BRF SA (BRFS) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to BRF SA conference call to discuss fourth quarter 2015 earnings. This conference call is being transmitted via webcast in our website www.brf/br.com/ir. At this time, all participants are in a listen-only mode, and after the presentation 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 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 international markets that are subject to changes. As a reminder, this conference is being recorded. This conference will be presented by Mr. Pedro Faria, Chief Executive Officer; and Mr. Augusto Ribeiro Jr., Chief Financial and Investor Relations Officer. We now hand the call over to Mr. Pedro Faria, who will begin the conference call. Mr. Pedro, you may begin.

Good morning, ladies and gentlemen. Thanks for taking part in today's teleconference. I am very pleased with the results we're presenting for this quarter, particularly as far as our international regions are concerned. These were the results of our international expansion strategy implemented over the last three years, which was intensified during 2015 both in terms of acquisitions and improving our operational efficiency. We had good results in 2015 with net revenues, totaling BRL32 billion, 11% higher on annual comparison. Despite the fall of 4% in total volume year-over-year, we managed to improve our mix of products and market, as a result our total average price rose by more than 16%. For its part, our EBITDA came to BRL5.738 billion in 2015, with a margin of 17.8%. Our ROIC rose to 13.2% from 11.7% in 2014. Another highlight in our result was the free cash flow generation that came to a total of BRL3.4 billion. This strong operating cash generation in 2015 combined with the divestment of our dairy segment, which brought BRL2.1 billion, easily financed our entire CapEx program of BRL2.1 billion, a share buyback program amounting to BRL3.7 billion and acquisitions of around BRL314 million. Thanks to this, I'm satisfied to announce that we have distributed over BRL1 billion in dividends and interest on equity to our shareholders.

Even then, our company ended the year with BRL8.5 billion in cash and equivalents and a net debt to EBITDA ratio of 1.28 times. The increasingly more global operation combined with a strong balance sheet ensured BRF to keep its BBB credit rating and maintaining our investment grade. The fourth quarter was marked by one of the biggest inorganic growth movements the company has ever experienced. We announced three acquisitions in three different regions amounting to approximately $500 million. This shows that we are reinforcing our strategy of globalizing our operation and moving increasingly closer to the final consumer.

In Asia, we acquired Golden Foods Siam, this company is the third largest producer of a cooked value-added item in Thailand, which has a higher added-value portfolio to complement BRF and reinforces our presence on important markets such as Japan and the UK.

In the UK, we acquired Universal Meats, strengthening our distribution and presence in the food service segment. Universal operation combined with Invicta, BRF and Golden Foods Siam operation put us in a heavyweight position on this market. We also signed a binding contract in Argentina to buy Campo Austral, a verticalized [hog] production company with strong brands in the cold meat category. These fit in perfectly with our processed products brand portfolio in Argentina. In line with our global growth strategy, we moved ahead our organization model, which is based on growing the centralization and presence in the region. It is against this backdrop that we made an announcement to the market yesterday on a change in our organizational model in which Africa given its growth potential will become a region with the same autonomy and structure as others. In another strategic movement, we aim to bring together in a single vice presidency, the processes of innovation and product positioning. Under this model, the former VPs of marketing, innovation and quality will become integrated. As a result, the strategic pillars of brand, quality and innovation will be interlinked with in an obligatory way under the leadership of Rodrigo Vieira. Besides this, we are continuing to invest in appreciating our main asset, which is our people. We have thus chosen Alex Borges as our new VP of Finance after winning cycle in charge of Latin America. Given the importance and complexity of the Brazilian market, we are strengthening our team substantially. We are promoting Rafael Ivanisk, who was our Commercial Executive Director to assume the position of General Manager of Sales and Marketing Brazil. At the same time, we're bringing Leonardo Byrro to assume the position of General Manager of Planning and Distribution.

Looking now at Brazil operations, we see that 2015 was marked by the return of Perdigao in two of the most iconic categories. This was a very important breakthrough for BRF, as it gave us the opportunity to finally carry out in an integral way the position of Brazil's two leading food brands. Now with an almost complete portfolio, we are strengthening our presence in the sales channels and to consumers, which give us more resource and flexibility to better fast grow the moment of economic slowdown in the country Brazil.

A look at the performance of the categories that have returned shows there has been a good increase in volume. The latest market survey figures show that for the second half of 2015 there was an increase of 18% in our total volume of cooked ham and 10% of smoked sausages products compared with the first six months of the year. This growth reflects a gaining market share as these two categories grew only by 0.96% and 4.26% respectively in the same period.

