BRF SA (BRFS) 2013 Q4 法說會逐字稿

Good morning and welcome to BRFSA fourth-quarter and full-year 2013 conference call. This conference call and the presentation are simultaneously transmitted via webcast in our website www.brf-br.com/ir. (Conference Instructions)

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

As a reminder, this conference is being recorded. At this conference are Mr. Claudio Galeazzi, Chief Executive Officer, Global, and Mr. Augusto Ribeiro Jr., Chief Financial and Investor Relations Officer.

I would now like to turn the call over to the management.

Good morning everybody. Hi, this is [Chris]. We'd like to start our conference call in English right now. Claudio and Augusto are here with us. We're going to change the format a little in the sense that we're going to run through the main points of the fourth Q in 2013 and give you guys more time for Q&A, okay? So, Claudio, let's begin.

Good morning or good afternoon, whatever be the case. It's a pleasure being here once again. The last experience was CBD, but it's a pleasure being here to give you a preview or let's say an organized playback of what we've been stating to the market in the recent months.

I will not address the members. I'll let our CFO do that. What I will try to do, as I mentioned, is a structured playback of all the comments we've been making in the past few months.

When Abilio Diniz took over as president -- chairman of the Board, he established a 100-day program seeing that the world has changed, economy has changed as a whole and that we are entering a different and new cycle.

During this 100 days that started in April, actually it was about a 120 days, two things was especially noticed and indicated. One of them was the 1.9 capture, which we had the opportunity to mention previously. They are divided in 28 actions, and the 1.9 I think because of a pure communication somehow was seen as being something that would be captured within a very short period of time. However, the ramp up is slower in the beginning and gradually increases reaching its maximum peak at the end of 2016.

The other major point was a structural reorganization viewing an [acceleration] of the Company. This change came from the participation of about 70 collaborators of the Company that brought out the fact that we needed to change the mindset from an industrial company to a sales or commercial company.

Also indicated that to do so we would have to have two new CEOs, one for the international market and other one for the local market. Also two new vice presidencies were created, one being the integrated planning VP and the other one, the marketing VP, which reunited the several marketing efforts spread out through the Company.

In September, we implemented the new structure basically. As of August 15th, the new management took over basically, and the implementation of the new structure occurred during the month of September. In October-November, we started to implement the 1.9 actions to capture value of 1.9, as I mentioned, with 28 initiatives on a slower initial ramp and gradually this ramp increasing during time.

We also, in October-November, we strengthened our trainees program so that we could prepare them and -- for being part of our management available talents of the future. We took a step, which was rather courageous, reducing our production for export in 2002 million -- sorry, 210,000 metric tons per year basically. And also we implemented the -- we did not implement it; we actually concluded our strategic planning BR-17 with 46 initiatives having as basic targets like EBITDA margin growth and share price and market price.

In December, we reorganized the external market. Where we had eight regional offices, we reduced them to four. And we also, during December, revisited our CapEx [tower] basically establishing real priorities that had not in view the increase in production or capacity but basically viewing a increase in productivity, logistics, IT and -- sorry.

In January, we implemented a very, very strong internal market go-to markets. We established a test pilot that worked very well increasing our client base. And this was done on a region in Brazil. And as it had a very good result, we started anticipating the rollouts were immediate.

Good year at the external markets. We established new strategy in pricing, that also in January, and we passed the green sector, which is very relevant for us under the VP planning sector. February was a very intense month with a lot of reorganization, a lot of restructuring. The most profound change was in the operations. We cut levels, different levels. We cut three regional offices that had the duplicity in structure of human resources, [CX] administration, which was duplicated basically at the end of the process or at our units.

Today we have three directors that are present in the VP's room where they actually act as a one-line, a direct line, to our units. This beforehand had a cascade of regions of activities that took a long time for any decisions to flow down to the production units.

We also empowered the units having much more action within their own areas. And the beauty of the whole thing was that we did a lot of internal talent promotion. We were able to identify these talents and they were promoted, and this has given us a very agile company.

