BRF SA (BRFS) 2010 Q2 法說會逐字稿

Good morning and welcome to BRF Brasil Foods SA's second quarter 2010 conference call. This conference call and the presentation are simultaneously transmitted via webcast in our website at 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 would appreciate if each participant made only one question. (Operator Instructions)

Forward-looking statements are related to the Company's businesses, perspectives, projections, results, and the Company's growth potential are provisions based on the expectations of the management as to the future of the Company. These expectations are highly dependent on market change, economic conditions of the country and the sector, and international markets, thus are subject to changes.

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 conference over to Mr. Fay. Please, sir, go ahead.

So good morning to you all. We will show--we will talk about the second quarter results of Brasil Foods. The second quarter shows the trend of a consistent improve in results. We had a quarter with good sales volume and better margin performance driven by sales volume. The margin performance were driven by volumes and cost reduction.

When we analyze internal and external markets, the external--in the external market, we can see that the volume that improved 10%, but the volume at the dollar price and the FX rate--also, we reached the same sales--gross sales in cash. It was much better in margin due to cost and the higher volumes. And then we can go in details after.

For domestic markets, we keep on showing--we keep on seeing a consistent performance in volume and, too, as the competitive scenario keeps on strongly in competitiveness. We had good volumes. And we had better margins. But prices were a little down during the period.

Regarding to EBITDA margin, we've reached the two digits, 10.6%, which is close of the historic one. We are reaching the historic levels of EBITDA margins. And we can consider that the quarter was good in cash generation. We have a good operational cash generation, decrease in the net debt, and reaching the ratio of EBITDA-net debt 2.4, which is keep on going down.

Now Leopoldo can explain in detail what we are talking about.

Thank you, Fay. So good morning, everyone. So let's analyze in a little more detail the highlights of our performance in the quarter and talk a little bit about our main perspectives for the year end. So all--on slide five, we can follow our results. So first of all, talking about the second quarter and then we make some highlights of the first half.

So first of all, related to the top line, the gross sales, as Fay already mentioned, we reached BRL6.3 billion in gross sales, 4% higher last quarter, and very good performance in the domestic market in terms of sales, boosted by a processed and marinated and other processed goods that increased 6.7% in volumes with flat prices. And the remaining growth came from dairy basically.

Flat revenues for exports because of the fact that [Fay mentioned] but with a very good performance in terms of volumes and in terms of profitability, as we will see ahead. And we reached a very good expansion on gross margins, coming from 23.4% of the net sales to 27.4% this quarter, so an expansion of 400 basis points.

In terms of operating expenses, the SG&A, we had also a 40 bp reduction coming from 20.7% of the net sales to 20.3% of the sales in this current quarter, which we reached the EBIT at BRL393 million, 174% higher than last year, and a net income of BRL132 million that compares with the BRL476 million last year, boosted by FX gains that in that time Sadia had a very larger balance exposure, which is now settled.

The EBITDA, we back to the two digits, 10.6%, compared to the 7.2% last quarter. And also, to get this net income of BRL132 million, we had financial expenses of BRL170 million--I'll give more details further on this presentation--and other operating expenses of BRL71 million. And the majority of this amount is due to the idle capacity in the system, of the preoperational idle capacity basically.

On the results of the first half, I would emphasize that what we achieved in terms of profitability measured by EBITDA--so it was above BRL1 billion, 9.8% margin, with a 440 bps increase compared to last year.

So moving on, on next slide, we can see the breakdown of our sales. In fact, no big change of what we had last year and average of the full year '09, so nothing to comment on here. The exports are accounting for basically 42% of the sales and domestic markets 58% of the sales, the very same figure of last year.

Now analyzing in a little more detail volume and prices and trying to understand what is boosting our profitability in our quarter-over-quarter basis and also in a quarter-to-quarter basis. Let's move to the next page, slide seven. So first of all, domestic market, analyzing the meat products and the dairy--the domestic market as a whole, we increased the profitability. But the majority came from the meat division because dairy--in comparison last year, it was a poor result.

In terms of volumes in the meat domestic market, 7.5% higher volumes with a decrease in prices 1.9%, which led to a 5.4% growth in terms of gross sales. I would emphasize that in the category [named] processed marinated and other processed, compounding all the processed meat products, we had flat prices, so meaning that in line with--Fay just said that we faced the competitive environment with reducing cost scenario led to this market behavior. And at the same time, we could boost our margins by a lot compared to last year.

