positive for us to plan better our business.

So, let's move forward. I will skip this slide here, the 12th because we've already mentioned about the performance of sales and revenues, so let's move forward on the 13th. And here is just a comment about the domestic market. So, those are the main categories that we operate through fully processed and branded products in the domestic market. So, you can take a look of the relevance of each market, and the performance all of those markets had compared to '08.

In the summary, the majority of them grew in terms of size of market, and we as a company will [look forward], in considering all the brands we have in all the categories. We had in some categories a little increase of market share, in some other, a little decrease of market share, so nothing different from all the trend that we have been seeing.

I would like just here to comment that the frozen meats, which is the one, it's a big market, it's BRL2.3 billion, but of course if we compare this type of convenience foods with other countries, a size of this market, this is still very small, and it can keep growing inline with the Brazilian recovery of real wages, the better environment that is in front of us for the next couple of years.

And this, the very last Nielsen figure showed a recovery of the frozen meat market, and we are positive about this segment, which is important to bring or to help in our profitability in this domestic market, but this is the message of the last year of the market size, and then on the Q&A session, we can discuss some more points about that.

In terms of our exports by division, no big changes compared to last year in terms of relevance of each market. I would just give a brief comment on each market. So, starting by the Middle East, it's still tough, this quarter. It was tough fourth quarter last year and basically because of oversupply. There is no issue of demand, no issue of cost, it's nothing, but basically the supply and this will take some more months to be fully normalized. It's important, this normalization, to boost our margins going forward as we foresee.

The Far East market and here -- when we talk Far East, we are basically talking about Japan market. Here is a very important news, which is that prices basically returned to historical levels, and we are having normalized demands. This is a very important market that demands a very important volume of dark meat, and helps to balance all of our portfolio to the export market.

In the European market, we are seeing a smooth recovery of prices, and a pretty stable volume, despite the crisis or despite these more constant credit crisis in those so called PIGS market. We are not seeing that this surging crisis of Europe will change. This trend of recovery, again it's not fully back, but it's much better than last year. Through all the year, throughout the year, it was a very bad year for Europe, but now it's giving signs of enhancement.

But on the other hand, we could see there is the expectation that due to this crisis, products and proteins like chicken could benefit in that scenario. And on top of that, there is the expectation of a higher grain cost from Europe compared to '09, which is the totally different story of ourselves.

In Eurasia, here recovery of the pork meat market, as we indicated last call, that due to the refresh of older system and the recovery of the economy itself, we are seeing good prices of pork cuts, but in chicken, limited volumes and no recovery based on the US ban and Brazil pretty much didn't got any new closer aside because of that.

Other countries, as you can see, has been growing quarter-over-quarter, and now accounts for 16% of our net revenues in the export market. And we are growing in those other regions that are giving very good results and news for us. And I would like to emphasize onto here, which is Africa; Africa, a good demand, a good perspective. We are launching a new sales office over there to take care of the Sub-Saharan African region. We are quite positive of that market. For the mid to long term, we strongly believe that we'll keep bringing the good news.

China, growing volumes, although the base volume last year was quite small, but we had new approved plants that may open up new export flow to the region, but China is always specific or a very interesting issue, because China, the potential is absolutely far away from this very limited business we have nowadays with that region, and we strongly believe that China will be a mass importer of proteins in a whole, and Brazil will definitely play a remarkable role in that sense.

So, moving forward on slide 15, this is just to bring again this message to you that although we are getting more and more confident with the recovery of international market, we still have this slowdown of the raw meat trade after several, at least the case of non-stop growing of the overall meat trading in the world, which benefit Brazil by far compared to other countries.

So, we are returning in 2010 to the levels we had in 2008, so that's just a point here for us to be aware that markets are still balancing supply and demand for us to fully back to a normalized, and to a more balanced scenario of supply and demand. But for the future, we continue to see a positive trend for Brazil, as a main player of that, and there is a big space for the trade compared to what's consumed in the world of those proteins.

Now, taking a look of the Brazilian exports, no big change compared to last year's figures, but slightly higher pork figures in terms of exports -- and the pork is the one that we -- and we have been saying for several years, but we have a gut feeling that we are getting closer to a positive news on the pork, but I would like to stay here on this positive, to wait and see what's next. But we are quite -- we are seeing movements in the international barriers or new agreements that will allow Brazil to start to export to new countries in the near future.