Another point, as far as the operation is concerned, is that integrated planning did not necessarily talk with the production planning, which was actually based in each of the units. This has agilised tremendously all decisions, which are taken at the --

We also implemented a very strong reorganization in marketing. We are looking at branding and pricing in a worldwide basis, reduction in SKUs and a better structured portfolio. TI and logistic also during February has suffered very considerable and profound changes. We have established a war room that follows on an online basis day-to-day or hour-to-hour every action be it in delivery, distribution, production, so that we can correct the fragile performance which we had during the fourth quarter.

In the external market, we had in January [1913 - sic] bought 60% economic rights and in February additional economic rights on federal foods and the total amount invested at this February increase in the economic rights was of $27. We also during February acquired 40% stake based on an enterprise value of $68 million of Al Khan Foods, a leader in food services and distribution in Oman and they represented Sadia in that region in the past 25 years. This is exactly aligned and according to the strategy of consolidating distribution wherever we are present.

The fourth quarter results, which Augusto will be addressing, mentioning, has taken advantage of the 1.9 captures which we did during the period. Otherwise the results would have been a little bit worse. There is -- we also intensified a lot of fragility in the distribution and logistics, which as I mentioned we are correcting through the war room and we are addressing logistics and IT very strongly with investments.

If I can speak a little bit a bird's eyes view of the first quarter, the first quarter we have increased our market share in most categories, a reversal of the tendency -- of the previous tendency. We are right on top of our budget with initially reasonably good results, which does not necessarily indicate a reversal of tendency, but is a very positive synergization. Of course, we are going to have in this first quarter some costs, non-recurrent cost in reference with a very large changes which we implemented during the first quarter, specifically or more especially in February.

As far as our ongoing policies and expectation in the future is that we'll continue generating very strong cash. It's a generation -- strong cash generation which Augusto will be addressing. Our CapEx is directed in not increasing production, but productivity. We will have a very conservative M&A policy. In other words, digesting only companies that we can do so and that we have competence, and basically looking for consolidation of distribution on the different regions.

Our total objectives, as I mentioned before, is like EBITDA, market share, market value as well as increase in volume and better pricing. We cannot forget that we'll have a production coming in in Abu Dhabi with our new plant, about 80,000 tons a year. Initially it will be a ramp up getting to 50,000 metric tons. And depending on our results, we'll increase the production locally.

In other words, we will have very strong brand in the region, which is Sadia, for over 40 years. We will -- we do have distribution. We have Al-Wafi as a distributor. We have now Federal Foods in much more participation, our participation, and, of course, we will have the production.

Basically I would say this is a review of the comments we've made during this period since August 15th, six months of very, very profound changes within the Company. And I will now pass the word on to Augusto that will mention our numbers and our performance.

Hi, good morning, good afternoon everyone. Thanks Claudio for the [speech]. First of all, I will just reinforce as Chris said before that we -- I will not go through the presentation. That's available in our site. But instead I would just highlight some points that I believe are important to call to your attention.

Don't get me wrong. The idea is not to raise different figures or excuses or whatever. It would be regarding the result of fourth quarter. The idea is just to give you a better view of what was the truly results of our last quarter of 2013 in such a way that it will help you to understand what are the true growth basis from a Company from which we are going to grow in 2014.

So first of all, we presented in the fourth quarter of -- in the year 2013 a growth of 7% of net revenue against 2012. It is important to take -- to pinpoint here is that we have -- we grew -- we had continuously seen the impact from 2012. We took out part of our volume in the mid of 2012, and when you do that, it will be something like a same-stores sales approach, in order to understand the real net revenue growth year over year. The number would be around 12%, and not 7%. That is important because that reflects all the actions that we carried out throughout 2013 in the internal markets in Brazil in order to recover those volumes that we lost even if it is a zero.

Talking about now the internal markets another point that we like to raise here, we reached the net revenue in the fourth quarter of BRL3.6 billion, in line with the fourth quarter of 2012, but with 16.3% decrease in volumes. It is important as well to qualify this decrease in volume because they are basically -- it basically happened given three main issues.

The first one, in the first -- the last -- the third quarter of 2012 -- in the fourth quarter of 2012, we had a huge volume -- huge, no, but a very important volume of birds, chicken mainly, that we sold in Brazil that came from our external market business. So we divert volume from the external market into internal market of Brazil at the end of 2012. That inflated the volume of that period, but that's not good -- the margins of that period related to those birds were not good.

