BRF SA (BRFS) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to BRF S.A. Conference Call to discuss fourth quarter 2014 earnings. This conference call is being transmitted via webcast in our website, www.brf-br.com/ir. The presentation is available to download in our website. At this time, all participants are in a listen-only mode. And after the presentation, we will conduction a question-and-answer session. Instructions will be given at that time. We will 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 provisions based on expectations 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 internal market. These are subject to changes. As a reminder, this conference is being recorded.

At this conference are Mr. Pedro Faria, Global Chief Executive officer; Mr. Augusto Ribeiro Jr., Chief Financial and Investor Relations Officer; and Mrs. Christiane Assis, Investor Relations Director.

I would now like to turn the call over to Mrs. Christiane Assis, who will open the conference call of the fourth quarter 2014.

Good morning and welcome to BRF fourth quarter and annual results conference call. At this moment, I would like to handover the call to Pedro Faria, BRF Global CEO. Pedro?

Good morning, everyone. Thank you for participating in our 2014 earnings call. 2014 was an extremely pioneer for BRF. It was a year of transformation with structural changes within the organization. We focus a lot on execution with the implementation of a number of projects aimed at improving the Company's operating performance in Brazil as well as in international markets.

The Company's consolidated revenues for the year including discontinued dairy operations amounted to BRL31.7 billion, an increase of 4% over 2013. Consolidated EBITDA was BRL4.9 billion in 2014, some 56% higher than the accumilated figure for 2013, which resulted in an EBITDA margin of 15.4% compared to 10.3% in 2013.

Our net income reached BRL2.2 billion compared with BRL1.1 billion in 2013, which translates into an increase of 109%. The Company's cash flow, our favorite metric amounted to BRL4.1 billion in the year, triple the amount of 2013 and to finalize our return on investment capital, ROIC was to the tune of 11.8% in 2014, which is a substantial improvement of 4.6 percentage points regarding the return registered in 2013.

Talking about our Brazil operations. Throughout 2014, we focused our efforts in Brazil in making structure improvements in both the logistical and distribution area. We've diversified and improved our channel management in areas the Company did not reach or did not serve directly leading to an increase in active clients as well as a reduction in inventory losses and higher profitability. As of June, we started a strong and intensive campaign training the sales force with a view of increasing productivity per salesperson enhancing the tools and expanding cross sales. This led to some very good results, an increase of 22% in the number of clients in small retailer in Brazil, reaching 160,000 points of sales by the end of the year with also an increase in our cross sales amongst our brands from 53% to 77%.

In terms of our level service provided to our clients, we focus a lot and we think we have a meaningful improvement of 12 percentage points in our outperform index on time in full by the end of the year. Despite this achievement, we still think there's a long way for us to go to better service our clients.

At the beginning of 2014, we changed our strategy international market. Cutting volumes in markets that no longer represented profitable opportunities to focus more and more on selected clients, geographies, channels and markets that we think we can better serve.

Additionally, we introduced a series of initiatives, which translated in improvement in our operation. We have lengthened and improved in some contractual terms with our clients, we clearly have better inventory management, we reduced operating expenses and we also improved the phasing of shipments to the amount which reduced our sea freight cost for instance and having tax (inaudible) throughout the entire P&L of the company. We also think those initiatives have led to reduce the volatility of our international markets.

In line with our international expansion strategy, which aimed at gaining access, increasing access to our clients and consumers and strengthen our brands, we have continued our move of integrating the distribution into our operations. We have acquired 100% of the economic rights of our United Arab Emirates distributor, 40% of our Oman distributor and 75% of our long time distributor in Kuwait. Those have all lead to a substantial improvement in our operations, which can be translated by increase in market share in those markets.

We have also announced the signing of binding memorandum of understanding with PT Indofood in Indonesia, creating a joint venture that will explore opportunities in poultry and processed foods in Indonesia. This is a strategic step that opens the door for a market, which consists of 250 million people where protein consumption is increasing substantially.