This highlights BRF's strength when it puts its two main brands forward. Still on the market share, from this management report on, we have decided to divide the presentation of processed products into [chilled and filled] items, prepared different in terms of importance and strategy for us. As far as frozen products are concerned, we have decided to focus on readymade dishes lasagna breaded items, for instance, which are the most important products of the mix. Considering this new way of looking at our market share, the latest news and survey show that BRF market share was 63% in cold meat, 41% in filled products, 64% in readymade dishes and 67% in margarine. This shows that we are holding on to our undisputed leadership position in most of our relevant category. I also would like to say something interesting about the results of our commemorative campaign in 2015, which is very important for our results in the quarter. This led to an increase of around 5% in volume and we won market share, even against the challenging economic backdrop. It was by far the best performance in the last three years. This result only came about with the following combination of factors, focus on execution, terms of urgency, optimization of sales management, strong connection between our brands and the consumer, all these elements are an inherent part of our company and contribute to BRF's trend.

We should also highlight the progress we made with the sales team the fourth quarter. We unified the sales force, which now consists of 100% of BRF sales people that sells everything there is our portfolio. We also moved into the second stage of go-to market that will now focus on segmentation and research. This initiative to help us reduce the cost of serving customers and increase the sales team productivity allowing us to give the client an even higher level of service.

Looking at the International regions, we see that in Middle East and Latin America with the highlights of the quarter, we harvested good results Middle East in the fourth quarter 2015 thanks to our constant efforts to make advances along the value chain, strengthening our structure and reach; as a result even faced with worsening situation in Africa and in most of BRF world outside the globe as a result of macroeconomic problems and liquidity shortage in the region, we managed to expand our EBIT margin by more than 9 percentage points over the fourth quarter of 2014.

The Latin American region was consistent in its strategy of recovering profitability and there was at 5.5% increase in the EBITDA margin this quarter over the previous year. In Argentina, we worked hard the brand portfolio and products. Successfully re-launched Paty, a brand that is synonymous with the hamburger in Argentina, improving the quality and the presentation of the product even further consolidating our indisputable position as the market leader. We also acquired the Molinos brand, such as GoodMark, Manty and Vienissima. This started to appear in your results from December onwards. Still in Latin America, we are aiming to enter and develop new markets in the Americas. As a result we are already seeing higher volumes and increasing growth trends in the Caribbean and Central American countries.

In Europe, we increased the margin thanks to the better mix of product and channels. This was the result of the consolidation of Invicta in the UK and the great consolidation of our portfolio. On the other hand, Eurasia continues to put negative pressure on the result, particularly our export of basic pork cuts due to the worsening of the macroeconomic situation in Russia.

In conclusion, let's have a look at Asia, where we were impacted by higher inventories in some of the markets and the temporary interruption of imports from one of our plants. As a result, our volume fell 7% in the quarter over the same period of last year. Nevertheless, we are making a number of strategic movements in order to reduce the volatility of the margins, such as the acquisition of Golden Foods Siam in Thailand, expanding to new markets in Southeast Asia like Malaysia and Myanmar and despite this our EBIT margins remain very solid and we are above 15%.

I will now hand over to Augusto Ribeiro, who will talk about the financial highlights of fourth quarter 2015.

Thanks, Pedro, and thank you all for being with us this morning. As Pedro has already said, we are very pleased with the results we are presenting today. I'd like to report some of the important financial figures in the fourth quarter of 2015. The consolidated net revenues in the fourth quarter of last year rose by 11% year-over-year and changed to almost BRL9 billion, boosted mainly by the prices that were 17% higher. The cost of goods sold came under pressure in the quarter, mainly as a result of the currency valuation on prices of grains, packaging and input, and expanded by around 15% over the previous year.

For its part, the gross income came to BRL2.8 billion, 4.2% higher on an annual comparison. However there was a decline of 2.1 percentage points in the gross margin of the previous year as a result of these higher costs. Operating expenses rose by 15.42% in the year, boosted mainly by higher fixed expenses such as trade and market in Brazil, and commercial expenses from the incorporation of distributors in the Middle East region. The other operating results line show the positive figure of BRL226 million impacted by non-recurring revenues of BRL309 million. These revenues arose mainly from the accounting reclassification of Minerva through a financial investment available for sales, that no longer impacted the equity income line, and created a gain of BRL126 million as asset was marked-to-market. There were also gains in the recovery of expenses of BRL149 million mainly from a legal case over compulsory loan with Eletrobras and a recovery of the PIS/COFINS tax on [imports].

EBITDA in the quarter came to BRL1.9 billion, 7% higher year-over-year, boosting the EBITDA margin to 21% in the period. It is worth mentioning that if we had adjusted the EBITDA by the non-recurring events in the quarter, we would have had an adjusted EBITDA margin of 17.6%. Net income came strong at BRL1.4 billion, 43% higher on an annual comparison. It was positively impacted by income tax and social contribution line that came to BRL265 million positive bringing a net margin of 16.8%. In terms of our CapEx, we're continuing to invest in the footprint and automation projects and investment in the quarter, we are focused on expanding and optimizing our chicken plant in Argentina. Our investment in the fourth quarter came to BRL740 million, bringing a total for 2015 of BRL2.84 billion. This was a higher than our guidance of BRL1.84 billion, and was due mainly to the currency devaluation. We expect to maintain the same level of investment of around BRL2 billion in 2016.

