BRF SA (BRFS) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to BRF SA conference call for the second part of 2016 earnings. This conference call is being translated via webcast on our website, www.brs-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 participants will make only one question. (Operator instructions).

Forward-looking statements related to the Company's related businesses, perspectives, projections, results, and the Company's growth potential are provisions based on the expectations of the management as to the future of the Company.

These expectations are highly dependent on market changes, economic conditions of the Company and the sector, and international markets. Thus 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. Jose Alexandre Carneiro Borges, Chief Financial and Investor Relations officer. We'll 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, and thanks for taking part in today's conference. I am very pleased to say that our expansion strategy and global transformation are ongoing at posting, and results are becoming more visible every day.

As we see in our results, our international operations are growing significantly, with volumes rising by 17% on an annual comparison. On top of that, we show remarkable resilience on the EBITDA margin, that have remained at 13%, even against the challenging and exceptional backdrop we have seen in the first half of the year.

This was the quarter we partially consolidated the acquisitions of Calchaqui and Campo Austral in Argentina, which combined brought more than BRL60 million in revenues for the Latin American market.

We also concluded in a very satisfactory way our 100-day plan to integrate GFS, now known as BRF Thailand, in which we map a number of opportunities for synergies on the operating side as well as on the commercial side.

This should continue to help boost the profitability of Operation Asia. One good example is the new breads line, the zinga, which is produced by BRF Thailand, and will be launched in Middle East market in the coming months, under the Sadia brand.

We have also announced the setting up of Sadia Halal, a BRF auxiliary that should be based in the Middle East, and will be established as one of the biggest halal food companies in the world, with around $2 billion in net revenue.

We believe this is such an important step for the company in order to expand and consolidate its position in the Muslim markets. The creation of an independent company in the region will allow us to give much greater focus and accelerated expansion in the market where the population grows twice the global average.

Regarding the sector outlook, the chicken cycle in the second quarter was even more difficult compared to the first. Basically we see three variables that directly impact our results, and which are worth the commentary, the price of grains, international poultry price in dollars, and the exchange rate.

What we saw in the second quarter is that these three variable elements moved in an informed and synchronized way, creating a difficult and almost exceptional scenario for the sector. In the quarter, corn prices have risen by more than 100% over the same period of 2015, increasing our cost matrix substantially.

On the other hand, the production and supply of chicken continues to expand, and squeeze prices in dollar terms, which combined with the currency appreciation of around 10% over the previous quarter, pushing our pricing reals to even lower levels.

However, when we look at some figures from the sector, we have impression that the worst is clearly behind us. Market figures show the slow-down in production of one-day chicks, which points to a reduction in poultry production.

Moreover, the entry of the second crop volumes has already made a positive contribution to the decrease in corn prices as a result of greater availability of grains in the market between July and August. Even considering the current discussions of a potential crop shortfall, we should see healthier price in the coming quarters.

Finally, we have begun to see a recovery, international dollar prices, in markets that are critically important for BRF, such as the Middle East and Asia. As we move to our Brazil operation, we continue to see demand shrinking.

Nielsen figures show that the market for some important categories for BRF, such as ready-to-eat meals and cold-cuts, have fallen by 10% and 60% respectively, compared to the beginning of the year. At the same time, the pressure from costs during the quarter led us to make a new price increase of around 7% at the end of the month of May.

Having done two successive price increases, we continue to see the competitive dynamic in the short-term, performing in line with expectations, competition holding back on raising prices in order to gain market share.

As a result, BRF lost around 2 points in terms of market share, compared with the beginning of the year, but continues to have a very solid leadership position with 57% total market share. We are following our strategy of improving the level of service to our clients through a number of initiatives to enhance the execution and improve products, such as the new version of the go-to-market, which has provided a very satisfactory way of segmenting even further our client base.

The goal of this improvement in execution and price increases is clearly to recover the profitability of our domestic operation. Continuing Brazil, I am very pleased with the results of our innovation program, which remain strong and focused on getting closer to the final consumer, bringing new attributes for our clients, for our consumers, in our categories.

Besides the extreme success of our [sell a meat next] line, which had its production expanded by 30% in May, market also proved to accept very well the launch of our new ready-to-eat meals line, resulting a gain of almost 4 percentage points in market share for that category.