And in dairy, we reached a very bold increase in terms of volume, 17%, but with a mix effect that produced much lower average price than last year. So this 17% is concentrated on the fluid milk growth at around 25% quarter over quarter. And the profitability measured by EBITDA margins in this specific segment reduced quite a bit compared to last year, not because this year is that poor but because last year was a very, very high-margin scenario in this specific quarter last year.

But in summary, the domestic market as a whole boosted margins in a little more than 300 basis points compared to last quarter last year. In a quarter-to-quarter analysis, it is slightly better than the first, showing that the domestic market is reaching a very good performance, although we keep on seeing opportunities in the future for margin expansion.

In terms of the export market, we had this almost 10% increase in volumes, which is quite good for the market as we are seeing and especially after so many disruptions and collateral effects because of the crisis, international crisis. But--and we could reach a 4.5% increase in prices in U.S. dollar prices. But coupled with this, with the BRL appreciation at around 14%, we had a flat--pretty flat scenario for gross sales. But beside that, we could reach a 600 basis point of margin expansion quarter over quarter.

And in a quarter-to-quarter basis, we also reached at around 400 basis points expansion, which explained in the majority the EBITDA margin expansion from the first quarter to the second quarter that we are seeing. So this is in a nutshell what we can analyze about volume and prices.

Looking now, next page, on page eight, the COGS--this is the expression of this better gross profit at around 400 basis points better this quarter. A part of that is due to [conjunctural] factors like corn and soybean much lower than last year in average, in the 20% area, so corn a little bit lower than that, some 15% lower than last year, and soybean meal at around 25% lower in the quarter domestic market compared to last year, helped to reduce our costs. And a part of that is, of course, resulted of much better performance with normalized volumes and normalized demand. So we are now having operating expenses according--our business plan.

Looking into a little more details to SG&A, we could 40 bps and also included in that account the 30 bps expenses of pre-merger expenses that accounted for around BRL22 million in the quarter. In the year to date, we are in BRL35 million in that line, which has to do with IT consultants, pre-merger expenses with other consultants and other work that we need to do before capturing any synergies.

The next page, page nine, we can see the evolution of EBITDA margin. So more of what we have been talking to you of a gradual and consistent margin expansion powered our business-as-usual margin.

Moving forward, on page 11, so a little more color on the main drivers of our segments--first of all, proteins on top left, we can see that after a sharp rose on pork prices, in the last quarter, prices stabilized in this $2.5 per kilo area. But in terms of average, it was 9% higher than first quarter, whereas the chicken is pretty much stable in the short term but with 12% higher prices compared to last year. But what we are seeing right now is because of the surge on feed prices, named wheat, because of the big drop on Russian crops and some other European eastern countries, we are seeing in fact with prices skyrocketing and which is resulting in increases of corn and soybean prices as well. And this is of course pressuring on margins of all the protein segments in which we are seeing opportunities for (inaudible) prices right now.

As you can see here in the bottom of the grains at CBOT--so you have here the curves of soybean and corn--you can see that two quarter compared to last year, we have reduction in both corn and soybean. But when we compared, short term is flat, as I mentioned, but in right now had a very sharp increase. And just for you to have an idea, comparing the 18th of June until August, until now, we are having 59% higher wheat prices at CBOT because of a 25 million tons shortage of wheat basically in Russia, which is very supportive for all the grains, the feed grains in the world.

Looking on the right part of the chart and top, milk, you can see all the seasonal effect. But look at the bottom on this box, the comparison on price is paid to producers. You can see that we paid 17% higher prices compared to last year. But when you compare second quarter to the first quarter, we paid 22% higher prices due to a shortage of milk because of climate conditions and other stuff, which of course pressured our margins as we could not pass on prices, especially of fluid milk, like UHT. So the perspective is for these circumstances to stay at least until year end.

In terms of U.S. dollar, we are seeing at least since September-October last year a little stable scenario in the range of 1.75, 1.85, which is pretty good for us. We used to say that we don't have a preferred dollar range. But though a stable dollar, which is very good to us, and we are seeing our results the effect of that.

In terms of market share, next page, it's just to show you that this is the current picture of our market share in the year to date. And it's pretty stable in both [deals]. In the midterm, when we look year over year compared to last year, we'll announce on the short-term--we'll, which means month after month Nielson figures. It's pretty stable in terms of volume.

Next page, just taking a look at the export by region--so there is no big change in the breakdown of sales internationally. And I will take advantage of this chart to give you some updates of every region, every main region we are exporting right now. In the summary, I would say that international markets is performing quite well nowadays. There is no big inventory, no big surplus or scarcity of products in the majority of the regions we deal with.