In terms of our financial management with a view of maximizing working capital, the Company financial team has done a great job resulting an increase of our accounts payable, decreased in our accounts receivables as well as the inventory management, which all contributed to a reduction of our financial cycle by almost 11.3 days. The Company's cash flow resulted of this improvement in working capital, but also the operating improvement and optimize CapEx policy generated cash to the tune of BRL4.1 billion as mentioned before, this was three times higher than the accumulated of 2013.

These results have allowed us to distribute $824.3 million in dividends and interest on equity, which is a record in the history of BRF. Following the strategy to focus on assets that are the Company's core business, we have signed an agreement with Lactalis Group to sell our dairy division. The contract was signed in December with the amount of the transaction fix in dollar terms of $1.8 billion, approximately $700 million at that time. Also, in order to optimize our return on investment, we signed a partnership agreement with Minerva, relating our beef business. We had exchanged two of our slaughtering facilities in the state of Mato Grosso for a stake of 15.2% in the Company with the right to appoint two members to our Board -- to their Board of Directors. The Company cash-rich position at the end of 2014 allows us to take opportunity perceiving market and we announced a share buyback program of BRL1 billion already executed, which meant that the purpose of the program was to ensure the efficient use of the available cash resources in a way that maximizes our return and the allocation of the Company's capital. More importantly, we promoted in the fourth quarter of 2014 a large event for all of our leadership called the Viva BRF in which we brought 4,000 people under a same roof with a purpose of consolidating the Company's new culture Viva BRF, which has many talkers see an high performance linked to our remuneration tools as one of its fundamental pillars. We are very pleased with the transformation occurred in the Company in 2014, and that strategy that has been carefully executed until now. It is important though to mention that 2015 is shaping up as a very challenging year for the Brazilian companies given the slowdown in the economy, this structural adjustments needed in the economy. And in this week, the potential impacts we are facing of a strike of truckers, which is blocking the roles in Brazil and affecting our operation as well as the lives of all of the Brazilians. I will now hand over the call to Augusto, our CFO who will provide more details on the financials and I'll have to excuse myself and I'll take one or two questions before I have to go and take a trip to Brazilian.

Good morning to everyone. All the results that are present here referred to the company's continued operations excluding results from discontinued dairy operations, which are in the process of being sold to Lactalis, as we announced in December 2014. The consolidated net operating revenue in the fourth quarter of 2014 amounted to BRL 8 billion of 6.8% against last year.

All of the company's business units made a positive contribution to this result through higher volumes in Brazil any food service as well as better average price in the international market. Talking more specifically about Brazil, the year of 2014 was (inaudible) important for the company, as we started -- strategy for Brazil.

The results in the fourth quarter, which is seasonally stronger -- seasonally stronger as well as for the results of 2014 as a whole showed that even against a challenging year of our consumption and an economically down. We had successfully implemented our strategic goals anticipating consumption trends in seeking growth in the small retail sector.

Net operating revenue in Brazil amounted to BRL 3.9 billion in the fourth quarter, up 7.6% when compared to the fourth quarter of 2013. These were mainly driven by an increase in volumes of 10.6% resulting from an improved performance in commemorative product, our seasonal product combined with better (inaudible) as a sales point as well as our growth in the small retail channel.

Now, moving forward into the international markets, the strategy of optimizing volumes in some regions of the international market paid off in 2014, combined with the structural change such as improving contract terms verity inventory management, reduced operating expenses and balance volumes boosted the returns in the regions.

Net operating revenue from the international operations in the fourth quarter was BRL 3.6 billion, up 5% compared to the fourth quarter of last year, boosted by an average price that was 17, almost 18% higher in BRL terms against last year and 5.5% in dollar terms. Accumulated net operating revenue from international operations in 2014 came to BRL 13.3 billion, an increase of 1.5% compared with 2013. When we talk about our food service segment, the result for the fourth quarter of the year continued to show growth trends in both revenues and volume, despite the challenging backdrop in the segment of outdoors food consumption.

The discipline in the execution shown by all the teams ensured an increase in sales for the fast-food chains, industrial kitchens and small businesses throughout the country. We have also achieved extremely positive results in this period with the Christmas kits campaign. Sales of more than two million units were recorded, sustained by an improved management model, which guaranteed that the execution went according to plan.