Our financial cycle for the period came to 34.3 days, a change of 2.6 days over the previous year due to the continuous effort by management. BRF cash flow came to BRL3.4 billion over the last 12 months, 19% lower than previous year, this was due to the higher CapEx and the increased demand for working capital due to the growth of our operation. As a result, we ended the quarter with net debt of BRL7.3 billion and a net debt to EBITDA ratio of 1.28. That's the end of my speech and my last conference call at BRF. I would like to thank you all for your attention, and the good relationship we have build up over all these quarters. I would also like to welcome, Alex and wish him good luck. I am sure he will continue with his job we have got underway. Thank you.

Thank you very much Augusto, it's a pleasure to assume this new challenge. I feel that I can bring a real contribution to this new position after my experience in leading one of our markets, which gave me an important experience in operation and a clear understanding of the challenges and opportunities that we have to accelerate growth in our company. With that, I pass back the word to Pedro. Thanks

First of all, I'd like to say a big thank you for Augusto, for these years of working alongside him and for his dedication to BRF. I'm sure that the enviable position we have today financially has been achieved due to a great extent to his excellent work. I also wish Alex who has been my long-standing friend and colleague even greater success as our new CFO than he has achieved running LATAM operation for BRF. Before ending our earnings call, I would also like to share with you some prospects for the coming quarters. We are facing simultaneous problems on the Brazilian market as a result of the adverse macroeconomic conditions and a tougher competitive situation. During the first two months of 2016, we have successfully implemented a realignment of prices in all of our sales channels, which led to an average price increase of around 10% and corrected the relative distortions between channels.

Obviously, this situation means we've taken initial challenge in terms of the performance of volume, which is being counterweighted by hard work in the execution in the field. At the same time, we face a challenging situation on the international market, in terms of international price in dollars, resulted from oversupply in some of our operating markets. This impact of the situation on our margin has been stronger due to temporary rise in corn price in Southern Brazil. However, we reinforce our confidence in the structural improvement of our business model on the international market, which although will not leave us immune from these effects, will ensure our margins and a much healthier performance compared with time and company space, where we have been in comparable cycles.

I would like to finish by reinforcing our conviction in our strategy and commitment to long-term value creation for our shareholders. The three of us myself, Augusto and Alex are ready for your questions. Thank you.

(Operator instructions) Lauren Torres, UBS.

Pedro, if I could ask just one question, I guess I'd ask a somewhat high level or general question on your outlook for this year. It seems like hearing a lot of companies that are affording, I'm talking about 2016, attracting more about focusing on what they can control and what they can't considering the volatility in the market. So I was just curious to get your perspective on once again focusing on what you can control, why you feel in light of this environment and strictly with Brazil getting weaker this year, that profitability is in front of you, is it more about the strength of international offsetting domestic weakness, or you feel that there is leverage domestically that you really haven't pulled before that can stimulate some better growth on a year-over-year basis this year in Brazil. Once again a general question, sorry for that, but just trying to get your thoughts on building a better business this year and improving profitability.

Thank you Lauren, it's a pretty broad question but a very relevant one. So as we head into the year of 2016 as we said, we have a combination of a more adverse scenario internationally, which is the essence of this cycle. We cannot report the law of gravity, we can report the law of cyclicality in some elements of our business. So of course this is playing out more in the first half than in the second half; we have to all understand those cycles in our industry, they are pretty short-lived, usually a couple of quarters, but as we enter 2016 there is a challenge there and also Brazil economic situation, right. So these are the two, I'd call it, headwinds that we are playing out. So you are right, we are focusing a lot on the levers we have, one of them which is still playing out is our portfolio a better mix of products and markets, this continues to strengthen the overall platform as you saw in the fourth quarter, in which we generally posted, I think, very solid profitability, able to defend our margin and also focusing a lot of internal levers, as I mentioned in the call in Portuguese, we have our [ZBB] in full force guaranteeing that our expense platform spacing in control, we also have implemented a number of changes in the model, we go to market in Brazil.

Right, now we have 100% of our sales force, the BRF guys, which has led to dropping the cost to serve, and we are focusing on our innovation platform, I think that the year 2016 will be marked by one of the strongest innovation and pipeline activity that I have seen in this Company at least since 2010. So these are kind of the levers that we control, what I would like to take advantage of your question to say that cycles, they tend to be very short-lived, we are starting to see some of the elements of that cycle playing out more concentrated in the first half and then we should go into a much better second half, this is our expectation.