When you look at 2014, we as a nation before we do have some strategy for (inaudible) product and the sales that we did of chicken were more aligned with this impact that we had planned and forecasted for our business. But the difference between quarter 2012-2013 were relevant. And other one was the volume, actually the feed volume, raw material volume that we saw to do at the end of the fourth-quarter 2012, we do not have that business anymore. It was sold to another company. So when you compare quarter against another, this will also impact our volume growth.

And finally, the process through the core of the internal market debt amount of volume decreased 2%, and that is basically because we increased strongly our price throughout 2013. The average prices year over year went to -- in the fourth quarter against fourth-quarter 2012 was around 19%, which is a very strong price increase. So it affected a little bit our volumes in the last quarter.

But when we consider what I just said regarding volumes and all the action, further action that we did throughout the year, the internal market EBIT increased almost 11% in the fourth-quarter 2013 against 2012. This is approximately BRL40 million, which we consider a good, a very good result.

In the external market, we exported 2.5 million tons in 2013 growing 1.5% in relation to 2012, we get -- with a price increase of 15.9%, which we successfully passed on. But also we get some good impact from exchange rate. And the revenue, net revenue, for 2013 amounted to BRL13.1 billion.

Now if we break the result into regions, it is important to mention that all market presented improvements in the fourth-quarter 2013 with the exception of Middle East. So the Japanese market started to get a better balance between offer and demand. The local stock decreased considerably, which helped us to recover partially the local prices.

Europe, the consumption increased a little bit; the same for Americas. So the only major issue or the main issue that we had in the fourth quarter was related to Middle East, and that's basically because the higher local inventory and the unstable demand scenario in December in Saudi Arabia. However, if you take the year as a whole, we grew 7.9% net revenue against a fall in 2.3 percentage in volume.

Another point that's important to mention that in external markets we saw a little bit of countries that tend to [externally] cease to import given political reasons or financial reasons or something like that. So in the fourth quarter when you compare year against year, we did not sell volumes to -- or the volumes sold are much smaller to Russia and Ukraine. When talking about dairy products, this -- our strategy of focusing on our mix with greater added value and reducing the dependence on UHT milk continued throughout 2013. This contributed a lot to improve our results.

If you look at 2013 versus 2012 full year, the dairy segment reported a growth of 3.5% in net sales with less volume, 15%, but with a lot more price, 24%. So in the year operating results amounted to BRL60 million representing a gain of 2.3%.

However, in the fourth quarter, we get a negative EBIT of BRL27.7 million basically because of three reasons. High cost of milk sourcing, declining prices in UHT milk, from higher cost with less price in the market for UHT business, but also because of some non-recurring events that I'm going to mention you in a few moments, which impacted the dairy specifically. In the food service segment, we grew 1.6% comparing to the fourth quarter of 2012 with a net sales of BRL500 million. For the year as a whole our EBIT increased 7.5% to BRL177 million.

Now, I would like to open the space here to talk about those mentioned before, non-recurring events. We can divide those non-recurring events in three main blocks. The first one is a one rate restructuring, people restructuring. We had restructuring cost of BRL71 million in the fourth quarter. If we add what we had in the third quarter, that deal would go to approximately BRL100 million. So anyway BRL71 million related to restructuring cost in the fourth-quarter 2013.

On a smaller proportion, we announced to the market the portfolio reduction program in 2014. So when we went through all these programs, we already identified a need for -- a need of provision around BRL5 million related to less over that might happen at the end of the program. I'm talking about packaging and I'm talking about raw material that I might not be able to consume totally by the end of the program. So we already provided that at the end of last year, around BRL5 million.

And the third, which is more relevant, we went through a revision in our CapEx program and decided to cancel some investments for capacity increase, which is aligned with our strategy, which is aligned with our current idle capacity in our factories. This has impacted our results in BRL35 million.

So if we sum up all these three issues, three points, we will end up with the amount of BRL110 million of non-recurring events. Why is that important? Because we do believe that these are truly non-recurring events. You might question yourself. Every single year you might have your non-recurring, but we believe that these should be -- raise to your attention because they distort a little bit our results in the fourth quarter.