In the second half of the year, we will launch new product lines focused on healthiness. Moreover, we will introduce a new category of ready-to-cook meals. This category was created in partnership with the famous chef, Jamie Oliver. The focus is to bring healthy products and move consumers closer to food, a campaign that Jamie has been pursuing worldwide.

In conclusion, we remain very confident in our financial position to navigate throughout this year of macroeconomic downturn in Brazil and sector challenges. Without deviating from our long-term strategy, continue with our short-term efforts to strengthen initiatives to reduce costs and expenses through our zero base budget program.

And we have improved our commercial logistical execution in operations even further. I will now hand over to Alex Borges who will give you more financial details on second quarter results. Thank you very much.

Thanks, Pedro. I would like to highlight some important financial figures from our second quarter results. Our net revenues increased by 7.6% year-over-year, to BRL8.5 billion. This result was due mainly to the strong growth in our international volumes, with the highlight to Asia and Europe.

We had a gross profit of BRL1.9 billion, reaching across margins of 22.5%. This result was impacted by the challenges of the cycle, due to a strong increase in chicken supply, and increase in costs of grains, a lower chicken price in dollar terms, and a stronger real.

To give you an idea of the grain impact in our results, if we were to consider market price variation in the first half of the year, and multiply this value by BRF's monthly consumption volume, we would reach an increase of approximately BRL1.4 billion in cost year-over-year.

This increase was BRL936 million in the second quarter alone. This should have been the impact on the gross profit from the grains alone, all other variables being constant. However, we managed to offset part of this impact through a number of initiatives, such as and improve the peak conversion ratio, a better nutrition formulation of the animal feed, a better execution of the purchase of grain, hedging, and other initiatives.

The actual impact in our cost of the grains increase was around BRL1 billion in the first half of 2016, and approximately BRL600 million in the second quarter alone. In other words, we managed to offset the impact of the grains by around 30% so far this year.

We also managed to control operational expense as well. We continue to focus on our zero base budget program in a number of initiatives to offset the impact of the cycle. If we were to exploit the recent acquisitions, our SG&A would have increased by 4.5% year-over-year, well below currency impact or the Brazilian inflation in the period.

In spite of our efforts to offset the impacts of the cycle, both in terms of cost and SG&A, our EBITDA margins declined by 6.3 percentage points year-over-year, and reached 11.1% in the quarter, and the total EBITDA came to BRL944 million.

It's worth mentioning that even though we are in the worst moment of the cycle, we had a consolidated EBITDA margins of 13.2% in our international markets, which is over 10 percentage points higher if compared with the worst quarters of previous cycles. And these profitability results were achieved with interesting growth in many of the regions.

In another hand, we recognize the challenges of the Brazilian market. On top of the big increase in costs and the shrink in demand, we witnessed a reduction in volumes and our operational deleverage. All these factors together increase even more the challenges for this region.

We are keeping our focus on recovering the profitability in the region, and we raised prices again by approximately 7% last May. Considering the current outlook for costs, new increases in prices may be necessary.

In terms of our financial results, we had a net expenses of BRL504 million in the quarter. This amount included a BRL294 million in net interest, BRL85 million in adjustments to present value, BRL84 million in monetary correction and others, and BRL39 million in foreign exchange variation.

It's worth highlighting that we had an increase in net interest in the quarter of approximately BRL34 million, due to the increase of the net debt position in the period. In order to provide more transparency to the market, we have revised our managerial cash flow session in our earnings release.

Previously, we presented a simplified free cash flow version with EBITDA, changes in working capital, and CapEx. Now we are presenting the complete cash flow in a managerial format, and we will upload in our investor relations site other reconciliation line by line from the accounting cash flow statement to this managerial version.

Our operating cash flow duration came to BRL908 million for the quarter, which allowed for the financing of BRL795 million in CapEx. There was also an impact for the payment of BRL595 million in acquisitions in the quarter, in the share buyback program of BRL360 million.

As a result, our net leverage for the quarter increased to 1.99. If we were to exclude the acquisitions and the share buyback in this quarter, our net leverage would have come to 1.82 times net debt to EBITDA.

The cash generation for the quarter already shows a significant improvement compared to the first quarter of 2016, and an EBITDA to cash conversion was close to 100%. With this, we finish our initial comments, and I'd like to thank you all for your presence, and we're now ready to answer your questions. Thank you.