In the meantime it's really a game of defending our profitability, we are full force in the implementation of realignment in prices in Brazil, prices going up more than 10% in the first quarter as we had said in the third quarter, so really defending the profitability, strengthening the pockets of growth in the portfolio through acquisitions as we said, we launched three acquisitions in the fourth quarter alone, and focusing on a few [bets] that seem to be going really well for the Company internationally like you know Southern Cone in Argentina, which I think that we're doing much better there as well as the Middle East.

Luca Cipiccia, Goldman Sachs.

Pedro, I want to follow up first on some comments on the earlier call on the price increases in Brazil, I think you said 10% since January, I wanted to get maybe a bit more direction on how we should model that considering the sequential change in mix relative to the fourth quarter with the Christmas sales and all of that as well as the shift maybe that's also happening in the portfolio with Perdigao gaining or becoming more relevant part of the mix, so when we talk about 10%. I assume that is on like-for-like price increases that's on aggregate, what's the right way to think about the first quarter that will be the first and then very quickly second, just on the international expansion, last year was very active, the number of transactions, where does inorganic growth in international markets stay today on the priority list, how should we think about that, and where are the gaps potentially where you think you could still do opportunistic acquisitions and do you think with all that's going on with several of the challenges, the expansion has already occurred, you have the organizational platform and let's say management bench to continue expanding and adding more assets in the international business for now at least.

Luca, thanks for a very lengthy question, but I will start from the very last, which is the one I can remember, then we try to roll into the other elements of the question. So yes, organizationally I feel very confident we are just yet announcing further the centralization of our model, strengthening of our Africa platform, we see a lot of the efforts we've done in the last three years in terms of building a strong bench and talented people as well as the ability to extract highly seasoned talented people, as you know, are only strengthening. So I think on that side, it gives me a very positive perspective. I've been closely in touch with the PMI, Post Merger Integration, of all of the acquisitions we launched in 2015 and I feel very confident of those, I feel like we are actually meeting or beating our original thesis going to the acquisition. So I've seen a lot of movement in Thailand, a lot of movement in Argentina, maybe Alex can comment. Your other question about the M&A pipeline, we come from the old saying of being more aggressive when others are fearsome and being more fearsome when others are aggressive, right. So we really think that this cycle that the whole industry is going through is precisely the right moment in which a company BRF holding a very strong balance sheet, financial capability can take advantage and opportunity. Of course, we have our eyes into very specific markets, very focused on few categories and also trying to professionally advance in the value chain, and there will be no more sustainable mix. So I think there will be a number of very interesting opportunities. I think we have been pretty active on that front. Having said that, we need to balance that against actually integrating and bringing Golden Foods Siam, our UK and Argentina platforms into our business. So I think that's kind of the big prospective.

Just quickly, so the priority is more on the M&A, is more geographic gaps now or rather product mix, meaning the market you're in more brands but downstream or you still see geographic gaps or regions where you would want to scale up rather than changing the portfolio mix?

A bit of both. When we talk about Southeast Asia, I think there are geographical gaps we want to cover. We've been having our eyes very focused on markets now with the platform of Thailand. So Malaysia, Myanmar, Philippines, Vietnam, these other markets that we think are quite interesting. In Latin America, obviously, our first concentrated force came into Argentina, but with Argentina you have Uruguay, Paraguay, and probably bigger markets like Chile, Peru, Colombia, which geographical gaps that at the right opportunity we would definitely like to pursue them. And, of course, in what we call the halal belt, the Muslim world which we have clearly established ourselves as the largest halal food player in the world. I think there are a number of the opportunities that we can continue to focus. In terms of mix, I think again, even in Brazil we are paying attention to opportunities in reaching our mix to get closer and closer to real food to help real food to a lot of the trends we've seen innovation. So of course we cannot concentrate everything on inorganic. To build there, I think we have a very strong pipeline of innovation as I mentioned in the previous call, but the overall trend is to advance in the value chain and get closer and closer to consumers. Going back to your price increase question, if I remember that correctly, 10% is the best way we can guide you in terms of what we are doing here contemplating all elements of the pricing, of course, the best way to model that and maybe Augusto can help me here, is to actually try and extract the seasonality. Because you've been following the company long enough, you know that the fourth quarter, we usually be strong one in terms of mix, in terms of our campaign, of you know of festive and Christmas and seasoned products, which as I said, this was probably the best campaign we had in three years, which tells a lot about our execution, this is the time-sensitive operation in which all elements of the execution must be aligned from marketing, to trade marketing, to sales execution, to correct alignment and a difference between price to retail and price to consumer and I think we came out of this campaign feeling very happy and that translated into, I think, overall even better profitability in Brazil than we were hoping for coming into the fourth quarter. Maybe Augusto want to talk about it, but I think I need to emphasize, if you look at that going forward, we will have a much more dynamic pricing, I think we are living in a Brazil, which has a much more inflationary inertia, so I would not expect us to do big shift, big movements likely we did in January, like double digit plus but to continually accept the opportunity to price and to make sure we have the right portfolio and the right channel mix. So please, Augusto, can you complement on how we model this going forward?