Now, let's move to the final session of our presentation, which is the debt and investments of the company. So, in terms of investments, we had a total investment, which is the traditional CapEx, plus the investment in breeding stock, summing BRL170 million in this quarter. It's in the lower pace, taking that we planned to invest a BRL1 billion this year for this concept, but all the investment has been driven to the productivity and optimization projects, because in terms of capacity, we have still idle capacity being utilized in both Perdigao, but remarkably in Sadia's system.

So, moving forward to the debt position, here also again a message of a very robust statement regarding our debt position. In terms of net debt, we had a BRL4.3 billion of net debt compared to BRL10 billion pro forma last year, and BRL2.9 million average to EBITDA, and decreasing. As far as we are getting cash generation, and as far as we are having a very optimized investment plan, this is a trend to up -- a negative trend. It's a positive thing, but negative in terms of leverage till the end of the year.

And in terms of our profile, the profile of the gross debt, we finished the quarter with a 74% long-term debt basically due to the bond issuance in the beginning of the year, and the balance of 41% local currency, and 59% foreign currency denominated debt, which is a quite good balance, so in terms of our balance sheet, only good things.

Moving through the shareholders composition, and no change, but the Tarpon with 5% here, that must be released, because which is the trigger of relevant investors. But another change is that the number of common shares is double than last because of its pick-up shares, that all of you are aware of, but no other changes, relevant changes in terms of our difuse control part of company.

In terms of our monthly traded volumes on page 21, we doubled our liquidity compared to last [12 months], which is quite positive, and look to the ADR volumes; we are pretty satisfied with the liquidity. These days, we are trading some days more than BRL20 million, $20 million per day only in ADR, so gain now compared to a world class company in terms of liquidity.

And the final message, now with the more green and yellow colors, reminds of Brazil, reminds of the World Cup, and it's natural as the Brazilian company -- as the Brazil company that takes Brazilian demand to support the soccer team, the national soccer team, and now showed to have campaigns,both in Perdigao and Sadia brand name campaign. So, we hope that next quarter, when we'll be releasing the second quarter results, we will bring not only good news regarding the Brazil food results, but maybe good news regarding Brazil as a soccer team.

Thank you very much, and let's move to the Q&A session. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Each participant may ask only one question. (Operator Instructions).

Our first question comes from Mr. Eduardo Vieira from Credit Suisse.

Hi, good morning. Thanks for the call. Can you give us any guidance, that you can give, about what level of normalized EBITDA margin you should be choosing once you are fully integrated, and in the next year or so? So, you comment a little bit on growth appetite for acquisitions, and also if you have a target net leverage for the short-term? Thank you very much.

Okay, Eduardo, thank you for your question. First of all, in terms of what do we call as normalized margins for Brasil Foods is our historical EBITDA margin pro forma of around 11.5% is a good level for what we call normalized margin. So, we expect to be in that shape by year end or maybe depending on market conditions, by ending of the third quarter, right?

So, this is -- and for the next year, we intend to have such a more normalized margin, and plus some synergy gains that we need to -- of course, after the cut approval to understand how fast it's going to happen. I'll jump straight to the leverage that you mentioned, then we together with Fay we can comment about acquisition trends or our expectations or our intentions. But in terms of our leverage targets, it's below 2 times net debt to EBITDA. It's what we consider to be optimum leverage.

And how high would you go for temporarily in the event that you like have a higher CapEx for a period or if you do an acquisition, how -- I know you say a two times run-rate level, but would you -- if there is an opportunity, how much would you be willing to take your leverage temporarily until you bring that back down to 2?

Okay, I got your question. We are a very conservative company regarding leverage, so we will never jeopardize our operation, leveraging excessively with the system because of that. I would say that for a small or tiny business, that we can go probably two, three times if we are in an absolutely normalized environment, okay?

But as you can see, just taking a look at our track records, all the movements that we made, we called for new capital in the system. So, this is the philosophy of the company, this is somthing big in the ladder. Of course, it will call for new capital injection, so a very strong 1 point change in the very short term could be accepted, but looking through our track record, it never happened. Okay?

Great, and should we -- go ahead.

Okay, your other point regarding the acquisition; I will just give you our view. The company has the strategy of organic growth, and also growth, the internationalization of the company. And basically, it has to do with what we call more -- a further step on the market that we already are very well established; meaning that we are -- we may be looking in the future for further processing and distribution to compliment our export flow from Brazil. Opportunities are in the market, we know that, but everything has to be inline with our strategy, which still has the very well managed growth abroad, and has to be regarding a brand retribution also on the big markets.

And anyway, we are now in time to have our strategic planning process. We used to run in five years and five year's base. So, we should have this to the end of this year, and then we can go more straight to this kind of issue. But of course, let's see if some opportunities came, then we will analyze it.