Excuse me, ladies and gentlemen, we will now begin the question and answer session. (Operator instructions). Our first question comes from Luca Cipiccia, Goldman Sachs.

I wanted to ask first a follow-up on some of the discussion on the BRF Portuguese call earlier about Brazil, just to pick it up from that thread, more on the visibility on rebuilding profitability in the second half.

Maybe if you can give us more context on what do you expect, how long do you think it will take before going back to double-digit margins, even assuming a better environment for corn, in light of the changes in mix and channel, in brand and product that you highlighted earlier, as well as some of the year-over-year effects that may facilitate that process?

Third quarter last year was a pretty bad return, it was sort of adjustment in prices and all of that. This year I assume you may have some additional costs for the Olympics or some of these other items, but there's a high seasonality as well in the second half.

So maybe if you can just give us some visibility on the level of margins, or the level of improvement that we should expect considering it may be a better cost environment, but possibly as well a more sticky mix headwinds as we discussed in the previous call, from a channel and product perspective.

And then, if I may, I would have just a quick one on Sadia Halal, but just in case there's time for that.

First of all, my apologies for making switch from the Portuguese to the English call, thank you very much.

No, better for me.

OK. So when it comes to the domestic operation, Brazil operations, you're asking about double-digit EBIT margins, is that right?

Yes, I mean just as you look into the second half and you've been commenting about rebuilding profitability sequentially, what do you think is realistic to expect in the current market context.

OK, so I'd start my answer to you by saying that, we mentioned it in the Portuguese call, we have had sequentially better months throughout the second quarter. So if I look just at the picture from June results, you already see us navigating a double-digit EBIT margins, OK?

This is when we get the true benefit of the price implementation, we get the true benefit from a level of price relativity across all categories and across all channels much more rational. So I think we are building off of a gradual yet surely recovery of our Brazil operations.

What makes me confident about that is a number of initiatives are starting to pay off. Our GPN was mentioned in Portuguese call in which we're emphasizing a lot segmentation. We're seeing the early results in the sub-channels we have segmented, and improved our level of services.

We're also seeing our stock house, and Juptura, as we call it, coming down. We have a relationship program, Mais Mercado, which is also bringing the anticipated results. And we are starting to see yet when you look at the quarter picture, we're starting to see stabilization in market share loss, and in some categories notably we are gaining market share again.

We are gaining market share in ready-to-eat meals, which is a strategically relevant category, and we see even on the processed categories in general, the high frequency ratings we get from mutually showing our stabilization of that market share trend. So I'm confident that we'll see that.

The big challenge, because there's a number of variables which we don't control, we are hoping of course for a much better price environment for our inputs. We are almost know that there is a communicating wave between chicken prices outside of Brazil and chicken prices in Brazil.

So you should expect the Natura category in Brazil to have quite a positive price trend in the next few months, and I also expect that some of the innovation program that we bring also helping to fight back the erosion in the mix which I think was the main concern we had for the second quarter.

So I expect the quarter to be sequentially better than the first and the second, and I expect to have a nice fourth quarter with a very well-executed campaign around festivities, so we can start the year of 2017 on a much higher and stronger note.

Luca, if I may, I just want to add that you started the key drag on our results for Brazil from the second quarter was cross-profit, right, we saw the [fine] of about 3.5 percentage points quarter-over-quarter, so this is really hurting us.

On the one hand, it's cogs, as we mentioned, the cycle, grains, and everything else. But on the other hand, it's a little bit of a loss of operational leverage because of having lower volumes, right. As Pedro is saying, we are seeing sequential improvement of the results, and that should come particularly from gross margins.

We are looking to return, or get back contributor trajectory of recovering the gross margins and getting back to levels that we had historically in this market, and we're going to do that not only benefiting from the cycle that's improving.

But with the full impact of a price increase, improving the mix of channels and products that really hurt us in the second quarter, but also increasing volumes, which should help us to improve operational leverage, reducing the idle capacity, costs related to this loss of volume. So we are very confident that we're going to gradually continue to improve the business to recover the profitability in this region.

OK, very clear. Can I ask quickly about the [GLL], quick one?

Well go ahead.