Just to reinforce as well, what we've done in the fourth quarter and there is going to be the tone as well throughout 2016. One important thing that we did, we started working with the relative prices between Perdigao and Sadia, by channel, by region within Brazil, I believe we're doing a very good job after six months of launch of the brand, as Pedro had said the pricing movement we did it in now in January, a big move roughly 10% price increase and a brand averaged of 10% price increase. In going forward, those actions consider Perdigao relative the price is, Perdigao, the second branch, my choice. Strategic movement, we think each one of the regions of Brazil, those are going to be the main drivers when we are considering profitability. So at the end of the day, there might be price increases. We're going to do that if we have to. But a lot of strategic things, we improved a lot our knowledge of Brazilian market in the last year, given some investment that we did internally as well as the changes in structure and governance that we did created for example, the five regions within Brazil with the qualification of our sales force as well.

Andrew Muench, HSBC

Thank you for taking the question. So this one is on management here. I guess the changes that you've made, trying to understand what differentiates our capability that these changes bring to the table and then sort of , secondly how important is the decentralization of the management team sort of can you speak at a high level about these management changes and what they do for the organization. Thank you.

Thank you, Andrew. So let me begin by what I think is perhaps the biggest change in terms of how we are organized. So I think that has been the adequate cross integration and connectivity between marketing innovation and quality is paramount to our business. This is a very long value chain and we have all of the aspects, they play a role towards bringing the highest quality products and also being able to have a best time to market innovation and of course these are the two main pillars of our brand. So I think for the first year into my leadership, we felt we needed to give a lot of emphasis on quality, by the way I think all of the indicators on quality showed that yes we recover a lot of ground and the highest quality products, as a overall function, but now I think that it will be very important that these functions are well integrated and connected. So this will be fundamentally the biggest impact on how we organize ourselves going forward.

The second one, which is very important and, of course, this coincides with the promotion of Rafael, we also bring a very seasoned guy, a ex-CEO of Cremer did a beautiful job there, to kind of take both of them, the role of pushing out Brazil forward. I think Flavia Faugeres did beautiful job, she left a lot of good legacies here and many, many fronts, and we realized that we need to strengthen our regional functions in Brazil that play - will be more into Rafael's role but we also need to ensure coordination between all other chain and the elements of we making sure that in terms of distribution and planning, we are functioning like a clock works, so I think there's two guys, they strengthen the bench for Brazil, they build a lot more substance for our teams and I think the internal reception we got for their movement was really positive.

Thirdly, in terms of the centralization, which is I think the overall journey for an organization we see as another example there as we kind emancipate Africa as we feel very confident and positive of our plans and growth projects there. So it is kind of the high level drivers of the change we are announcing, of course there is also the people element, which I'd like to emphasize, I feel very positive to see that in the last few years, we have substantially strengthened our internal bench, so a lot of those movements come actually with promotion with people actually changing or switching roles inside the company, but giving them the perspective to growing their careers in BRF, as well as we continue to be able to attract very solid talent, a lot of them not very new to the company, since they've been helping us is some shape or form in the course of the previous years and, of course, underlying all of this a very strong sense of [meritocracy], a strong sense of giving people the right opportunity.

So, of course, all of that maybe a lot to chew in one movement as a formality but I'd like to say that internally the coherence of the movement feels very positive and we only got very good reviews about that. Finally, just to take advantage and again thank Augusto here for the very good job he did as our key financial guy in the last few years driving this company to an enviable financial position.

Jeronimo de Guzman, Morgan Stanley.

I wanted to go back to the Brazil margin, maybe basically two long questions, one is just kind of looking at the fourth quarter. One thing that was surprising was that you did see a big sequential improvement in the margin despite the fact that did hit pricing. So if you look at the third quarter margin versus the fourth quarter and you try to adjust for the non-recurring it would still be over like 500 basis points of margin expansion, so just wanted to understand what helped drive some of that recovery and then looking forward, I also wanted to ask on the margin outlook from the perspective of whether that 10% price increase is really enough, just because we've seen corn and soybean prices in Real increasing much higher than that and inflation obviously you have that inflationary pressure. So what's that more pricing going forward and what does that mean for margin?

Well, Jeronimo, starting from the last part of your question, we think 10% sales rise in January because there is also a very strong realignment of the channel relativity, which was again a very important part of that exercise, going forward we still think we have more price action to do to recover what we think is a sustainable profitability and again I'm very encouraged to see a competitive scenario, which seems to be a lot more rational and should also help us. There is the inflation component, there is the spike in grain as you said so. The overall challenge for us and one is I feel very confident is to sequentially improve our profit margins into 2016, perhaps at the expense of volumes. But again, creating a solid foundation for growth as we enter with a lot of the innovation. And you are right, I think we are positively and happy with the strength of our Brazilian platform, without clear pricing being a driver in fourth quarter, mix and, of course, seasonality plays a big role with facility, but the number of our levers starting to have an impact, for instance, lowering our cost of sales, for instance, being more rational on the use of trade marketing and a number of other things that help us build profitability in Brazil, which show to the market a sequential improvement despite the absence of pricing, which is coming like I said full force first quarter. I'd also like to ask Alex to share his thoughts on your question.