And the remarks are--far east, basically Japan, we are seeing adequate inventory levels and good demand for Brazilian chicken and good margins year to date. Eurasia, it's Russia basically in pork, very positive bias for prices due to the skyrocketing wheat scenario. And traders tend to build up inventories for the year end and because of the scenario of the cost is going up.

For chicken, we've profited from the shift of around 150,000 tons of chicken from U.S. to Brazilians. Other countries, I will remark Africa, in which we are seeing good demand for [leg] quarter. And because of the good demand of leg quarter in Russia, we are seeing a more supportive market for Africa in the second half.

In Europe, after a big--a long period of lackluster margins and lackluster demand, we are now seeing a more stable market with good demand due to the summer. So there is a positive seasonal effect for chicken basically. And the pretty same story of Russia of higher costs of wheat is right now boosting chicken breast, fresh chicken breast, at the market. So prices are going up. And we tend to take advantage of that scenario going forward.

So moving to--I forgot to mention about the Middle East, sorry. In the Middle East, we now see a really normalized pipeline, no more oversupply in the region. We tend to see better prices in the second half. Also, [punctually], we are seeing good demand from Iran and a good perspective for Egypt due to the new agreement, which take lower tariffs.

Now we move to the investment and indebtedness profile. On first half, we reached a total of--total investment of BRL402 million splited in BRL241 million pure CapEx and BRL161 million investment in breeding stock. And the guidance for the year is the very same of BRL1 billion total investment.

Looking to the debt profile, we ended the quarter a little below BRL4 billion of net debt and a ratio to EBITDA 2.4 times coming down since last year and approaching quickly the two times area, in which, as we said last quarter we believe to have that before year end. And the area--the two times area is what we consider to be a good ratio for the Company looking to the long term. Also, I would comment that the long-term debt, non-current, accounts for 75% of our total debt, which is pretty good and with a very good maturity above two years.

Now we're going to see two slides that we brought at this time in this quarter to explain some little structural changes, an important one to comment to you, which is related to our balance sheet FX exposure. This exposure in the past on the pro forma basis, second quarter '09, it was almost $3 billion. And after all the liability management we did after incorporating Sadia, we stabilized the exposure according our internal risk management policy in the level of $1.1 billion. It was the same story until last quarter. And this quarter, we are publishing only $154 million of exposure.

And the change is--reason being basically two ones. The first is the on-cash generation during the quarter. And we used that cash to down pay U.S. dollar debt. And the second is due to a new international counter [tenders] rule in this migration to IFRS. There is the so-called Brazilian CPC 38, where there is a treatment for hedge accounting, so with special accountability for this type of instrument, which means that you can designate an export pre-payment facility like we have plenty in our balance sheet to designate as hedge accounting. So we did that by 1st of June, designating little more than $0.5 billion of these type of facilities, so meaning that from now on all the FX effect of these amounts with the MTM will be in our balance sheet in the net worth of the Company, but not in the P&L, the monthly P&L or the quarterly P&L.

You are--we are only going to see the effect of debt when you have the debt portion of debt matured according the revenue we exported. So the FX effect will be much more according to the cash flow and not the accounting movement quarter over quarter. So that will help us to understand the next slide.

This is just to say to you that, from now on, the U.S. dollar effect on our P&L based on the balance sheet exposure will be reduced. Now we took advantage in this quarter of this conversation to explain or to give--to bring here what we published in our notes regarding the breakdown of financial expenses. So first of all, let's understand the first half breakdown of the BRL326 million total financial expenses. That breaks down like this. BRL177 million is interest, which is basically the result of average net debt of around BRL4.2 billion, BRL4.3 billion at 7.5 coupon average and some other banking costs and tariffs.

This FX effect of BRL83 million, it's basically the result of a BRL0.06 depreciation from quarter to second quarter, quarter last year--fourth quarter last year to second quarter this year, this BRL0.06 by $1.1 billion of exposure that you saw in the last slide. And on top of that, you must add some BRL12 million of the extraordinary amount of BRL511 million that we designated as hedge accounting on 1st of June at 183 and didn't benefit, let's say, from this drop on FX until the end of the quarter. So by saying that, this was the U.S. dollar effect.

And this BRL61 million that we call as investment conversion is basically their effect, the euro effect during this period from first to second quarter of the international holding companies established in Europe. So these losses reflect basically the euro depreciation over the capital invested throughout the time. As you know, from first to second quarter, we had a pretty stable FX scenario, BRL dollar but [A2A] sales appreciation of real compared to euro. So when it happened, we have this kind of a loss. But right now, as euro is appreciating again, this effect is backing. As you can see, the majority of these results of the euro is concentrated on this second quarter.