For instance, if you talk about our EBIT at the end of the year, instead of a margin of 5.6% of EBIT we would have a 7%, which would be higher than the 6.7% that we obtained in the fourth quarter of 2012. When you're talking about EBIT again for 2013, the Company reported an EBIT of BRL1.9 billion, 48% above the EBIT generated in 2012.

And another line place which is important to bare attention regarding non-recurring events is our EBITDA. So just let me before I move on, this is going to be the last time we're -- the last time we will mention an adjusted EBITDA. From the first-quarter 2014, it will be only EBITDA. I think it will help your analysis. It will make our life easier.

But again, since we mentioned that from 2012-2013, I will relate to these specific numbers. So if you took that non-recurring event and add up into our adjusted EBITDA, our margin would grow from 11.6% to approximately 13%, which is -- would be higher than the 12.5% of 2012. Again, this is not excuses. I'm not just trying to clean up the figures for you to understand the real performance, which is going to be the base from which we grow in 2014.

Finally, I just would like to bare attention to some specific points, which we are very proud, and they are actually coming from all the actions that we started to implement in 2013. First of all, a very, very strong cash generation in 2013. If you took the full-year 2012, we generated BRL115 million of free cash flow against BRL1.5 billion in 2013. This is more than 10 times growth, which is good, the good news that this tends to be a reality, constant improvement in free cash flow mainly achieved from a greater efficiency in working capital and CapEx.

When talking now about CapEx, we -- the investment in 2013 amounted to BRL1.5 billion. The majority of it in line with the strategy of the Company more focused on improving process through investment in logistics, automatization systems, IT. The guidance for -- and here we're giving a guidance for 2014 is BRL1.5 billion, the same number including the biological OpEx BRL500 million. So, two CapEx around BRL1 billion.

Another important point that I would like to mention here is our improvement in working capital. The Company has been working on their optimization of working capital. We moved from 56 days in December 2012, which represented by that time 14.5% of our net revenue to 49.5 days in 2013, which represented by the end of the year 13% of our net revenue.

In 2014, we also expect to see an additional improvement in the management of accounts payable and receivable inventory. And finally, which is also important, the Company net debt was BRL6.8 billion. The ratio of net debt to adjusted EBITDA was 1.87 times, which are in line with our, not a guidance, but, our policy around 2. So we are in a very good financial shape, ready to move on as we are moving in terms of M&A or other action.

Now, thank you for your time and let's move forward to the Q and A.

(Operator Instructions). Tim Tiberio, Miller Tabak.

I just have two questions that I'll roll up into one question. First off, with some of the recent political developments in Ukraine, do you see that as an increased opportunity for Brazil Foods to regain or gain market share in the Middle East? I know that there has been a large producer in Ukraine that has been more aggressive in those export channels. I would assume that a weaker currency could help them, but on the other hand, maybe some concerns about credit issues could create an opportunity for Brazil Foods. So I would love your thoughts on that development.

And then just lastly on the feed cost environment if you can may be provide us with a sense of how you are framing up the cost side of the business heading in the 2014? Thanks.

Hi. (inaudible) Actually, we see Ukraine as a potential long-term contract (inaudible) on protein market. We have a lot of (inaudible) to bring in that growing cooking industry. But we don't see any movement on the short term obviously for the political instability that's going on and drought. Also we are not sure about the access to European market either because that divided the opinions regarding (inaudible) are not useful for us. Ukraine right now is not a short-term player or we are not looking at short-term opportunities there.

And moving forward to the second question, you mentioned something about cost related to feed. More specifically I guess you are talking about grain and those things. I've tried to summing up more of our view on that topic. So considering the currency view of grain prices, our cost will be pressured mainly in the first months of the year, of 2014.

So if you talk about corn, there is, for instance high speculation of the harvest size. As for the fact the Brazilian farm is currently holding it's corn sales expecting better prices yield in the short future. As far (inaudible) being the costs under pressure because of Chicago prices. They are sustained by America demand and because Argentina farmers are also holding back their sales, which put pressure in the premium paid in the Brazilian ports.