Net operating revenue for Food Services reach at BRL 573.8 million in fourth quarter, an increase of 13.3% compared to the fourth quarter of 2013, which was mainly driven by the growth in volume 16%, although the average prices sales slightly by 2.3% in the last quarter compared to the same quarter 2013. As mentioned previously, BRF increased its operational efficiency presenting stronger results, which seemed from strategies carried out in Brazil and international markets. Coupled with that, we also had an important cost reduction in the price of grains that 2013, these led to gross income of BRL 2.7 billion in the fourth quarter of 2014, an increase of 38.3% compared to the same period in 2013.

The gross margin was 33.4% in the last quarter of 2014, compared with 25.8% in the fourth quarter of 2013. Therefore, the company's gross income in accumulated terms for the year was BRL 80.5 billion, 23% higher than the previous year. Talking about our operating expenses, which came to BRL 1.3 billion in the fourth quarter following trend, we started seeing at end of last year and decreased 1.9% period against period. This is what mainly, this is a better management of expenses, reflecting the results of attain from the zero based budget project that we initialized at beginning of the year.

The accumulated operating expenses for the year were relatively stable showing a slight increase of 1.1%. These was a result of higher spending on marketing and trade marketing in line with our strategy of having greater focus to the final consumer and strengthening our brands. In percentage terms, bear in mind the company's growth, the operating expenses fell over the year and came to 15.9% of our net operating revenue, compared with 16.4% in 2013.

It's important here to mention that in the other operational results line, we had a positive impact of BRL179 million due to the capital gain obtained with that beef asset transaction with Minerva, as mentioned in October. This value offset almost quarter percent of all other expenses of the period. Therefore, the result of the company's operating improvements can be seen in the company's net income for the period. When you look at the continued operations alone, net income sums up to BRL 991 million in the fourth quarter of 2014, almost a BRL 1 billion, showing an increase of 334% against last year.

The accumulated net income for the year of obtained from continued operations totaled BRL 2.1 billion, an increase of 110% compared 2013. When we considered both continued and discontinued operations, the company's total EBITDA was BRL 1.8 billion in the fourth quarter, 135% higher in the same period of 2013 with a margin of 20.9% compared with 9.4% in the fourth quarter of 2013.

Accumulated EBITDA from continued and discontinued operations came to BRL 4.9 billion, an increase of 56% in comparison to 2013, representing a gain of 5.1 percentage points in the margin.

Investments, the investment in growth support an efficient amounted to BRL 342 million in the quarter, represent a reduction of 9.1% year-over-year. We are also considering this amount, BRL 135 million of investment in biological assets or breeders, including the amount of BRL 387 million of investment acquisition/others, we reached a total of BRL 729 million in investment in the fourth quarter of 2014. Therefore, the investment for the year totaled BRL 1.5 billion and very aligned with the guidance provided directed towards building the processed food plant in the Middle East as a lead automation projects, process improvements in IT support projects. This number 1.5 also includes the BRL 517 million of investment in biological assets.

For 2015, we estimate that we will -- our investment amount to BRL 1.3 billion, an additional 500 plus and additional BRL 550 million in biological assets, in fact is roughly at falling BRL 500 million for change in the operational footprint, BRL 400 million for improvement automation in the plants, and BRL 400 million for sustainable growth projects.

Well, the results achieved in 2014 what assessment that we have shows in a solid strategy for the company, which we believe will bring us the gain expect in the coming years. We will continue to visibly work on our long-term projects such as the go-to-market GTM, seeking continuously improvement with our level of service and further implemented structural changes in logistics distribution with the view eliminating redundancies, optimizing our industrial footprint and implemented a new pricing model.

We believe that (inaudible) projects combined with (inaudible) products conquered innovation. We will boost the potential for growth in the regions where we operate and continue to bring superior results for BRF in the future. I would like to thank you all for participating in this conference call. We are now ready for the question-and-answer session. Thank you.

(Operator Instructions) our first question comes from Jeronimo De Guzman, Morgan Stanley. Mr. De Guzman, you may proceed.

