BRF SA (BRFS) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to BRF SA conference call to discuss fourth quarter 2016 earnings. This conference call is being transmitted via webcast in our website, www.brf-br.com/IR. (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, 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 to all, and thank you for being here. We close another year at BRF deeply disappointed with the result we present today. 2016 was a very difficult and atypical year, as we have been saying given the [grains], deep retraction of Brazilian economy, and despite this perfect storm, we managed to protect our margins at two-digit levels, much higher than historical parameters.

As Abilio mentioned today in the Portuguese call, we are proud of the work we have done in the past four years. We made improvements in various fronts. We also acknowledge that there were some mistakes along the way. As we approach the year-end, we start to discuss at the Board level how we could improve and revert our results. With that in mind, we went to 2017 100% focused on reverting the current trends. We hired a well-known consultant company, BCG, to provide us an independent and deep diagnostic of the business.

So, yesterday at our Board meeting, we also approved the establishment of a Steering Committee, which will be led by our Chairman, Abilio Diniz, and this committee will be formed by Abilio, Walter Fontana, and [Eduardo Avila], who has more than 30 years of experience in the industrial, and has been working with us in the capacity of an independent consultant [in Zeca] and by BCG, which have been supporting us in this process. This committee will meet at least once a week for at least 90 days to ensure that the initiatives will be implemented with (inaudible).

After the first diagnosis, I'd like to detail with you the three big agendas we would like to be engaged. First one, obviously to recover our profitability in the short-term. The focus here is to increase cost competitiveness both in the industrial and [agro] fronts. We have already improved quite a bit in a few indicators, like our fleet conversion and productivity yields, but we see a lot of additional opportunities to tackle in areas such as procurement, specific opportunities in the footprint, and also a different management model with our [out-growers] and partners in the field.

In the search for synergies and efficiencies, we will also reorganize some corporate functions, focusing on what we think will optimize and bring a lot more agility to our decision process. And besides that, we are implementing yet another round of ZBB. This is our fourth year in a row implementing the methodology.

The second agenda is how we deliver our growth targets, and we'll spend a lot of time and energy in Brazil and OneFoods, as we see them as the main growth levers and avenues [of today]. In Brazil, we already told you before, we have improved significantly our service level with the main national retailers. If we take a look only at the cash-and-carry channel, this evolution was stronger and already resulted in a positive outcome. For instance, in the second half of 2016, we deliver a [12.5] top line growth year-over-year in this channel.

The main strength of the Company lies in the traditional trade channel, which has suffered more from the retraction in consumption, and also from the down-trade trends that we verify. However, we've been implementing a new segmentation model that's significantly improved our execution and service level, already showing positive signs. With that in place, we believe we'll have a much more granular understanding of each individual point of sale, getting to know them better and delivering products and offers that are much more customized and effective.

We are keeping our efforts in innovation as we did in 2016. And besides already substantial pipeline of high value-added products, we'll also take a very important initiative in our base load, high volumetric products. With that, we'll be able to strengthen our position in the entry-level segments and protect our core. Besides that, with the end of restrictions from the antitrust authority in June 2017, our portfolio of brands and products can become wider, and we'll be able to act in some entry-level segments that, to date, we are not present.

We are reshaping our marketing strategy, intensifying deeply the category management. The idea here is to enhance the connection of our consumers, reinforcing our brand strategy in each individual category, directing much more effectively our resources to better execution.

I'll give you one specific example. In the first quarter of 2017, we see a positive seasonality for cold cuts, which is the most profitable category in our portfolio. And as such, this category now is our deep focus. We are investing a 360-degree activation campaign with above-the-level media, consumer campaign, trade marketing materials, more than 500 additional merchandisers working in the points of sale, so this mobilization concept brings the kind of execution that we do with Christmas products every end of the year.