So all-in-all, we believe our cost will be in line the figures from 2013. If you consider the dollar, the average dollar is around BRL2.35. But that will be an average pressure at the beginning of the year. But we have a lot of actions related to COGS. SG&A as well, but let's focus answering the COGS side, which we are -- Claudio mentioned restructuring within area trying to speed up the season and speed up the flow of communication within the area, which then are already showing some very positive results, bringing the industry to our operating room which has created a very good channel of conversation and communication. So, so far, the feed crop pressure are under our budget, aligned with our budget. It will be a bold issue regarding the first month of 2014. But we see the year in average with the same prices of 2013. Okay.

Alex Robarts, Citi.

I would like to have my first question on the exports. When we look at the EBIT margin of just under 1%, I mean clearly this is, with a lot of factors that were going on here, one of the lowest that we've seen in a long time. And if we think about the factors beyond the cost and the dollar impact on soy and we think about price, and specifically the dollar price. I mean, if we look at sales tax it looks like your dollar price per kilo in the export market was several percentage points weaker. And as we think about the first couple of months'(inaudible) that the dollar selling price for poultry, like it's actually 3% or 4% below the fourth quarter.

So the question specifically on export is that, if I maybe -- if you think about your bargaining power with the customers, was there a dynamics that perhaps you could help us understand that made it such that your average dollar price in the fourth quarter for the exports was below what seemingly is presented by sales tax and the industry? And as we think about the first part of 2014, is that price something that you think you could improve on? And kind of the larger picture is, is it fair to assume that the export margin versus fourth quarter will start to improve as we kind of role into this year? That would be great, and that's the first question.

Thank you, Alex. Thank you for question. You're right that our average price actually in reais will either be flat, but we mention the price in dollar. So what we have to say is that, we would expect improvement. We should expect -- we are expect -- we have seen improvement in the first half of 2014, mainly it works in a market in which we are working with a better offer than (inaudible). So part of those not increasing prices in 2013 was due to a rebalancing when we started the inventory regulation. So we are not able to -- actually we decreased prices in order to move forward our volumes, the local volumes, especially in Middle East. That would've been the main reason for the difference in terms of shelf life price and stuff like that.

Then in the first semester, first quarter already included, but in the first semester, we would expect a better price in external market, mainly because we do have a better off than (inaudible) within the Company into the market and also the real depreciation that would help us. So we answer straightforward to your question that the first part of the year should be better than the fourth quarter what we are actually seeing.

So just complementing what Augusto mentioned is that previously the market that was expected would have a better result because of the parity, in other words, the devalued real, that did not always occur. Because we were over-offering, we had overproduction and we had to actually because of our shelf life had to actually decrease our prices to be able to reduce our inventories. Now, as we mentioned, we've reduced our production for exports and we are following demand with the industry, not the contract, the industry pushing whatever the market wanted or not wanted to absorb.

We're seeing results already.

Yes, we're seeing results, positive results, from that action that was taken in October-November of the planning in reduction of our exports. Basically that has been very good, and we do have a very good indication that our external market at least for this first quarter will be within our budget, which is aggressive.

Alex Robarts: Okay, very clear. Thank you for that. And my second and last one is just on the restructuring plan. You mentioned in the earlier call today that you have some productivity gain in the domestic market, but you also have these restructuring costs related in certain parts the advisory fees and some personnel severance issues and that in fact the margin expansion would have been better had it not been for the restructuring cost.

And I guess as we think about the BRL112 million in the fourth quarter that associate with the nonrecurring restructuring cost, how should we think about that in the first half of this year? In other words, is it an amount that really you're kind of with these 27 projects kind of taking on a case-by-case basis? Should we allocate, like analysts, some amount for restructuring cost, the nonrecurring one, for the first half? If you could give us any color of how we can kind of think about these for the first half, that would be very helpful. Thank you.

Thanks, Alex. Unfortunately, we do not give guidance on restructuring. That I'm sure is going to help you both a lot. But I'll try to answer in a different way and let's see if that works. We're still going through some initiatives that we probably have nonrecurring impact as you mentioned in our results throughout 2014. I would -- I could mention initiative in SG&A. We're going through a [zero-base] budget program in cost.