So having said that, let's move to the end of the presentation, just showing to the shareholders' composition, which has no change. But the Tarpon appears here as higher than 5% that we need to disclose. And the other participants pretty much keep on the same participation.

Monthly traded volume, next slide, 94% higher than last year in terms of a quarter analysis. In the year-to-date analysis, it's much higher growth because we reached $53 million per day.

Now some launches of the Company--Batavito, which is a brand name from Batavo, is a line of products of fermented milk. This is large for teenagers, youngsters. And here the fondue, the cheese, is kind of a cheese cream, is very popular here for wintertime. It's a new product from Batavo. On the bottom right, I won't translate that because the name in Brazil is escondidinho. It's hard to translate. But it's a popular, very popular dish here in Brazil, very good one. And Prezato, it's a high-end premium cold cut in--at Sadia.

So having said that, I leave here as a final message the recognition of the market in terms of some awards we got in this period. And I will highlight the first one that we were considered among 500 companies in Brazil the best company from Istoe Dinheiro Magazine.

So having said that, I'll turn to the operator for Q&A session. Thank you.

Thank you. Excuse me. Ladies and gentlemen, we will now begin the question and answer session. Each participant may ask only one question at a time. (Operator Instructions) Our first question comes from Mr. Marcel Moraes from Credit Suisse.

Good morning, everyone. My first question regards profitability at the business, the way they are today. We know that we are--I mean, at some extent, we--there is a chance of seeing grain prices going up because of the wheat price. And--but you have also mentioned that profitability has gone up over the last 12 months. So what I would like you just to comment on, not considering synergies, right, if you expect profitability to keep on going up over the next few quarters. And where should it come from, if it's in domestic market or if it's in the export markets? This is my question.

Marcel, thank you for the question. In overall, we don't--we won't--we don't think that the margins will keep on this upward trend from now on, except for the effect, the seasonal effect, the good seasonal effect of the last quarter. So this is our basic assumption for the second half. But of course, we need to take into consideration right now the other effects related to some cost pressures. But as I said, we are seeing the market, the supply-demand situation now favorable toward these present prices.

Yes, I would complement what Leopoldo said that this wheat problem, this situation in Russia, they--Eurasia will have to prepare the wintertime in a work scenario for production cost of protein. It's hard to say the total effect of that. But I would say that we expect to have more volatile scenarios for commodities for next time. I think that the commodities will have bigger prices, not as big as it was in 2008, 2009, but bigger than it used to be during this 2010. So we can expect some price volatility and price points changing, mostly in export goods.

Marcel, just as a piece of information for you, during this period that I mentioned during the presentation, from the ending of June, when this scenario triggered until today, wheat--international wheat prices increased by 59% at around 42% for the feed wheat in Europe on average. And the corn prices at the CBOT in the same time increased only 12%. And domestically, not only because of these movements, but also because of the support from the government, the domestic corn prices increased by 12%. So just for you to balance the impact of the international players, especially the ones in Europe, to our impact.

Okay. Thank you. Thank you very much.

Excuse me. Our next question comes from Mr. Alan Alanis from J.P. Morgan.

Thank you so much. And congratulations for the quarter. You just mentioned that you expected more volatile and higher commodity prices going forward. Should we infer from that comment that you are actively hedging or if you could remind us what your hedging policy would be for these commodities, please?

We had our [weak] management. The point that we have some protection so we can be long or short, depending on the position that we took. I would say that we have a comfortable moment to safety. But anyway, I believe that we are passing a turning point regarding to international price of protein. We expect that this price goes up in the short term.

I hear you. And also regarding, I mean, that same line of thought but specifically for exports, have you seen any change? Or what are the kinds of changes that you're seeing now that Russia announced that it will start importing or should be importing some poultry again from the United States? And what are your expectations of--if I may ask a very general question--in terms of increased capacity throughout the world now that demand will continue to pick up?

Let's say, so in the worst scenario, everybody tends to be more flexible regarding to their import, importations. As Europe now released some GMO corn to import. So this is normal when the scenario pick ups the strength that it happens since Russia announced the situation on wheat crops. So I expect more flexibility from the markets, which may include American poultry. But it's not yet--I don't see any modification on that part.

And the other question was?

Regarding the effective--

Yes.

Yes.