In OneFoods, we have concluded successfully the carve-out of all of the assets, therefore creating the largest Halal protein company in the world. We see significant growth potential in these markets, and as a first step, the acquisition of Banvit in Turkey has made us our first and most important player in the largest Halal food market. In the meantime, we are also working on a potential capitalization process to enhance and deepen our links to the region and accelerate even further this expansion.

Third and last on the agenda is building a model of integrated management. In that front, our main initiatives will focus on elevating core processes of the Company and how to evolve our supply chain planning process in a much more integrated and transversal one. When we split our international business in regions, and even Brazilian sub-regions, we have become a lot closer to [consumer and clients], but we created a bigger challenge to optimize our consolidated business.

In many cases, our learning from past mistakes has shown that optimizing one specific part not necessarily brings the best for the overall Company. With that in mind, we are building a much more transversal concept of planning and management that will focus optimizing also our long and complex supply chain, understanding the needs of each market but working in a much more balanced way in our pull-versus-push strategy.

I believe this is a very special moment of the Company, and it will be very important to be transparent and give visibility to all of you. Therefore, we are sharing some of those initiatives we are putting in place. I believe we are in the beginning of a new cycle in which I'm very confident to prepare and to extract the best of what we have accomplished in the past four years and to achieve our long-term goals. BRF now needs to change and [adequate] itself, but without changing the course of its long-term strategy. The Steering Committee, led by Abilio, will help us a lot in this journey, and Abilio will play a key in this. And I would like to thank him for all the support in this process.

I'm finished now my comments, and we can go deeper into our results of the fourth quarter in our Q&A session. Thank you very much for attending today's session.

(Operator instructions.) Lauren Torres, UBS.

Pedro, not to be too backwards-looking, but I think we need to be still, seeing the results that came out of last year. But, in your release, you highlighted internal execution challenges, so I'm just curious to get a little bit more of your perspectives, or specifics on those challenges. I know there were industry-driven challenges and competitive challenges within the industry.

So, just curious, what was -- I don't know if I'd say self-inflicted or out of your control that you felt were the biggest challenges of last year, and just thoughts on how easily can those be corrected as we think about your 2017 results? Thank you.

Lauren, thank you very much. This is a great question we had the chance to answer in the Portuguese call. I think the best way to simplify my answer to you, in 2016, we have suffered from a big dislocation in markets, in parameters, in variables which are critical to our business and that we don't totally have control.

What perhaps we [did] envisage back then, and I think it has given us the possibility to really understand, is that the way we were organized, and the way we were trying to become ever-closer to the market, we basically didn't cope well with second order effects and third order effects of the dislocations in the market. What do I mean by that? We have a long and complex supply chain, and we need the perfect and well-integrated expression of that.

So, in a genuine attempt of maximizing our profits in all of the markets and business units that we operate, we lost a bit of sight and visibility and ability to react to challenges in the supply chain. So today, we enter the year of 2017, and I think the fourth quarter results were a very good testimony of that for us. We're still taking some lagging effects of the crisis we've seen in 2016 in the form of inventories, in some markets, in the form of some (inaudible) in some of our factories, in the way we have to actively promote promotions in advanced shelf life products.

So, all of those, they have really hurt our profitability as we reverse the original trends of the markets, and that has given us a lot of visibility on how to correct what I'm calling self-inflicted pain into a much more transversal way of operating the Company, bringing core processes closer to the decision points, also instilling a much more granular view of the way we manage the Company, being able to respond fast to the effects in the market so that we don't need to take both our reactions with kind of a lagging perspective and without having the visibility of the [whole].

So, the Steering Committee and myself, we're fully committed in the past 12 weeks to understand how we best organize ourselves, how do we elevate some key processes of the Company, like integrated planning, like our category management, to make sure that many of us have a good perspective into the whole of the Company. I think this alone will help us accelerate our process of reversing the profitability trends of 2016.

Victor Saragiotto, Credit Suisse.

