BRF SA (BRFS) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to BRF S.A. conference call to discuss the second quarter 2017 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 call will be presented by Mr. Pedro Faria, Global Chief Executive, Financial and Investor Relations Officer.

Participate also in this call: Adezio de Almeida, Pedro Navio, Leonardo Byrro and Elcio Ito.

We now hand the call over to Mr. Pedro Faria, who will begin the conference call.

Mr. Pedro, you may begin.

Good morning to all those present.

We have a very intense quarter, where we started in a trouble and difficult scenario with a weak flesh operation and all the political turbulence in Brazil.

I think we ended in a more positive direction.

We have grown and strengthened ourselves despite the adversities we have faced.

We concluded the work of the steering committee, where we were able to map the main points of improvement that BRF needed and which was a starting point for the main changes in both the management model and the organizational structure.

Within the new organizational structure announced, we have Alessandro Bonorino joining us as Vice President of Human Resources, bringing a very extensive experience from IBM.

We have made some internal reorganizations, all focused on a much more integrated and transversal management.

We are able to manage the weak flesh event in a positive way, and we were prepared to demobilize our dedicated crisis response structure, bringing back our executives to day-to-day business.

The event impacted us in approximately BRL 160 million in the first semester.

But with all behind us, what remains that the lessons we learned and the opportunities; we continue to work and improve our controls, focusing even more on the quality of our products.

Looking forward, the event has influenced major consumer markets to elevate even more their quality standards.

We hope this will differentiate BRF from its competitors, potentially gaining more market share in the medium term.

I like to think that the end of the second quarter marks the beginning of a transition period for BRF.

Transition marked by an emblematic date, which is the end of all CADE's, our antitrust authority, restraints, bringing back regulators' outstanding categories and removing constraints with respect to creating new brands and product lines.

It also marks the transition to a new business model, a new organizational structure, which we believe is ideal to resume the growth and profitability of the company.

The transition is also valid when we think about our results, despite the different dynamics we face in each of our regions.

Even with a very weak month of April, impacted by nonrecurring events and the Brazilian calendar, we saw a good sequential recovery in the following months, and we closed the second quarter with a very strong growth of volumes, showing continuity of the recovery process throughout the semester.

As a result, we reported net revenues of BRL 8 billion and EBITDA of BRL 575 million.

If we were only to exclude the impacts of the weak flesh in the quarter, this number would have been much closer to BRL 700 million.

In Brazil, the good news comes from the reversal of the total market share loss trend, which has been happening since the end of 2015.

In the last Nielsen reports, referring to the last 2 months, we had gained 0.8 percentage points of market share, returning to a considerable position of 54.4% of the total market.

If you look only at the sausage categories, which has a very strong importance for balancing our production, given the high volumetric characteristic of this category, this growth was even more expressive, almost 3.5 percentage points, coming from both Perdigão and Sadia brands.

When we analyze these numbers in detail, we see that the growth is result of what we call a share of share of handlers or gaining share within the point of sales we are already present.

This shows us that the hard work that we have done on segmentation, improvement of the level of service, execution and pricing differential between the brands has worked quite well for us, allowing us to increase the number of items sold per customer.

This was the single most important driver of share gains.

Looking ahead, we will return to focus on the growth of our numerical distribution, that is the number of point of sales that we buy products.

This is another way to grow and gain share.

And now, with the end of the antitrust restrictions, we approved with our board the creation of a new brand, which will have a portfolio of products with very attractive prices to operate in the so-called entry segment.

We are now moving on to developing and implementation phase of this very important project.

In addition to bringing growth and improving our operating leverage by diluting fixed cost, this new line of products will also help us optimize our chain by improving raw material utilization.

In the international market, we see each of our regions evolving in the same positive direction despite different moments.

We have Asia emerging and growing sequentially, at the same time recovering profitability with an EBITDA margin of 17.2%.

We see Europe still below its potential, but already showing the signs of recovery in the U.K. and Continental Europe.

With the exception of the positive seasonality in Eurasia, the volumes of the region remained low due to the weak flesh operation and constraints to our operations, but clearly presenting better prices.

In the other hand, we continued the challenge of OneFoods, given the high inventories and last hit demand across the region.

Despite the difficult competitive scenario, we have maintained the strategy to protect our market share.

We've seen a very strong growth in market share in the Gulf region of almost 3.4 percentage points on the yearly comparison.

On the other hand, we have not been able to pass the prices we would like, given the scenario of extra supply.

The additional impact of this Saudi Arabia tax, which has not been seen in first quarter '17 due to inventories and the lower grain cost benefit also due to high inventory level, caused our margin recovery to be a little bit stalled.

However, such data points to the second quarter a significant decrease of the exports to the region on the quarterly comparison.

If we look only at the Saudi market, which is the region largest, this drop is even more relevant, almost 22% decline on the yearly comparison.

This movement is allowing for a fast reduction of inventories, and we already begun to see the opportunity to pass prices.

The quarter also marks the conclusion of the Banvit deal with the month of June numbers already consolidated in our BRF figures.

I'm very happy to say that the results are far better than planned.

We continue to see great potential in the acquisition, not only in the domestic Turkish market, but also as a means to complement and diversify our position across the region.