My question was about two things, one if you could clarify what is going to go in there. Should we think about the Middle East operation? Is this more of a platform for, you know, a different kind of segmentation? Does it mean you're going to separate your division in a different way going forward?

That's the first part. And secondly, maybe if you could talk around the main rationale for this. I understand that operational flexibility, more consistency and strategy across the Sadia brand and the Muslim market, but how much that is a driver, how much is the better relation and maybe platform in this markets? How much could it be the idea of crystallizing some value?

There were reports about potentially an IPO. I don't know if you can comment about that, but maybe give us some context of why you're doing this between crystallizing financial value, operational flexibility, and domestic relationship, that would be useful.

Thank you, Luca. I think the reasons why Sadia [allowed], I think you are quite right to point a number of the reasons why, but I would say the overwhelming reason why is to accelerate growth. We truly believe we have a winning formula there, we truly believe we have the best brand in that market, and we also have execution capabilities which I think are second to none.

So this entity will be [born] as already one of the top, if not the largest, halal food company in the world, and actually [growth means] expanding the business model that we successfully employed in the GCC in the six countries in the Gulf, to other regions, Egypt, Jordan, two markets which are deeply investigating, as well as some other opportunities in southeast Asia and other bigger markets.

So we think that the reason for an independent management company is also again in the lines of our philosophic thinking of empowering people, giving them freedom to run the businesses. We have a platform I think you had the benefit of visit, which I think is quite substantial, good [bench] in terms of talent.

So I think unlike some other comments which may induce people to believe that we are trying to unlock value or monetize any assets, we're truly thinking in terms of how we accelerate. In that sense, I think Sadia Halal brings something which is quite unique in that world.

Because when you think about the perimeter of this entity, we are probably starting from farm to table, and the farm starts in probably the best production hub globally, which is different from other halal food companies which don't benefit from a Brazil production platform which has perfected chicken production according to halal standards in the last 30 to 40 years.

We're also talking about our distribution model in the Middle East, we're talking about the kizad sector in Abu Dhabi, and of course expansion projects into halal markets, Egypt, Malaysia, Turkey, Jordan. So this is really a way to ignite faster growth into what I think is one of the best hidden values in the BRF story, which is our halal food print.

Pedro, if you'll allow me just to complement. Luca, if you think about this, right, we've been in this region for since the '70s, and export platform. And the movement we made in the last few years and we accelerate in the last few years to become more of a local player with local distribution, branding, commercial execution, and so forth.

That you saw there, and that we still have a lot of room to grow to improve our product mix, to increase penetration, to increase the offering and so forth, supported with the plant in Abu Dhabi and so forth. This entire movement of becoming more of a local player has really taken off the results of this region.

If you think of where we were some five years ago in terms of EBITDA of this region, we were south of $100 million per year in terms of EBITDA in the region. To be exact, the number was close to $80 million if you look back in 2012, and that was actually a good year at that time.

If you think what we did last year, which was close to $450 million in EBITDA, this is multiplying the business by more than 4, just by the fact that we put a lot of emphasis, focus, execution and the chain there really local and building this platform.

So what Pedro is saying to accelerate growth is how we take the next step to become even more of a local player, to really capture the local opportunities, we just more independently managed, and more focused team there, to really accelerate what we're thinking is going to be not only the [GCC], but a [fun] halal strategy.

We see a lot of opportunities for growth in the regions. We have mentioned that over and over in our discussions, and having a separate entity dedicated, fully integrated, we are in a firm belief that we can really recognize, as Pedro was saying, and then further accelerate growth and profitability of this business.

This is the main reason behind it. You have mentioned a lot of other potential benefits, but this is what's really driving us to pursue this opportunity.

Very clear, makes a lot of sense. The fact that that could be a public company, would it help anyhow, or just consideration comes after?

As we have answer to CVM's considerations and questions and stuff, this is one of the alternatives that we are analyzing, and we may consider to the extent that it helps us to further accelerate growth. This is something that we are considering as well.

Thank you very much. Thank you.

The next question comes from Lauren Torres, UBS.

My question, or follow-up I guess, on your domestic business, you seem quite positive about some of the industry conditions turning in the second half of the year, but you've put some good pricing already in place. I'm just curious about plans for the second half.