Okay, that's great. Thanks very much.

You're welcome.

Excuse me, our next question comes from Mr. Alan Alanis from JP Morgan.

Yes, hi, good day, everyone. Congrats for the good results. I have a couple of questions. One regarding working capital -- we saw a slight deterioration here quarter-over-quarter, particularly on days receivables, so the specific question is what should we expect going forward in terms of working capital, and what would be the size of the opportunity specifically in terms of working capital, once the two companies are integrated?

Okay. This deterioration compared to last quarter, there is a thing regarding inventories, and basically because we take advantage of this scenario to increase our grain position, so there is a -- one part of this answer is because of that, as we were very short by year end. So, now we are -- in the ending of the quarter, we are longer. In terms of receivables, there is no deterioration, but just a issue of quarter reduction.

Yes, seasonality.

Our -- yes, seasonality, that's right. But the opportunities, your point is quite good. As we have a very heavy working capital. It's in the size. If you just make the calculations through our balance sheet, you're going to take a -- depending on your methodology, but around BRL4 billion of working capital invested.

So, there are several, several opportunities for us to reduce that in order to be more efficient in terms of return on capital. You're company wide, we have something mapped, but of course only with the full merger of the two companies, we'll be able to put into practices those enhancements.

I hear you, but you do see decreasing from that BRL4 billion level in a material way once the integration starts and is completed, correct?

Before integration, I can tell that it will stay pretty much stable with the opportunity to slightly reduction because of this scenario of grains cost reduction.

Okay.

But all this, this working capital will be slightly reduced because of that.

Got you. That's very useful. And if I may ask another question to the CEO, I know it's a -- I mean the answer to this question can be very long, but if you could summarize it. I mean, you've been now coordinating procurement in exports of Sadia for quite a while.

And it's a question around cultures of the two companies of Sadia and Perdigao, and what would be the winning or the prevailing culture as a vision going forward? Specifically, how would you describe in a few words the cultures of these two very large organizations, and what will be the main characteristics of the culture a year, two years from now, if you may please?

Okay, in that point, I think that we are finding a very good environment to do this merger. First of all, we are talking about a merger procedure and not an acquisition procedure, which means that we are mixing the cultures. And when we -- we did a poll to check about the expectation of our employees and the expectation of the managers and so on regarding to the merge.

And the main finding that -- although we had a very competitive time during last year, the people are quite similar, the culture of the people are quite similar. The companies comes from the same area, people used to stay for a long time in the company, which is good for this moment. I would say that I'm very comfortable regarding to the culture that we are assembling together.

Of course, with this we are talking about the new companies, not the bigger -- Sadia or a bigger Perdigao, but it's a bigger and a different company, more international company, more international driven business, and with strong brands and so on. I'm very comfortable regarding to that. One thing that it's losing in this period that we are waiting for approval is that we are having time to planning, and to check and going carefully regarding to people, since one of the main issues of our merger is that we -- this is a kind of a merge where there are a lot of people involved.

And we are talking about more than 100,000 employees. And so, we have to be very careful regarding to that. And another good point in that, as we have a very strong growing issue for the future, the company has to grow, has to implement, analyze and so on, and as Sadia has already few management capacity, since a lot of people left Sadia during the crisis, we are having a merger, kind of a merger. It's not related to cut jobs, that normally the other moment that I was involved with, this kind of moment; it was regarding to cut a lot of jobs, because the synergies comes from this.

And in our merger, different from others are the synergies are coming from the purchase, together the expense that we -- we are talking about the total expend, about $21 billion if you talk -- we including wage and so on. When you talk about direct to indirect cost, we are talking about to BRL12 billion, which means that this is the main point and the main driver of our merge procedure. In summarizing, the merger are going very, very well regarding to control issues.

Thank you. That's actually very, very useful, appreciate it.

Okay.

(Operator Instructions).

Our next question comes from Mr. [Paul Birchinoff] from Nevsky Capital.

Good morning. I was just wondering if you could give us some guidance on tax? Obviously this quarter, you had the help from tax, unless carried forward. Will that be happening in the next few quarters? I was wondering if you could just sort of give us an effective tax rate?

You're asking regarding the FX losses, right?

No, sorry, the tax.

Tax?

Yes.

Okay. We are -- the tax that we've got here in this quarter is defected. There is an important point regarding the tax raise. When you look quarter-over-quarter, sometimes it's a little difficult to have a precise view of that. So, when we look to the year-to-date to a full year figure, it's much easier for you to understand. And our effective tax rate for this company, as we are organized in our local operation and international operation, it's in the line of 18% to 20% of effective tax rate.