I think that the cost, the production cost, will increase all around the world.

Correct.

More than in Brazil. We see that an opportunity to be more--the competitiveness of Brazil could be improved now due to this commodity change, mostly in Europe and Eurasia.

I hear you.

But I don't believe that until we can have a lot of capacity increase due to the scenario. Yes.

I hear you. So basically, you're saying that if these commodity prices were to go up that--and I'm assuming that FX, foreign exchange, remains at this level--that Brazil will regain some of its global competitiveness so you have a positive outlook for next year.

Yes, yes, it's a guess. It's our guess.

Good. Okay. Thank you so much.

Excuse me. Ladies and gentlemen, as a reminder, please restrict your questions to one at a time. Our next question comes from Mr. Jose Yordan from Deutsche Bank Securities.

Hi. Good morning. The question's for Leopoldo. You mentioned that your migration towards IFRS, et cetera. If you can remind us when the official date that you will switch over is and I guess what your expected impact on your EBITDA calculation is because the one thing that you don't include in your EBITDA calculation is the other operating items, which will likely be--which do form part of the EBIT calculation under IFRS. So just two sides to the same question, when will it happen? And I guess what's your normalized other operating income and expense going forward?

Okay. Regarding the IFRS adopt, it's going to reflect the results, the full-year results. So by year end, we will reflect towards the IFRS. Of course, we are now--we are right now studying and analyzing all the gaps for us to address adequately.

Regarding to this specific point of CPC 38, we took advantage of a policy that already mentioned and treated that point to use this type of understanding or ruling to adopt this type of accounting. But in terms of the type of impact that we should expect in our EBITDA margins, although we are still analyzing, very important to emphasize that, we don't expect to see a big impact according to our first impressions or first calculations.

Okay. Thank you very much.

Thanks.

Excuse me. Our next question comes from Mr. Gabriel Lima from Santander Bank.

Thank you. I have just a quick question. I just want to better understand the strategy regarding your dairy segment, as milk has increased much more than the dairy segment. So what is the strategy here? Are you being less exposed to produce processed milk and more exposed to commodity milk? Or that's not the case? Thanks.

Yes, the general strategy is to keep on improving our processed milk business, which means the yogurt and dairy base, and to have less fluid milk, not less fluid milk than we have now but more processed milk than we are having. So we are putting more effort on Batavo brand and going to put more structure on refrigerated dairy business in order to decrease the dependence on the commodities.

Yes, but when I see your release here that milk--the milk segment increased 14% in volumes in the first half compared to a year ago. And the dairy products decreased 6%. Is that the case? I mean, is that reflecting less exposure to commodity milk?

So point is that we are having a very poor performance on UHT during the first quarter. Then we recover some milk areas. And then this is a less, say, so a mix between the milk protection and milk area you're farming--the milk farming areas and the product strategy. The product strategy, it's much based on processed. But that's just very [modern]. The first half of--the first quarter, we have a very poor performance in UHT. And now we are keep on and maintaining our performance as it was before. That's why there is this difference. But this is more tactic than strategic.

Okay. Got it. Thanks.

Excuse me. Our next question comes from Mr. Tim Tiberio from Chardan Capital Markets.

Good morning. I guess my question is around the domestic processed food markets. And you obviously saw a benefit from the World Cup in the second quarter. How should we look at as far as volume growth what percentage the World Cup and the potential boost from that had on food consumption in Brazil?

No, as a matter of fact, the World Cup helped a lot the beer manufacturers. For us, there is not a strong impact regarding to that. We expect as usual to have the second half of the year positive seasonality, mostly due to the end of the year products, the seasonal Christmas products that used to be a good moment for us. But the World Cup, regarding to our product, we do not see any important consumption increase.

Okay. Thank you.

Welcome.

Excuse me. Our next question comes from Mr. Jose Yordan from Deutsche Bank Securities.

Hi, I have a quick follow up. Just on the consultant fees that you mentioned in your press release, et cetera, I guess any color you can give us on how long the Mackenzie mandate lasts for. And so I mean, for how long and what kind of amount per quarter should we expect the consultant fees? And when do they disappear altogether?

This is pretty much not only Mackenzie. But there is [IDMS], [APX], [Centuran], these kind of consultant firm that we need to prepare the synergies to--we are changing the system. We put the same SAP on Sadia and [basically] on bases in the new [VRF] basis for next year. So we have a lot of job to do in the preparations. And we need some consultant firm to help us, mostly during this year and partially next year. But this year is the main part.