Hi. Good morning, had two questions, one of them was on the provisional measure that was announced today regarding cable taxes and then increase in those. Just wanted to see if you could tell us what the potential impact could be on those and then a separate question on international, just wanted to gauge how much -- is there any easy way you could help us gauze, how much of the margin improvement is coming from some of the cyclical factors that we've talked about like the lower raw material prices that are stacked versus some of the more structural changes you've made, including the freight expenses and the simplification of the organizational structure.

Thanks for the questions. Well, first of all, regarding the tax issue, it's pretty nil then the outcome of that today. So, we are sure analyzing issues seen in back for the company and for the industry. So, we don't have numbers to share with you right now. It is something that we still work. We've been trying to understand actually how it is going to be implemented throughout the year. First of all, I guess, I think it is valid only from June, July of this year. So, we still have to go through the details of that for, which product does it apply et cetera.

So, there is no news right now on that specific topic. You got our margin expansion 2014 and what is extra throwing and what is all the factors like grains,like the FX rate et cetera, currency what we showed to the market in the last three months of the last year, that we made a lot of improvements in terms of our supply chain, in terms of our relationship with the main clients, in terms of how we've been dealing with specific regions of the world. So, the majority of the benefits actually, we believe that they are here to stay. We improved that just given a couple of examples, all audit to cash cycle of freight (inaudible) of our freight renegotiated based on our better supply chain provider to those companies. We are delivering better products on a sustainable period of amount with very certain frequency. We decreased our SG&A in order to have a better and align structure within the company. So, when you take all that in consideration, we believe that it's going to stay.

Regarding currency I just share you some of examples. If you look at the Middle East, for example, we are in a much better shape regarding our results. We have lower inventory levels currently, we invested and increase our distribution capability in the region and that coupled with our extra facility that we are starting to the Commission at the end of last year. We provide a better leverage to be able to sustain price levels to have at least decreased the volatility in those markets.

So far looking ahead for 2015 what we're seeing is that the prices has been falling, but our ability to sustain our margins, our ability to sustain our profitability based on what we did last year, very strong and will be sustained. That's our main target for the year.

Our next question comes from Jose Yorden, Deutsche Bank.

I have a quick clarification on before we show the payroll tax where you one of the companies that change to pay based on revenues or why are you following (inaudible) traditional way.

We are following the percentage of revenues currently, we're applying that.

Okay. So, in a few weeks or few days I guess you will be able to share more the impact on that?

Yes, sure.

Okay. And I guess my other question was just how sustainable I mean you had a huge increase in the gross margin this quarter that -- that why I can tell it was about 3.3 percentage points above. What's the consensus of everybody, so there was a complete surprise and I get at that some of the factors are structural et cetera. But actually we think of gross margin going into 2015. How much of this is sustainable from how much of (inaudible) any kind of idea you could share with us about where our gross margin will be based on a BRL 290 wherever we are now obviously that makes a bit difference, but just assuming stable currency where we are today?

2015 is going to be a tough year for the company if you think about the economy in Brazil, if you think about the truckers strike currently that effect in the short term (inaudible) actually been affected for that, but we implemented so many change in the last year that we believe -- we believe now we assure that we are much more structually prepared to deal with all those issues in 2015.

If you think that last year, we will increase the number of part of sales on the moms and pops, there is more retail channel margin 22% from 130,000 product sales, 160 product sales at the end of the year. We -- for 2015 is a strong year for us to work out their productivity, how to increase the productivity on those new product sales that we obtained until last year. We are also -- we will continue to look for new product sales, and plus all of the projects that we will continue to monitor and to put a lot of strength behind it.

In Brazil, for example, we had a new structure implemented by the end of the year. We created five new regions within a country with a full P&L responsibility. We have marketing and try to marketing and accounting all of those functions are actually being put with more detailed, more focused on those regions. So, therefore we believe our focus ability, our deployment in 2015 will be even better than 2014. Put that in perspective, the year is going to be a challenge one for us, but we believe we have everything that we need at least from our side in place for the year.