We had factories and distribution centers footprint analysis. Some of them will happen in a short term, first half of 2014. And others will depend on some strategic decisions with a medium-term impact. I would like to give you numbers, but as I said, some of the initiatives are still being analyzed and decided if you're going to move forward or not.

For example, if we consider our dairy segment, we're going through a strategic review of the business. So all possibilities are over the table for decision. That's why it's difficult to put a figure for 2014 in terms of number. But I can tell you these figures are going to happen. They are a part of our structure and we're not finished with them yet. I don't know Claudio if you want to --

No, we will have, as Augusto mentioned, restructuring costs that will be non-recurrent. However, we've planned for this during the year and it will affect, of course, our EBITDA, but not that significant. The first quarter, obviously as you saw, we've implemented a very, very strong action in the different sectors; marketing, operations, and TI and logistics. But this will occur, but we do not believe that it will decrease significantly our expected and projected results.

And furthermore, just to add to that, we also expect some positive nonrecurring events. We're planning on reviewing the sales of forest -- farms and all this stuff that are going through that would bring a positive nonrecurring event for the Company.

And this should balance out approximately.

Okay, thank you.

You're welcome. Thanks.

Diego Maia, HSBC.

Just reviewing the domestic markets, if you guys could help us understand what is the breakup between the impact and the cost regarding lower fixed cost dilution from the weak volumes like 8% decline year on year. And the impact depression from higher label cost and dollar denominated items. If you could help us understand the breakup of the impact in our cost would be very helpful. And also if you could comment on the -- if you've seen any volume improvement in January-February, how should we think about that going forward? Thank you.

If you think about the first quarter of result in internal markets, we are already seeing some improvements. Well, first of all, 2014 to speak frankly with you, and I think everybody knows that, expect that already from Brazil, we might have a decrease, a slowdown in consumption rate in Brazil, so -- due to the economics, et cetera.

But the majority of the actions that we had currently in place in BRF mainly depended on ourselves. I'm talking about distribution, I'm talking about action, some specific channels, talking about the SKUs portfolio in Brazil, which will add up to the bottom line increase. So we're confident that even though with the economical slowdown, potential economical slowdown, we might be able to have good results in our internal markets even though the actions are currently in place.

In the first quarter more specifically, we believe that we are ahead in line. We started some good actions in some specific regions in Brazil for the small channel and the results are pretty good, and we will rollout that by the -- by May or March to the other regions of Brazil which is a good result.

We, for instance, giving you an example, I'm not sure if you have the numbers but if you look at -- if you have access to the news numbers, the readings from November-December and the readings from December-January, this year is showing that we gained market share practically in all the category that we are currently playing, which are very good signs of all the actions that we are going through. And the first part of the question related to a breakdown of costs. And could you be more specific? I didn't get it.

It's regarding the impact of low dilution. But given that you guys had weak volumes in the quarter and the pressure that you're seeing from high labor and dollar denominated COGS. If you could break that up.

Yes, we -- I'm sorry, I don't know how to correctly breakdown the COGS. Real devaluation is good for the Company as long as they have a better curve demand relationship outside of Brazil. If you had low inventories outside of Brazil, definitely real depreciation will help the Company.

But we had cost increase in Brazil. We saw the feed, the soybean feed increase in the fourth quarter of last year 12% against the third quarter of 2013. So this is public information, not from ourselves, that came mainly from the real devaluation more than through a commodity price by itself. So I think that is that what I could give you in terms of number for the internal markets.

Okay, thank you.

Welcome.

Chelsea Konsko, TIAA-CREF.

I am just trying to understand your adjusted EBITDA figure for which you have 11.6% margin I believe. And then you mentioned on the call earlier without the non-recurring effects, the margin would be 13% in the fourth quarter. Correct me if I'm wrong, but I was under the assumption that your adjustments to get to the adjusted EBITDA where you add back the operating results already was adding back the effects of the non-recurring items. Can you please just explain what's included in those other operating results if it's not the non-recurring item?