I just want to understand that it seems that, in mid-2017, the restrictions on launching new brand imposed by Brazil (inaudible) will [be lift], which should make more room for BRF to launch a new brand focused on low-end customers. I just want to understand if it is part of the discussions in the Company or not. Thank you.

Yes. I would like to ask [LB], who heads Brazil unit, to try and elaborate the answer.

Okay, Victor, so thanks a lot for your question. And yes indeed, this is one important milestone for us in 2017. We are working on our strategy to be able to enter in some segments of the market that we do not play today, specifically in Brazil in some regions and in some categories. Around 30% of the volume of our categories is played in a very low-priced segment that we do not have brands today, and we are working on our strategy.

If you look at the innovation pillar, we have been working a lot on the value-added, more premium products that we launched in 2016. So, we will continue to do that looking into 2017, but to also expand our innovation platform and new products for 2017, looking at this low value-added segment that we do not play today. And we see that in a very complementary way of our strategy of having the B brands [but to go] (inaudible) operating in Brazil more in the mainstream and premium segments, but now having also the possibility to work on that low value-added segment, which is very important in the traditional trade segment where we have been suffering most of our down-trade and competition pressure. This is where those brands can play a role in helping us have a more broader portfolio and spectrum of offer to our consumers in Brazil.

Alex Robarts, Citigroup.

My one question is about the focus on the domestic market and the channel mix shift toward the traditional trade as the convenience premium and the economic recovery comes back into the Brazilian economy, which we all expect at some point this year. I guess for us it's really about a 2Q tipping point from our point of view.

But, the bottom cycle, it seems to me, in Brazil has been reached, and I think the debate is the pace of the recovery this year of that Brazilian margin. So, here's the question. When I think about -- as I understand the strategy, that the beginning of the year is perhaps not to look for price increases in the Brazilian domestic market. We also have this statement that you want to bring in some regional brands or new brands in this Value B brand segment after July when your restrictions peel off.

And the mix effect that that might have, how should we think about the revenue per [kilo] growth throughout this year? And connected to that, you've talked since BRF Day in New York in October about getting the traditional trade channel up to par. How are you in that process? Do you feel like it's still a work in progress, the segmentation and go-to-market to the traditional channel, or are we almost finished, and the benefits of that work should show itself in the first half?

So, a couple small bits around a larger domestic market margin recovery question. Thanks very much.

Alex, thank you so much. That's a great, great question. I think it really ties in with what has been enormous focus for us, and we had the opportunity to discuss in New York.

So, I think the conscious strategy the Company undertook, which gave us some pain in 2016, we really focus on improving our ROE, or net revenue per kilo. And that was really a significant push that we did. Unfortunately, we had to be more [open] than we should have with rounds of price increases. This always creates some level of conflict with the channels, et cetera. But, the lesson that needed to be done was already done, and that homework is behind us.

So, as we look at the current stage of the Company, I think we're much more comfortable in terms of where our contribution margin is in the vast majority of our categories, and we also need to focus now on really providing a much stronger volume output, which would then also have a very important impact in diluting costs and expenses. So, I think on that process, I think we're pretty much where we should be.

And then, on the overall journey of understanding each one of our more than 200,000 points of sale as they were individual, having access to online real-time data in terms of disaggregation, categories, channels, regions, and also with a much stronger ability to influence what's going on in the field, I think what gives us is a perspective of being much more granular and laser-focused on the actions, promotions that we do to be able to manage our business much more granularly.

I'd also like to ask Leonardo to jump in and to give you his own perspective, but I think the process in Brazil is slow but sure progress, which I think we'll be able to harvest a lot of what we are planting now. And I agree with you. With Brazil reaching the bottom and clients feeling the effect of lower inflation, feeling the effect of having more disposable income, a lot of what has proven to be our biggest challenge, [even shown] by our Festivities campaign, which is a [down-trade] of consumers, this is the first year in the past 20 in which chicken consumption per capita in Brazil dropped. This is unheard of in the last 20 years. But, I think, as we hit the bottom and consumers start making choices more oriented towards brands and value, I think we, having occupied a whole new perspective in the point-of-sales, will magnify the impact of that recovery.