And Jeronimo, just looking forward as you asked, obviously we're facing a challenging scenario, of pressure in costs due to increased prices on grain in some of the international markets, where we are more exposed to the cycle also, facing some pressures in terms of the margin, but I think this is the time to really realize and execute on the transformation we have made on the company, on a different structure, different price product mix, different way, we're getting our go-to-markets to our clients, a number of examples in the Middle East, in Southern Cone, in a number of other regions where we believe we can successfully go through this cycle. So looking forward, yes, we are facing a challenging scenario pursued with economic challenges, with the grains feeling pressure but we're working a lot in terms internally with the things in our hand to keep cost under control and to deliver a help of profitability. We will look into increased prices where we make sense in a diligent way, maintaining our disciplined finance stake in light of the more challenging scenario. So looking forward, we're going to be very active and see what is the price position that makes sense to really have healthy margins throughout this cycle and really leveraging up what we have built in terms of trends and strategy to get to our [charts].

Thiago Kapulskis, Brasil Plural.

I just have a question about corn in Brazil, we are seeing actually prices going up a lot and you guys already discussed a little bit of this. But my question is, besides actually passing through cost, what else could you guys do to make sure that these costs are not actually going to affect you, I mean, in terms of either hedging I know you guys don't hedge commodity prices, but is there anything else you guys are doing on that? And my follow-up on that would be, is there any kind of risk there you see for a lack of corn in Brazil not even saying about prices, but a real lack of product that would actually disable your operations or hurt in terms of, having to stop or halt operations or something like that? That'll be my question. Thank you.

Thiago, this is Pedro trying to answer from the last part of your question, you don't see operational risks involved in effectively sourcing grain in Brazil. You have to remember BRF has the fifth largest origination capability in the country after the big four trading companies that operate here and globally. We also benefited in this scenario relative to the competition given our footprint, which is a lot more into the center west of Brazil where for the more acute phase of this spike in grain prices, we continue to sort effectively grain price in a very competitive manner. So yes, it's not a list that I see overall, you saw government also bringing some of the strategic stocks they hold to try and level the price actions. So yes, it is an impact, we are not immune to that, of course, that translates into a margin compression, which is a very short-term lead. We have to remember that this is also at the end of the day creates the trend of prices of chicken going up in the cycle, so these cycles tend to revert in a very fast rate but the grain price action is something that I feel no other company has the potential to mitigate the impact through the variables that we control. So I'd like to mention that strong effort our team is doing with the live operations bringing better yields, bringing better yet conversion rates, playing with all kinds of knowledge this company has to secure that part of this impact is mitigated, of course, on the other variables of our cost breakdown we are doing a strong effort. I think we are ever more productive on the labor side, we are recording ever low turnover ratios, we're also implementing a lot of new systems attaching productivity to compensation in our factory, which is warmly received by our workforce. So all of that plus our scale and advantage in procurement help us to mitigate to some extent this price increase. So, of course, sensitive I think short-lived in terms of an impact, and our team is working very hard to mitigate as much as they can.

Excellent. Just a quick follow-up. So if the government keeps doing public auction, specifically in the Centre West, which is were it seems that they have the largest stocks right now, would you then benefit from that given that you have a strong footprint there, right?

Yes, I don't make a strong link of causation here because it's not the fact that the government sells and I am able to buy, I am able to buy because they have the largest infrastructure in the place to continue to originate, and this is a long-term history for the Company being able to have strong direct relationship with farmers and a number of capabilities that this spike help us a lot. The government coming to play is relevant because it's actually now stabilizing the market in a way or not. Of course, all attentions to the Safrinha, which used to be the second harvest and now has become the first harvest in terms of hedging. I think in anticipation of that we have viewed some level of hedging going into Safrinha and second harvest which will also again mitigate the scenario in which prices don't converge as it probably have giving in all historical seasonality pattern.

So I think that the overall message here, Thiago, is this is not something new to BRF to see prices of grain going up and down, I think we believe we have the best infrastructure, resources and capabilities to play against that even if you know for few months that translates into some kind of margin compression.

Jose Yordan, Deutsche Bank.

My main question was asked already. So I just want to - my second question was just about a clarification, the BRL309 million of non-recurring one-time items were all allocated to the Brazil segment. Is that correct?

No, that's not correct, Jose. We are exercising allocation based on basically all of the markets. I think Augusto here to my right can help you understand the whole non-recurring and how it was actually allocated.