Sorry, I mixed up a lib both lines, adjusted EBITDA and EBITDA. It will affect the EBITDA, but it didn't affect adjusted EBITDA because we take of those results line. All the nonrecurring items that I mentioned to you were booked on that specific line of nonrecurring item. So the increase of the margin, and we should add up that, BRL110 million to the EBITDA figure of the Company, and then you got an increase from 9.4% to something higher. I can give you a brief calculation here.

880.

10.7%. 9.4% to 10.7%, that would be the EBITDA margin if we consider those non-recurring items.

Okay, thank you.

You're welcome.

[Mark Jason, Evasco].

I have just a one question that relates to -- I just want to understand how should we think about increasing the new roots in the small channel? Where do you stand in that process? You mentioned in earlier at an earlier question that you are just starting in some cities. And how should we think about cost associated with that? How should we be thinking about increasing cost as more difficult to get to those smaller mom and pops?

Well, as I mentioned we did a pilot project in certain areas of Brazil, and we were able actually -- the number that we've -- from supervisor on up, we do joined all of those managers and management group so we have one structure as far as sales is concerned. By joining the forces basically, we would need -- would have need redundancy in the number of sales of our salesforce that was addressing basically the market as a whole.

But we did not use or did not place a redundancy program. Actually, we used this excess salesforce to reach the regions what we were not present. There is not -- there is an increase, of course, in distribution costs in reaching this additional market, but it's overcompensated by the increase in the number of clients and customers.

Just to complement that, Claudio is wise, of course, but where we are currently, we just started that pilot. We were successful in terms of our internal target, our PPI, and we are moving forward into Brazil. But, of course, we still have to go through -- for each new route, the profitability for each one of them, we need to look at the sales productivity for the new client because we started with more volume and then we start to increase the volumes sold for each one of those clients.

If you put it out all together, what we are looking at the route should be very good positive results, not only specifically only the client but the new route should be positive and should give us reason to move forward. We are current in that way and what we can say to you right now that we expect -- we did have good result in the beginning of the stage of this project and then moving forward as from May 2014 to all the regions of Brazil.

So how long do you think it will take you to roll it out throughout Brazil?

Six months.

In just six months you think you can get everywhere in six months.

Yes. (Inaudible) please do not add up times (inaudible) in our volume and something like that. In the six months we will finish the rollout. What that means? That means that we will be able to have sales redefine the geographic area of responsibility. We will have already the majority of the IT systems already implemented to support the salesforce.

We will have redeployed those guys, those sales force that are ready today selling only Sadia, only Perdigao, only Batavo, et cetera, now working with BRF approach. But again, this is a ramp up. Once we started, even after six months, we still be working with the first pilot, increasing productivity, increasing the correct mix, trying to sell products with more profitability than other ones. So it will take time.

I would like to just state another fact is that in region where we made the pilot test, we went from 14,000 clients to approximately 18,000 clients. So we don't know yet if this will be the multiple which we'll place in the market, but it is an increase in our client base.

And from that 14,000 to 18,000 what was the incremental revenue that you saw?

Very few at the beginning. We are not relevant in terms of volume. We expect it to be relevant as we move forward. First of all, the first contact, was like one boy here. Hi, my name is whatever. I came from BRS. I will be here attending you. It starts a relationship.

We don't know yet what would be the result as far as the portfolio, which we will be offering. Presently, it is increase in the client base, but not very evaluated what would be the relevant factor as far as sales is concerned.

But the productivity gains that we saw in this past quarter, was part of that relating to this increase in the Middle East in the new and mature mom and pop sales groups?

No, because we we started this section in January.

Okay.

So it's additional, definitely additional.

Okay. Well, thank you very much.

You are welcome.

Excuse me. This concludes today's question-and-answer session. I'd like to hand the floor to Mr. Claudio Galeazzi for his final statement.

We would like to thank everybody for their questions, their participation and their interest. I do hope that we were able to answer your questions and doubts, but I would like to state that we would be always available, Chris, Augusto and myself at any time for further questioning, for further presentations and follow-up of the Company events. Thank you very much. Thank you, Chris. Thank you, Augusto. Thank you for the rest of the people here present. Thank you.

That does conclude our BRF SA conference for today. Thank you very much for your participation and have a good day.