Let me add to Augusto's points, of course 2015 is we're just in the start of the year, but we shaping up is a quite challenging year as I said. On one hand, we see Brazil having significant weakening of the economy, which is being felt in the marketplace. On the other hand, this last week crises with no roads being blocked presents threads to our operation -- sustained operations in which I'm very pleased to say that our team has done a remarkable job sustaining our operations and doing everything that they can. As Augusto mentioned, I think we have a solid plan more importantly and very impressed with our capability in terms of management disciplined execution in Brazil, the granularity of our focus in channels, categories and regions providing us a strong hold in the marketplace. On the international market, we see opportunities for continued expansion. Of course, we have a slightly positive trend with the weakening of the Brazilian real, still sustaining our margins on the international markets, which coupled with all of the results and the impact of the transformation we had in 2014, makes us carefully optimistic for 2015. I would like to thank you very much for participating in this call. Augusto will be here with Chris to talk -- take any pending questions and I look forward to speaking to you on our next quarterly meetings. Okay? Thank you very much.

Thanks, you.

Our next question comes from Lauren Torres, UBS.

Yes. Hi, good morning. Just a follow-up on the truck strike. I know you keep mentioning that there is going to be an impact or you are dealing with it. I don't know if there is anything you could help us quantify, what's happening and what you're doing to rectify or at least deal with it at this point. Just more color on that. And then secondly on your Brazil business, you've done a good job with rationalizing after use and working down to the product mix that you need. I was just thinking -- ask for further color on that, if you believe you are where you need to be with respect to your product mix and then with the category launch coming later this year, how are you thinking about that reintroduction and investment behind that? Thank you.

Thak you. Thank you for your question. Regarding the truck strike, that's something that actually affects Brazil. It will depend on how long it will -- they will hold their current position. The government is involved, there are being negotiations. So far, we have only two planes that can stop to one or two days. So we are operating in one ship. Maybe at some of the times, another ship is closed. So actually it's hard for us to tell you exactly the impact in our operations. It currently depends when it is going to be -- when do they stop their current manifestation, but again it's something that has a potential of the entire economy in the short term, the lanes of -- what is happening right now. So far, we've been working very closely to our operations, the eyes captured in Brazil. We have participation in the north east, we have participation in the center east, and participation in the south. So we are one of the companies in Brazil that is more diversified. When you think about factory footprint. So from that sense, we have a kind of advantage regarding how to move production from place to place. If we can do that based on SKUs, it's connective SKUs et cetera. So, that's something that it remains to be seen. If that for example by the end of next week, we still had this strike going on, that's hard for us to imagine what is going to happen with the cities, with entire country, with the lack of fuel in some places, there's something that they actually bought the trucks regarding, we're actually not ensure how that is going to be deployed for the next week. Let's see what is going to happen until today and throughout this weekend.

Regarding the SKUs, rationalization regarding Perdigao and coming back, but the mid of the year, we have a strong plan to reintroduce that (inaudible) a strong Perdigao, (inaudible) in July this year. We have started the advertisement of the Perdigao brand broadly speaking in some channels, we are ready discussing with our main key accounts and some clients like to reintroduce the brand. We have -- we look forward actually to have Perdigao back and those (inaudible) as you know we are playing only with idea, very strong brand, premium brand, premium prices, but as the economy goes through low down process probably few in 2016 to have a second brand with the strength of Perdigao, it's a huge asset. Actually, we are putting a lot of effort and we launching to have a good launch of Perdigao mid of the year.

Our next question comes from Fernando Ferreira, Bank of America.

Thank you. Thanks for taking my question. I just had a follow-up from the Portuguese call. I mean you mentioned that you still had to see a lot of potential improvement (inaudible) internal efficiencies, the series of clients, industrial footprint. But I just wanted to understand in your internal controls I mean how advanced are you on your BRS 2017 plan or on your synergy plan, right, that you 2/3 done or less than half I mean just wanted to get a more quantitative answer here. Thank you.