Do you need or would like to take more pricing? I guess you mentioned that your competition is being somewhat rational. With that said, if things get I guess more irrational the second half, would that change your pricing plans?

And I guess in conjunction with that question, as you think about mix, value-added products I guess are not doing as well in light of consumer, but how do you feel about that going forward? Is the incremental investment still going behind value-added brands, or is the consumer remain somewhat soft, the allocations when they shift? That's my question, thanks.

I really believe unfortunately a new wave of prices increases is in due course. The movement in our input costs such as grains have been really beyond anyone's expectations. But as we pointed out in the Portuguese call, these movements, they will be less intense, more granular, and more focused in some categories that we feel we still find room for price increases to take place.

As we move into the second half of the year, it's a busy part of the year for us. It's seasonally the stronger period of the year. We have festivities coming around the corner. So I am truly hoping, and I think I have reason to believe that competition that have maintained a big level of rationality as we move into this part of the year, it will continue to behave rationally.

We are all being subject to the same level of increases in our input costs, and I think we finished the first half in a relativity which I think brings back some level of equilibrium to the market. So I am hoping for a sequentially better second half of the year.

It will be a gradual improvement, but I expect this to take place as the Brazilian economy also starts to recover, and consumer sentiment improves somewhat.

When it comes to the mix, this is really the big priority we have. Consumers are making choices, consumers are looking for value for money opportunities. But we continue to roll our innovation program in what I think is a very satisfactory way.

We've had a big hit with Salamentos' neck version, as neck is a very interesting high growth category because it brings both high value-added for us, but also in terms of out-of-pocket and in terms of indulgence, I think it's a category that brings a lot in this moment of the Brazilian economy.

We took a challenge to reignite growth in ready meals, and we're very happy to see. Lasagna used to be the big item, and now it represents less than half of what we do, meaning that all the categories inside that bucket are actually presenting very remarkable growth.

We got 4 percentage points in market share in that category, and I think that the more I'd say basic items in our portfolio, they should be able to recuperate in terms of brand preference, consumers who have migrated from Sadia to Preto Ground, some of them will now hopefully migrate back to Sadia, which gives us extra percentage points in profit.

In terms of channel, I think as consumers become less constrained in their budgets, I think they gave rise to opportunities for convenience choice, for brand choice, and so I think this will be a gradual recovery. I don't expect one single thing to really ignite this, but I think we're just moving to a more positive tone here because we already see the early signs of our execution paying off, and a better economic environment overall.

OK, good to hear. Thank you.

The next question comes from Alex Robarts, Citigroup.

I wanted to go back to the halal project, and the Middle East. I mean it's pretty clear that your stated strategy is to accelerate growth with the halal project overall. And I guess in Dubai, when we were at the off-site recently, the markets that seemed to be very attractive, and nearby, as you said also today in your remarks, Egypt and Jordan.

And Egypt particularly is my question, this is a market with 80 million people versus 50 million living in the Gulf. It's a significant market, and as I think about you throughout history the last few years, it's been a dicey market for you.

I think at some point, if I understand it was in 2014, you left Egypt, and it seems to me you started to export more directly from Brazil as you say in the press release. Can you tell us a little bit about the growth potential in the Middle East vis-a-vis Egypt?

Is the acquisition currency of a separately listed halal entity necessary to expand there? Could it be done without a potential IPO? And so maybe if you could just speak to the potential of Egypt in the median term, and how might you think the Middle Eastern business can expand effectively in that rather sizable market. Thank you.

For sure Egypt, Jordan, Turkey, Malaysia, Southeast Asia, eventually in the second round even Indonesia, in other very important and large halal markets are in our radar screen of potential places for accelerated growth and continue to grow there.

And as we grow in this expansion, to some extent some of these markets represent a greater operational challenge, given their scenarios, macroeconomics, political, and so forth, and that's why it reinforces our view that we really need to become more local, and be perceived more as a local player than just what used to be historically an export platform out of Brazil.

Historically we have entry into countries who are very strong net importers. As we're moving along and growing, we are in the view that we need to strengthen our local position and relations with a lot of this market.

We are analyzing how could an IPO help us, and other alternatives as well could help us accelerate growth, perhaps having local partners joining forces with us, how that can help us to accelerate potential acquisition opportunities. So that's part of our study as we think.