When you look to one of the fiscal quarter, if it has a very important real appreciation or devaluation, or if the export market has a very strong result or on the other hand, bad results, it will influence heavily in that quarter effective tax rate. But when you look to the long-term on a full year, you should consider this 18% to 20% of effective tax rate as a good guidance.

Thank you.

Okay.

Excuse me, our next question comes from Mr. Denis Parisien from Santander.

Good morning, thanks so much for the call. I'm looking at the [Sussex] data -- for the Brazilian external trade data, and it looks to me that the numbers for April show a bit of a downturn in poultry. Could you please comment on that, and if I might ask also some information on your capacity utilization by segment this quarter versus the previous quarters? Thanks.

These Sussex, I'm afraid it doesn't give a real trend of what's going on, especially because when we look mostly on the month on Sussex, sometimes it has a lag between what really happened in the industry or in a company like ourselves. So, you should take care of analyzing these trends month over month.

And you have to consider that there's a lot of internal trade that's registered there, so it's difficult to analyze this totally. You have to see that as a trend in the long-term.

And your second question was regarding, sorry, the --?

Capacity utilization figures.

Sure, sure. We don't have it in the breakdown of this and that, but I can tell you in rough figures that we are now working near to 80% of capacity utilization in the Brasil Foods system, a little higher utilization in the Perdigao, and a little lower in Sadia, because in Sadia it's just entering new capacity because of new plants and new investments. So, this is a rough figure. It's a very complex thing, because you have several bottlenecks, which is not only in this lottery capacity, but also in the farming system, lottery and profiting.

And anyway, still we have some boundaries to respect regarding to the antitrust approval that is financed. So, we do not have all the information that we need to get the total figure, but that's what Leopoldo talked and I think this is the gross figure that we are talking about, 20% to 25% in idle capacity.

Using roughly in 80% -- and I understand these figures are never precise, but using that as a general range for the first quarter, could you give us a bit of color what that looked like in the fourth quarter of 2009, and what it looked like in the first quarter of 2009, if you could just for the sake of comparison?

It's not that different, because as you could see, we are working in pretty much the same volume that we had in the first quarter last year. So, this ramp up will start to happen right now, so we have enough capacity to according our plan for this year, and for a part of 2011. But as Fay said, we have limited perception of this accuracy regarding what type of capacity we can grow here and there, but as a general sense, there is capacities to be utilized in the system for several quarters ahead.

And we believe that after the approval, we could put some plants working in different way, so there's a lot to do. We expect to have good news there, but we still don't know exactly about the figure.

And the first quarter of last year, can you give me a rough idea what capacity utilization looked like in the worst of the crisis?

In that moment, it was much lower, because we reduced capacity 20%, so roughly -- and that was just the export market, so you can take 10%. Maybe we were 10% utilization lower, if it was 80% now, we were 70%.

70%.

Okay?

Thanks very much. And on the export side, I take what you mean by one quarter doesn't make a trend, and in fact looking at it on a three month moving average basis, it looks actually quite positive, but can you confirm to us that what you've seen here in late April and early May, the recovery in export markets in chicken import continues, and the prospects remain solid there?

Yes, we believe the external markets keep on showing a good trend. As we said before, we still have some price issues in Middle East, north of Africa area, Japan is quite stable, Europe is -- although Europe has some issues to clarify, we keep on having volumes stable there, and America is performing good, so we see a good trend 'til now.

Excuse me, our next question comes from Mr. Jose Yordan from Deutsche Bank.

Hi, good morning, everyone. My question is about domestic sales. I guess based on what we've seen from another consumer companies that have reported so far this quarter, as you probably know, many of them are reporting extremely high sales growth. And I was just curious why your growth was only in the low single digits in the domestic market, and if you could review what's your guidance, if your guidance remains at double digit growth in the domestic market for the entire year?

Well, we have to divide the answer. We have some categories, weak categories that are more stable, that are more related to the growing break of categories; that's sausage, ham -- and they're not very much impacted by that. They are more stable because they are high penetration categories. So, that's one reason to not have this double digit that you expect.

On other hand, the new categories that you are getting in frozen, I explained we think are very, very strong growth in volume. We are expecting two digits growth in volumes, and less of that in dollar wise due to price oriented market that these categories may have in some times of year, mostly in game.

But you're still maintaining your guidance for 10% or 11% domestic sales overall, or is that something that is too high?