Yes, so just jumping in here and trying to break down your question, Alex, and complementing Pedro here, so first, on the pricing, we have increased the prices to the level we think we need in all the categories and in all the channels and regions in Brazil. So, our contribution margin per kilo is now, in beginning of 2017, at the level we want. Of course, we do not anticipate any other increases throughout the year, but we might do that, but we will focus a lot on execution.

So, first thing is our prices being there, once consumers come back with the economy bounding back in Brazil, we think that the mix effect that you were mentioning will really help us get back on track in terms of the [whole] per kilo you see on our P&L today.

Second is the B brand strategy, or entering in new categories or new brands, as you mentioned, will help us play in a new segment, which will bring marginal volume to our supply chain, levering our supply chain and helping us to dilute costs, one thing that we were not able to respond fast over the past months in our business here.

And third, it will depend a lot on our execution, on the right volume, on the right channel, in a very granular way, as Pedro mentioned. Now that we have the contribution margin per kilo at the level we need, it's really the time for us to increase our volumes in a planned way, in an integrated way of managing our business to be able to really get the right focus and the right price without compromising our supply chain and our industry.

Luca Cipiccia, Goldman Sachs.

Just wanted to understand the order of priorities for 2017, especially when it comes to the [OneFood] project and potential IPO, or other plans there. My question comes from the fact that, towards the end of last year and even at the beginning of this year, it's [plain], at least that's how I perceived it, that something along this line was somewhat imminent, or in the short-term.

And I wonder now, with this sort of rethinking or period of assessment of the strategic model that you talked about, as well as the results, the profitability of the fourth quarter in the [Middle East], how should we think about that project and that potential sort of value creation opportunity in the short- to medium-term? Is it something that I would assume stays on the table, but should we still consider it possible in the first half of 2017, let's say, or those plans have been put on hold for a while?

Yes, thank you, Luca, for your question. And I think you were also attending the Portuguese call.

Actually, OneFoods is probably, and together with Brazil, one of our main focus and obsession of 2017 as it presents itself as our biggest growth avenue, okay? I think we were very successful in that project of doing perhaps the very complex part of it, which is a complete carve-out of all of the assets, figuring out how the interfaces with the [mother] company should be, and how the current position gives us a lot of interesting opportunities to reorganize ourselves.

As we think about the (inaudible) of the impact, I have to say that this is a long-term project. I think a good and bold step we did in January was the acquisition of the [leading] company in Turkey giving us already the leadership position in the largest market. And we intend to continue pursuing interesting alternatives to even create deeper links with the regions we want to service.

You will probably figure out, today's world, you have a number of geopolitical sensitivities, et cetera, but we just feel that the reception of the concept of a company trying and dominating globally a segment is very much appealing to a lot of long-term investors out there. So, we continue to work, and the progress is very much alive, and it is indeed part of this three-agenda topic that I mentioned for the Steering Committee.

And Pedro, opening the capital, say, [an IPO] scenario, do you think now is more or less appealing as compared to strategic investors to reach the same goal, or there's no [incentives], there's no decision on which alternatives gives that result better relative to the other? I mean, are you still considering the IPO?

At this stage, we're considering all alternatives. We don't have a clear decision, and we intend to continue following up on this and giving you full visibility as we go along.

Pedro Leduc, JP Morgan.

[Comes in] respect to Brazil and the pricing environment, and you mentioned you took additional pricing in December. You enter 2017 with a higher base. But, at the same time, we're seeing production costs declining, and probably a lot of idle capacity in your lines, as well as still very stiff competition.