As you're mentioning in Egypt for instance, what is the best approach not to be completely exposed to what is a challenging environment. We acknowledge that the whole region is challenging, it has offers, great opportunities, business and growth opportunities for us.

If you think about, it can range from capital structure discussions, access to funding, really partnering up with the local players, really getting closer to them, really being perceived more of a local entity rather than just a foreigner being there.

That really opens room for us to continue to strengthen our people pallet and a number of other factors, operational, strategically and so forth. So we really think that -- and you were there, right, you saw how much we have advanced in the GCC in some of the markets.

Some of the markets we have built a very, very solid leadership, a branding, a market share, a price positioning. I think we have got, and we have built a very strong and winning model that we are looking for ways how to better replicate that in a faster way, time to market, and so forth, to some of these other markets that I mentioned.

And very excited about it, and are really working hard on this project how to really continue to accelerate growth in the region, at very profitable and attractive results.

Okay. Thank you.

The next question comes from Jeronimo de Guzman, Morgan Stanley.

I want to go back just what you mentioned, it looks like this recovery in trends, particularly in volumes in Brazil going forward in the second half. I wanted to ask more specifically if you're already seeing any improvement in the trend in July so far now that the price increases from May potentially have been absorbed.

And then also kind of related to this volumes question, you mentioned that the competitive environment has remained rational, which means I guess that they've followed in pricing. So I'm just wondering what is driving the share losses? You see it just as a timing issue, that you're just the price leader and you'll recover that share? Has there been something else that's been driving the losses?

And then also I guess related to the volume question and the fact that you mentioned that the cash-and-carry format had been increasing, is if you have any specific strategies related to those formats to continue growing, or to have it be more profitable going forward.

So in terms of volume trends, we pointed out that we've seen even a pretty weak print for the second quarter. The month was gradually and sequentially better, OK. As we finished the second quarter, we have reason to believe that we continue to see this gradual improvement in volume trends, July being better than June, August, which is a good month because of calendar days being even better.

So I think that the overall trend is there. We don't know how steep that recovery will be, but I have reason to believe that with more of that price realignment being done with a lot of the equilibrium and relativity among channels, among categories, among competitors, I think the market is at a much more favorable stance.

I think the reason for rationality is quite straightforward. If we, the big leaders, probably the strongest balance sheet, we are suffering a lot of our smaller competitors, original players, they are also taking the pain if not more than pain than we are.

So that I think is bringing a level of rationality, which should even be perceived as we see the trends in production in Brazilian placements and so on and so forth. When you think about market share, I really like to believe it's more of a timing issue as we said.

We have taken the brunt of being the leaders in the categories and pushing them to a minimum level of profitability, and this also brings a lot of trends around how do the channels and the trade accept those movements. There is some more price sensitive channels that we fight hard not to lose, that whatever price reference.

So I think a lot of that is said and done, we come to this end of the semester with strong relationships with the trade, which have understood the necessity of those price increases. They've seen also competitors moving, so we're seeing emerging trends of stabilization in market share.

I have pointed out to market share gains in some of the strategically relevant categories like ready-to-eat meals. We've seen stabilization across the entire range of processed foods, so I'm more positive on market share trends starting to reverse or even recover. I think you have a second question, or I pretty much covered the entire question?

Cash-and-carry, yes. So cash-and-carry you are right, we have a dedicated team now implementing a full-blown strategy with cash-and-carry that involves different level of service, more merchandising, more promotion, that involves a careful methodic study of the format.

And as an opportunity, cash-and-carry is indexed to protein and to our portfolio. It involves understanding the profit mix and the project portfolio. We are relaunching certain items we had discontinued because they have a stronger acceptance in that trade.

We are bringing new SKUs, we are playing a lot with the pack size, pack price, which is very relevant. So I think we're already reaping the benefits of that initiative. This channel for us is one in which in the quarter we have grown compared to last year, so I think the trend is positive, we continue to try and perform our very best in this channel, which I think is here to stay.

It is indeed what's fueling growth of most of the big chains. It is indeed a very interesting format for consumers. Nearly half of the consumers there are actually end consumers and not transformers, so there's interesting segmentation possibilities. I think we're pleased with the initiatives we have for the format.

Great. Thank you.

Our next question comes from Antonio Barreto, Itau BBA.