Thank you, Fernando. We are -- we just think about the BRS 17 we are likely ahead given the good results of 2014, it was a really good year for the company, everything that we did or trying to implement actions that could be sustained independently of their (inaudible) of the the market, so that -- we believe we have a lot of things in place to ensure that we decreased the volatility of our business specifically talking about external market. But going back to question regarding where are we. We are slight above our ambitions in terms of BRFS 17, which is good news for us. And we are creating and implementing new project, as we move forward when we (inaudible) for example, our BRFS 17 plan. We didn't plan at that time. This movement that we did by the end of last year, which was the creation of the regional's with P&L responsibility.

We believe this will increase the capture all those projects that is still going on like a strategic pricing to be implemented to be captured in Brazil, like the improvement on our quality of delivery of service level. And now with the regional approach, which we believe it is going to help us a lot. So, that that we are currently, the factory footprint for instant is something that we just started. Okay. Is that three to four years plan, it takes time, it involves fixed asset investment. So, that's why -- that's the main reason for taking time to be fulfilled and those figures will be throughout 16, 17 as we complete these improvements in modifications that we are planning to do to.

Our next question comes from Alexander Reid Robarts, Citibank.

I also wanted just to follow up on something that you spoke about in the Portuguese call that was interesting, I mean taking a look at your investments in CapEx this year. Stripping up the piece that goes to the breeding stock, it looks like you've got about 30% to 40% increase slight this year for CapEx and I guess the BRL 500 million of this and the increment is coming from the footprint rationalization program that I guess started in January. When you think about this incremental investment, how do you look at the returns on this type of project and I would imagine that over the medium term the NPV could actually be higher than your general maintenance CapEx. But, the second piece of the question is as you engage this project, do you have a feeling and have you allocated some charges for restructuring our expenses, this will be thinking about. And do you expect to have some one-offs this year related to that footprint rationalization project. Thanks very much.

Thank you, Alex for the question. The CapEx at those moment I shared with you, the majority of them actually I believe that more than 8% value enhancing, in the sense that they're supposed, if you are right, in our assumptions to increase our ROIC, to increase our costs to have an important gain in our productivity. Of course, they are those projects that are more related with the environment and more related with the new regulations that are more -- evolved with the new labor requirements in Brazil. So those projects even though we made some calculations, some of them you do not have the specifically a return to approve it, you had to do it actually in order to keep your, your standards above the average or for you to see -- today is the new law you have to comply with. So, but the majority of them, more than 80% ROIC improvement. Okay? We have a strong walk calculation. We are very conservative on that sense. We are, as we saw the ROIC improvement last year against 2013, we -- it is something that we continue to monitor. It is going to be still an issue for the Company for the coming years. And that factory footprint is one important role in order to help us improve that.

Said that, the 20% percentage increase is a portion that we believe is going to be expended in 2015, more will come probably in 2016-2017 as we move forward in our strategy.

But at this point, you are not seeing any specific or material one-offs restructuring charges this year as you complete and execute the footprint rationalization project.

Actually no. We are not forecasting that. If that happens, we'll communicate the market and as usual as we did throughout -- just remember you that last year we expended margin BRL200 million of extraordinary expenses we laid off et cetera, find -- restructuring of people within the Company. So as long as we have seen a lot of value, we will continue to do restructuring projects. Said that we are not forecasting any major events for the year.

Okay. Very helpful. Thank you.

Thank you. You're welcome.

This concludes today's question-and-answer session. I would like to pass the floor to Mr. Augusto Ribeiro for his final statements.

No doubt, I would like to thank you for the opportunity to thank all of those who made BRF great company and whose effort actually have brought about a milestone result 2014. It is important to mention that even though we're looking 2015, with certain operation. We in BRF believe that we have everything that is needed for to sustain our good performance of course challenges will be ahead of us being the economic slowdown, being strike whatever those things will happen in Brazil, but we need so many changes in BRF in 2014, with some improvement in the way that we look our management. We went through a lot of improvement are made trucker see in our viva BRF movement that corporate culture, we've tried to play to change it, to improve it, to align with our strategy that we believe the current stuff is actually in place in the company and will help us to go through whatever comes in 2015. Therefore, the company is relatively optimistic for what we can do next year, actually this year 2015.

Thank you all for attention and see you in the next call for the first quarter meeting. Bye.

That concludes our BRF S.A.'s Conference Call. Thank you very much for participation. Have a good day.