And question to you is would it be possible that BRF potentially rolls back certain price increases done in the last year, [so which] product [often] got [eroded] by (inaudible) in order for you to stimulate the volumes or refilling of your plants? In other words, is it possible that you share a little bit of the lower grain costs with the end consumer, especially midyear (inaudible), and you can update us as well on the probably new brand introduction, or another alternative for the consumer? Thank you.

Pedro, this is a very good question. So, today, I believe the Company has positioned itself for what we understand being the current scenario. Of course, your question depends on how low grain prices can go, okay? For what I think we're seeing today, I believe we have, and given a long and very difficult process, I think we're being able to realign the parameters of profitability already in a number of categories. This is not as clear for us still in the international markets where I still believe there will be some room for increasing prices globally. But, very soon, and you know the dynamics of this market, we will see a lot of decompression of the pressure on our margins coming from our costs.

And I agree with you. One of the main levers we have, as we've been exhaustively saying in this call, is to be able to have a better perspective of the [chain], taking and minimizing, I think, very negative effects of (inaudible), of the sub-optimization of the value chain as a whole. And therefore, we are working very hard on integrated planning exactly to provide the ideal answer to the kind of challenges you are mentioning.

But, right now, I feel the Company has entered 2017 on a much better footing in terms of where we see our prices today. And I think our need of giving back some of the territory we gained at the end of the day will be correlated due to factors we don't control, like the intensity and severity of the reversal of grain prices.

And in terms of innovation of products in Brazil, can you mention a bit about the potential midyear introduction of an alternative brand and how you're envisioning that? Is innovation going to more affordability this year, or no change there? Thank you.

Yes. So, Pedro, I think [you're] probably with us in our BRF Day. I think our innovation pipeline is very robust, and it's significantly higher into geared into bringing value-added products and moving our brands. But, we are paying a lot of attention to the affordable and entry protein categories, okay? This is where a lot of our base load is. This is what I think optimizes our chain and our system. And therefore, a number of that innovations we're working now, they're basically protecting our core, improving the way we formulate those products, making sure that we are also competitive.

As we go into the midyear, as you said, one of the main restrictions falls away, and it gives us the possibility to create, I think, a more compelling brand architecture to meet all of the needs of the consumers. I think it will be interesting to listen to Leonardo comment, as well.

Yes, Pedro. Just tying your two questions, yes, we are working on that front to start that mid of this year, so it will really expand our innovation platform here to bring more offers to consumer in this low value-added segment that we are not playing today. And together, it will help us work on the better planning and reducing of the idle capacity you were mentioning in our business. So, we have a double count benefit here by implementing that strategy.

So, we're (inaudible) working with the team on that. And just to give you some numbers in terms of better planning and idle capacity you mentioned, we're already reducing in the last quarter of last year, this year, around 30% our idleness in our results in Brazil, and also our need to give discounts of products with advanced value [live] really because of better planning we're doing here in Brazil. So, if you combine that, of course the pricing issue you mentioned, [if] we will be needing to reduce price or not will depend on the relativity of prices to our competitors here in Brazil. What we expect is to have a [followship], but of course it will depend it will get to the levels we need and sustain the prices for the second semester.

But, the way we see ourselves putting investments to work is to build on the categories and really invest in strategies to move consumers to come back to our categories as we are doing, for instance, in cold cuts now in the first quarter. We're really using the price increases that we did to bring back some of that investments in activating promotions and POS activation for consumers here in Brazil.

So, on one side, we will protect the core with our innovations we have been doing and expand the platform to this low value-added segment starting July 2017.

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

Well, with that, I like to conclude today's session and conference call. As we said, we are very frustrated with the set of results we are presenting today. However, our confidence that we continue to work towards our long-term strategy, and now with an intensified focus with the Steering Committee, bringing a very clearly defined agenda towards reversing the course of our profitability, accelerating our growth avenues in Brazil in One Foods, and also creating processes in a much more integrated management will help us build a new chapter for 2017.

With that, I'd like to thank you very much for attending today's conference.

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