So we should expect a similar kind of charge as we saw in the second quarter, let's say, until middle of next year or something like that.

Yes, maybe what we are talking is that some in the area of--at the maximum BRL100 million of expenses to be seen this year or partially this year and a part of next year. But this would be the total amount of expenses to prepare the merger, prepare the merger of systems, of personnel, of processes, and everything.

And so far, it's been about 25 or whatever the amount was, 20.

It's been 35 year to date. It was 20, 22 I think, 22 in the quarter, and 35 year to date.

Okay. Great. Very clear.

Excuse me. Our next question comes from [Mr. Isayen Havis] from Arthur Capital.

Hi, thank you for taking my question. One--I was hoping you could provide me with an update on your discussions with [Kaday] and what if anything you can tell us about when this final decision to be made.

Okay. During this quarter, [FTE] that reaches the part of financial govern minister puts its report on target, which is the board of antitrust. And they approved it. They said that our operations could be approved with some restriction. We did not agree on that. We believe that our operation's according to Brazilian regulations could be integrally approved without any restrictions. But this was the opinion of the government, the financial minister. And then we are now waiting for Kaday to call us to argue regarding to these two points.

We believe that we have strong data, strong positions to argue with them that the competitiveness, the [revalue], the market concentration, and the efficiency. Under these four points, our operations could be approved. So this will be a discussion that is difficult to predict how long it will take. We keep on wanting this as quick as it's possible. But it's hard to say when we will have this final argue and decision from the antitrust board.

Can you just remind me what the--those restrictions were specifically?

They considered that we can have market control from the entry price brands. And so they--it's not a--they suggest, let's say so, that we sell this entry price brands, which were--they put some options. They talk about [Esangie], [Confiesa], the margarine brand, the [Doriana], which is a brand--Doriana, another--it was the entry price in margins, the [Delicata], Doriana, and [Claybon] in the margarine business. And for the meat, they asked us for--to analyze the selling of [Hisangie] or Batavo, which we do not understood exactly because Batavo's 75% of the Batavo--it's dairy, which is not analyzed at this moment. It's out of the analysis of the case because there is no concentration in dairy.

So but let's say in general they are saying this--that we have to sell the entry price brands. They put another option that was completely difficult to understand. That was to hire [Perdigo Artagea] brands from someone else, which is absolutely unefficient regarding to consumers and competitive environment. We really do not agree on that. This is under my point of view only a negotiation position and not really something that can be sustained on data basis, on economic basis.

Thank you very much. If you--if I may ask just one more point of clarification in terms of the charge related to idle capacity, if I understand correctly, I think it was Jose Yordan last about if IFRS--you will have to treat those differently than you're currently treating them, which I think that right now you're basically excluding that from your EBITDA calculation. And in IFRS, you would have to include those, which would depress your margin. Is that correct? Is that what the change will be in IFRS?

No, it should not change. In fact, we've already changed the calculation of the idle capacity and also the way we calculate the depreciation towards the new ruling. So you should not expect an impact related to that.

Thank you.

You're welcome.

Excuse me. Our next question comes from Mr. Juan Raffetto from MetLife.

Good morning. How are you? My question is linked to CapEx and basically the pace of CapEx year to date, which seems to be slow compared to your full-year guidance of BRL1 billion. Are you just linking this to the approval of the merger? Or you have more projects coming for the second half of the year? And in which areas will there be? Thank you.

Let's say there is a lot of things to consider. We have idle capacity in Sadia's system. We do not know exactly how much it is. But we know that there is idle capacity in the system. We are interesting in line with we said during the follow-on time. We think that this year BRL1 billion could be a good guess for investment. We--as Leopoldo said before, we keep on having this guidance. And of course, to improve the investment level in CapEx, we'll need to have the complete clearance from Kaday to make the right choices anyway. Okay?

Okay. And which kind of investments will you prioritize for the next--for the second half of the year?

We'll keep on the productivity and enhancement. This is the preauthorization of our investment. And then so it won't change until we got this clearance from Kaday to move forward.

We keep on completing the operations that is starting up. We keep on putting money in productivity. And as Leopoldo said--

It's important to emphasize that this situation, it's not jeopardizing our capacity to grow and to produce. It's very important to say. It's not that we are waiting.

We are not postponing any investment that can jeopardize our business in the future due to Kaday or something else.

Okay. Very clear. Thank you.

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

I just want to thank you all to stay with us. And I see you in the next quarter. See you. Bye.

That does conclude our BRF Brasil Foods SA's conference call. Thank you very much for your participation. Have a good day.