The allocation basically follows the potential revenue, the size of each one of the business. All the four main nonrecurring events of the build which were - the majority were positive. They are basically a corporate one, they do not in principle apply to a single market. Therefore, we reallocated a portion of it for each one of the market. It follows the size of that market in the quarter. So, for example, for Brazil it's roughly 48%, 60% of that amount, and then you have the follow on on the other market.

Jose, this is Pedro. I'd just like to take advantage of your question to say that we believe we stand in full transparency, a pretty straightforward set of numbers here. We have one one-off impact of Minerva, which we have been pointing out in previous quarters that it was to our understanding wrongly having an impact in our operating margin. So this was reversed as our decision to change our role in the governance of the Company. We also have a big one-off coming from Eletrobras alone, a long term spot was to recover some of those expenses, which is actually a good positive and have a cash impact in the quarter. And finally, throughout the year in our conservative approach, we've been building provisions, building things that at the end of the day looking against, I think a good job with our legal team. Some of those provisions they end up looking way too conservatives, so some reversions, which I think will be the normal course of our management here to always be conservative, build provisions ahead of advance and then in the unfolding of those events some of them coming back. But really a straight forward set of numbers to our opinion.

Very clear. And if I can just follow-up real quickly, Augusto, I think in the Portuguese call, in your remarks you mentioned your particular situation leaving the company and what your new opportunity was, but I didn't quite get what that was, I mean, I get that this all comes in the context of a bigger reorganization. But just curious if you can talk about what your new opportunity is or why you decided to leave at this point? It's obviously like a very friendly departure or whatever given that not only you're on the call but you have been showered with praise in both calls. And I would join that chorus as well. But any comments would be useful?

So, Jose, before Augusto says, I'd just like to emphasize what you said. This is an extremely friendly process here, very smooth transition. Alex and Augusto already part of the team here for a number of years. So, I think as far as our financial team is concerned and our ability to do what we've been doing, this is really a friendly process and smooth transition, you're right. Augusto?

Thank you, Jose, for the question. At the end of the day it is a personal decision, something that I've been discussing with Pedro for some time. After almost nine years in the company, I started with Sadia and I started with that merge and then the expansion. It's a personal one actually and there is lot of things complete, I'm not going to the competition, I am not moving, there is no such thing within our mindset. It's actually really friendly, it's a personal decision. And given I concluded as I like to think actually not the state to think, that I concluded a time within a company with a very well defined boundary is a cash issue eight, nine years ago with Sadia and then a merge issue with a lot of consultants, SAP, a lot of things between both companies. And then an expansion time here growing eight acquisitions last year, it was a very good year in organic growth for us.

So, it's a matter of personal decision, so I'm pretty happy actually with that. I'm 100% confident with Alex's capability. He's going to be the one, actually going to relate with you from now on. And then based on his experience, he's going to be very good for the company, he has a bright future for the years to come. Thank you for the question.

Alex Roberts, Citigroup.

I just have one, and it's something that didn't come up earlier in the Portuguese call. And it relates to your plant rationalization, automation of the footprint by a project, 2015 did see incremental CapEx, our numbers suggested that about BRL200 million into the plant rationalization project. Can you talk to us about are you happy with what the project has been yielding so far, I guess we understand that this is a multiyear project, what kind of benefits do think the cost structure will see this year from what you invested in last year? And what kind of projects do you feel are still on the board there to be implemented? So that's it for me.

Thank you, Alex. Let me take the opportunity to say a few things about this. And here, I think Augusto and both Alex may want to join. So you are right to say this is a multiyear program, okay. This is a journey that the company embarked about a year and half ago. We're still in the pipeline a lot of those projects still being implemented as we speak.

But we start to see early signs, very encouraging signs on all sides. On the quality, we see a sequential improvement. And also in terms of the cost structure, these are projects that they have usually very high rates of return. And, of course, they translate into, I think, a very different profitability that we are now showing for instance in our international markets. I've been closely following this company for as long as I don't know 2010, have seen myself a few very bad cycles. I really like to say that even in our most basic offering of products, in-natura products to market which are 'more commoditized', a cycle as bad as this one would have translated easily into negative margins across the board. This is not what we're seeing. So a lot of the effort into automation, into footprint, it's playing out as we get a cyclicality low.

So again, very confident about this. I think we are more towards the end of it in terms of the program, we said it would be like a three-year program. So I think we are on schedule. This has interestingly enough facilitated a few of our decisions in terms of moving from a Brazil footprint to a global footprint. Our automation learning curve in Brazil has enabled us to put in place and Alex can complement, perhaps the most competitive platform for exports, currently which is Argentina, fully automated, bringing all of the innovation and processes and technology that we learn in this process. So I think this is good, this is complementary to the rest of the footprint. If you look at Thailand now, which is still essentially manually and I think for that reason also highly flexible, able to create a lot of higher value added projects, which complement our portfolio. But some of the key learnings of our automation and this journey are there - are translated into our numbers and will continue to help us in our journey forward.