My first question is a follow-up to a comment that you guys made in the Portuguese call, that you're able to buy grains at a 14% discount to June, and June was already lower than May. I just wanted to make sure I understood it correctly.

First, is it 100% until the end of the year, of your lead until the end of the year that you bought? And if it's at the same price, there was a 14% discount to June, and you bought fiscal inventories or contracts until the end of the year?

The number that I was giving was the purchase that we made in June versus May. There was 5% lower on average, and that was a mix of buying on the spot, contracts that we have bought, and there is impacts of hedging contracts and other instruments.

When I mentioned about July about 14% to 15% lower, it's in the same basis. As you look forward to the remainder of the year, we have not bought 100% of our needs for grains, and I'm here more specifically on corn.

We have bought a significant amount of our needs, and that is in physical contracts with producers mainly, okay. The curve of the prices going forward, July on, it's pretty much following the curve that you see on the markets.

If you go into BMF, and you see what are the trading basis versus the Chicago crisis and so forth, there you see the curve, and that's the curve. Obviously each one of our geographies has its own dynamics, some of them more impacted by the second harvest, which are finalizing the next month or so.

But what we're seeing in terms of the dynamics is what you see on the screen in terms of the curve going forward. What I was saying was that the sub three in the second harvest was lower than expected, and we're still seeing more exports from Brazil than expected.

I think we will most likely as an industry, the whole industry, we will need to import some corn in the second half, and the import of corn could also help to ease the pressure or the potential shortage of the grain because of excess exports that we are seeing.

So we have seen the prices come down, there's about 20% that I mentioned, but we're still seeing the dynamics and the pressure. But even this other pressure gives us very much the comfort that the average cost levels that we're going to realize in the second half of the year are going to be more competitive to what we have seen in the first half of 2016.

On the soybean for instance, we're seeing an increase on the prices in the more recent months. That is one of the grains imports that we have been able to manage our needs more effectively and we've been guarding a very tight position, so we are more comfortable in that regard. But the combination of these two is what's giving us the comfort that of those too tight, but it's going to be a much better than this impact that we showed in our results in the first half of 2016.

Happy, Antonio, to follow up individually to go into more details if you want, but this is officially an area that we've been putting a lot of emphasis, a lot of focus, and I think for the results which we just disclosed, we have achieved significant results.

If you think about competitors that have not been able to be as effective as we were, we are talking here of about 3.5 or 4 percentage points of lower margins, or better margins that we gained because of our active managing globe purchasing execution hedging competitors of grain. So I think this has been a source of competitor advantage for us, and we expect that to continue to be the case going forward.

Okay, thank you for that, that was very clear. And my second to last question is about the line that you report as all the revenues, I could see in the financial reports that you guys had a gain on combination of visuals of BRL58 million on your [AK app] subsidiary there in the Middle East. And I just would like to know if this is a recurring gain, and if it's recurring or not recurring, if it was allocated proportionally among the business segments.

This had to do with the consolidation of our Oman operations, OK. So this was in the Middle East. As we move from the 40% to 100% stake, this was the adjustment in the gains that we actually have built over the years, and then we realized as we step up this on this quarter.

So it's other operational, but it's operational gain, it's not recurring, we're not going to have those going forward, and that was because of the Oman operations, so therefore impacting the Middle East results.

Perfect, very clear. Thank you.

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

Well, I'd like to wrap up this conference by thanking you very much for participating. As we finish the first half of 2016, it's no secret we have had one of the most challenging periods in the Company, having very adverse effects coming from variables we cannot very much control.

But I'd just like to state that I'm overall very satisfied to see that the Company is still running very strong, it's still very much looking forward to its long-term strategy, seeing the benefit of a number of investments we have made in the last few years paying off, showing a lot more resilience in our international business.

And also on a more positive way, looking forward to a gradual Brazilian economy recovery, and of course a number of our initiatives starting to pay off. I really believe this should be a year of first half second half total different dynamics.

It's still a lot of uncertainty around variables like corn prices, FX trends, so on and so forth, but I think we are very, very confident on our ability to endure tough times, as was the case of the second quarter, and of course be compensated by our efforts once markets become more favorable in terms of trends.

Thank you very much for taking this call, and I look forward to seeing you in the next conference call. Thank you.

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