We gave the estimate that if there are 8% to 10% growth in volume, it's possible and it's still possible, but bear in mind that this is how we prepare ourselves since last year to grow this year in terms of capacity utilization, lines of products and the like. It doesn't mean that it will largely depend on the performance of each category. And every year, we work in two ways -- first of all, taking care of our market share, our penetration in the market, and at the same time, looking to our profitability.

So, as I said, we are having much better profitability in the domestic margin, despite the fact that we are not growing at such a pace, but we are having much better profitability because of this management of our performance, but we keep this the same as we mentioned before, okay?

Alright, thanks a lot.

Excuse me, our next question comes from Mr. Jorge Mauro from Legg Mason.

Yes, hello, good afternoon. Thanks for taking my question. It's just on the poultry volumes in the domestic market. I mean if you could give us more color on the 20% decline? I mean the reason, and if you are actually shipping that poultry to the export market or if you are processing that, why is that [de climbus] so big?

Okay, perfect. This was very important, this reduction for us, because last year, we had to ship the volumes from the export to the domestic market because of the crisis, because of that disruption of the export flow. So, we have to sell in very cheap levels in the domestic market.

Now, we are at this size of in the tura or raw chicken products in the domestic market, is the pre-normalized volume. So, that's why we could enhance our profitability because of this mix enhancement, right? So, it's not a issue, but though better performance regarding last year of those more, let's say, punctual sales because of the crisis.

Okay, and if you could quickly comment on the Poultry and Beef division, they are expanding around 27%. How much is pork versus beef roughly?

In the domestic market?

Yes.

Some 60% is pork, some 40% beef is more or less.

Okay, thank you very much.

Excuse me, our next question comes from Mr. Gustavo Oliveira from UBS.

Good morning, everyone. The question is on your strategic plan that you mentioned that you are working on. When you think about the internationalization strategy and the timing from that, do you think you need to de-leverage the balance sheet a little bit more before you start in executing on some of the things you want to do in the international market or you can do that simultaneously with your de-leverage of the balance sheet? I think the question is should we start seeing more aggressiveness from you in the end of 2011 or already at the end of 2010?

If we are talking strategically, we will be more -- we would be ready, more focused at the end of this year, since still there we expect to have the approval of antitrust authorities. We expect to have our strategic five years -- in five years, the basic strategic plan done, and then we can -- we know exactly where we go and how we go. But of course, there is some opportunities on the table, we will see it. But in general, let's say that for the end of the year, we should be more active on that.

And that will be the time where our leverage will be much lower than it's right now. For sure, below two times as we are now near the three times, it will be near to two times, okay?

Okay, and your acquisition depends -- and you strategy depends a lot on acquisitions, and a lot of it is organic growth that will take a little bit longer?

We need them both, we need both way to grow. We need to seek for acquisitions since we are in hurry, we want to grow fast, but organic growth is something very important for us, since we need time to -- we have a long cycle business. It's related to the two points, organic and acquisition.

Okay, thank you.

Excuse me, our next question comes from Mr. Gabriel Lima from Santander.

Thank you. Leopoldo just mentioned that you have some opportunities in the pork exports. So, I just would like to know more about that. Are you talking about Japan and the US, and if yes, what do you think are the real potential of those markets since US is a big producer and Japan pretty much already buys pork from the US, I guess.

Yes, okay, thank you. It's basically due to the US issue regarding the cotton, but as I said, if there is this agreement between Brazil and US to trade pork, it doesn't necessarily means that Brazil will export pork to US but it will open up the door for us to the international or most demanding countries to start to import from us.

So, if we got any agreements from those very demanding regions in the world like United States, Europe or Japan, it will open a new door for us in the pork business. And Japanese market, of course, is our dream in terms of this nation of exports, but so far there is no clear timeframe for that to happen. But as I said, we are getting some positive sign of that it seems they are evolving positively.

Okay, that's clear. Thanks.

Excuse me, this concludes today's question-and-answer session. I would like to pass the floor over to Mr. Fay for his final statements. Please sir, go ahead.

So, thanks for everybody to follow our call. As a final message, we would say that we are seeking for approval in antitrust authority department, but in the meantime we have not stopped. We are not waiting for this approval without looking for our fate. We keep on believing in [a cold] systems performance in internal markets and domestic markets, the external market has some issues mostly in Europe, but it's still paying -- showing good trend, and we have the cost control.

This is the reason that will allow us to keep on believing that we will keep on having this gradual recovery of our results. Thank you, everybody.

Thank you. That does conclude our BRF Brasil Foods S.A.'s Conference Call. Thank you very much for your participation and have a good day.