Alex, I would complement that investments in our plant and really revision of our plant industrial footprint has provided us with a lot of flexibility to play and to reach a number of different markets. You have seen announcements that we had made recently with habilitation and approvals to get license to export to different markets. I think this is a great advancement that we have done. And we have been able to play better meats in terms of where to export and sell our product. And this all relates and dissolve consequence and result of the investments, the revision of the industrial footprint that we have executed. So we are growing in the international production as well. We are starting to have some production outside of Brazil that diversifies risk and that puts us in a position again to optimize and to have access to different markets, maximizing our price and our returns.

This plays a very important role particularly in a challenging environment that we are growing right now. So we can be smart and just where to sell, how to position our products, not to basis as much as of a downturn in terms of pricing and really optimize our results. So I think the investments that we have done and continue to do in our footprint, not only what Pedro said optimizing grain productivity and reducing costs but also providing a lot of flexibility to play more smart in our international footprint, international markets.

Thank you for that. That's clear. The kind of tag on to that and you mentioned this last quarter, in the last quarter call about the Lucas do Rio Verde plant vis-a-vis China. It seemed like it was a work in progress, you were organizing some total calm measures and such, is in fact Lucas do Rio Verde reopened for China or is that still kind of work in progress?

Okay, so thank you for the question, Alex. Coming towards the end of 2015, we were pleasantly surprised at the number of years working of having four new plants approved to China, Lucas do Rio Verde itself is not approved, but there's four plants being approved show that actually the Chinese market will, I think, progressively become more [important] into our market. And I think the fact that we got four plants approved show that in terms of the work we need to do both here in Brazil with our agricultural ministry as well as Chinese authorities for health and sanitation, I think we know how to get there. And I think that you are right, the more plants we have opened to China the better, I think China is a market that we have a kind of a super cycle still for the foreseeable future, supply/demand imbalance that leads to overall higher profitability than some of the other markets. So we continue to work very hard on that front.

Pedro Leduc, JPMorgan

Hi, thank you for taking this question as well. Two quick ones, this Flavia leaves, it's a sort of a non-compete clause or it's a free to move to anywhere she wants, number one? And number two, your income tax is positive now for two quarters in a row. And I know seeing this Brazil looking for fiscal revenues, I'm wondering how you're managing this and if you're comfortable with it and what do you see going ahead? Thank you.

Let the me refer to Augusto for the tax question.

Yes, the one thing in the last two quarters, they are basically following the -very strong currency devaluation. Actually it's very simple in our case, we have a lot of results coming from outside of Brazil, some of them - actually a big chunk of them they do not sell for any kind of tax upon them. And a lot of issues and expenses that we had in Brazil, they are deductible from both the end and from a tax perspective. So therefore, in the last two quarters we have concentrated a lot of that issue in BRF. Looking forward, we don't see that happen again. I don't think that we're going to see a huge devaluation of the currency in 2016, at least not in the same size as we saw in 2015. So we should go back to our normal tax performance.

Okay, and this if you were to repatriate these profits with impaired taxes, is that right or not?

Sorry.

If you were to repatriate, and bring to Brazil these profits or send off from abroad, then you would pay taxes but as long as you don't, you don't need to, is that a right reading?

That's right. That's right. In a way we have a lot of investments outside of Brazil. Our M&A strategy is forecast out of Brazil. So actually we're going to invest a lot of things outside of Brazil.

And Pedro going back to your question on Flavia, the answer is two-fold. First, our Senior VPs and executives they are - we have a standard non-compete clause, okay. And finally knowing Flavia very well, I really don't think and the way she is friendly leaving the company, I really don't believe she is going to competition and anyhow..

Thank you very much. This concludes today's question and answer session I would like to pass the floor again to Mr. Pedro Faria.

Yes. Again, thank you very much for joining this conference. Thank you for all the interesting point questions, reemphasizing our view for the next quarters. We are completely aware of challenging context that we are leading. However on the international side, as we said throughout the call, we continue to be upbeat on our ability because of our recent structural advancement to continue to defend our margins and profitability also knowing that the cyclicality in our industry comes and go as we've seen every couple years and so we think we have the tools to navigate that. On the Brazil side, again, more and more confident with the work they have done. The legacy that Flavia built as a team, so I think the movements here come as a natural continuity of the business, trying to defend our margins in that sense very happy with the outcome of the fourth quarter and also knowing that the strength of our brands and the strength of our distribution will also help us. That coupled with innovation, which we should see a very strong year for 2016.

I'd like to thank you all reinforce our discipline and our long-term commitment to shareholders' value creation. Thank you for attending this call. We look forward to see you in the next quarter.

That does concludes our BRF SA conference call. Thank you very much for your participation, have a good day.