Regarding the financial part, our leverage is definitely higher than desired, but we have a very structured plan to reduce it.

We secured throughout the quarter a very comfortable cash position of more than BRL 10 billion, and we have reaffirmed our commitment to bringing down leverage to 2.5x our EBITDA until the end of 2018.

In order to accomplish this plan, besides the anticipated operational improvement, we have a set of initiatives already mentioned.

We remain very disciplined regarding M&As, dividends and share repurchases.

And second, we have reduced our CapEx and OpEx intensity.

We invested BRL 450 million in the CapEx versus BRL 795 million in second quarter '16, creating savings of more than BRL 500 million in the second semester compared to 2016.

We continue to work on capital initiatives, focusing on reducing inventories and planning our production chain versus our sale expectation.

Fourth, we have been working on selling some of the company's noncore assets.

Finally, we announced on a relevant fact, we sold our treasury shares and the approximate amount of BRL 500 million, which will also reduce the net debt.

These initiatives, added to the operational improvement we are observing, should continue to evolve during the second semester, allowing us to reach our goal of cutting down our indebtedness.

We have now concluded our conference call, and we will remain here for questions and answers.

(Operator Instructions) Our first question comes from Lauren Torres, UBS.

Pedro, a very general question, I guess, just on how you're thinking about the second half improvement.

I think you've made it quite clear that a lot of the dynamics should be working in your favor going into the second half or maybe what you've seen so far in the second half.

But I guess, I'm just trying to separate maybe what just easy comps and the environment -- versus maybe the environment getting better and the initiatives that you're taking.

I'm just trying to understand with a lot of changes that are occurring at BRF, how much of this is imposed by you, meaning that the changes that the company are bringing about these positive developments versus just easy comps and weak flesh going away and these other issues that weighed on results in the first half being an issue and maybe not being an issue in the second half.

So if you could generally respond to that, that would be great.

Thank you so much, Lauren.

I find it also very difficult task to make a clear distinction between what is a cyclical conjunction improvement and the result of our continued efforts to improve BRF performance.

Of course, I will tend to be a little bit more biased towards the second one.

As I see that the second half dynamics are clearly being dictated by a much more favorable position in the Brazilian marketplace, represented here by the good news of an increasing market share, but also volume trends and profitability coming back, I think this is very much linked to our exercise in improving our service to the market and also creating a strong differential position for the clients and now embracing a more numerical distribution strategy.

I think we are clearly seeing in OneFoods a much better second half than the first half.

Of course, it's a more seasonally strong, but I also like to believe that our strategy of continuing to shoot for market share and to not lose any space will pay off as we see a cyclical rebound in prices, which I'm expecting to happen.

And finally, we see the whole saga of grains playing out.

We pointed out in the call -- in the Portuguese call, that we should still see month-to-month improvement in our cost position, given our inventory upgrades.

But somewhere between third quarter and fourth quarter, we should find a new norm and then have a much more stable picture, which I think will represent the closing level of our volumes and profitability.

So just, I guess, as a quick follow-up you talked about a better May and maybe even a better June.

So those trends into July or early August.

I guess, the same trend is continuing, you're seeing material effort on that side as far as improvements occurring?

Yes.

The way I would approach this, Lauren, I basically see the very early movement of a recovery in the first quarter of 2017, with a notable event around March and April, given the effects of the weak flesh operation.

But then the month of May, June and now July in the third quarter, really representing that we are much more solid (inaudible) as we talk about a recovery, both are cyclical, conjunctional, but also structural given the efforts we have implemented along many dimensions.

The next question comes from Soummo Mukherjee, Mizuho Bank.

My question is regarding the leverage trend.

The statements that you trying to get to the 2.5x leverage by the end of 2018.

Just wanted to understand a little more, if you could help me bridge the gap, especially where you see the year-end number and how prepared is the company to take steps outside of the cash flow generation, meaning asset sales and potential the equity stake initiatives in order to get to the 2.5 just from a bondholders' perspective.

Just also seeing what is the level of patience you think in terms of the current ratings that are at BBB with a negative outlook, if you don't deliver on that target?

Thank you very much for your question.

I would rather not talk about year-end expectations as we have committed to the board to coming back to what is our desired capital structure throughout the year of 2018.

Probably, a lot of this will come from operational improvement, already being perceived in the second quarter results, but I think becoming much more of a prominent trend throughout the second half.

But as we have presented, we are prepared to make additional steps to reaffirm our position of coming back to more reasonable levels of indebtedness.

The disposal of the shares is one such example.

Our stance towards OpEx and CapEx, I think, clearly points to that direction.

And we are contemplating even some sales of noncore assets.

So it is a well-structured program, which has been presented and approved by the board and will certainly give us the margin of safety to restore the level -- adequate levels of indebtedness throughout 2018.

Just a follow-up.

Do you have an intended leverage for the end of this year or only 2018?

Yes.

As we said, we are expecting, even as we think about the ratio of net debt-to-EBITDA, as we start having positive comps throughout second half for that leverage to start reversing towards the norm, but we are not giving or we have not committed to a year-end picture.

We are seeing a program that will lead us into a 2.5x by the end of 2018.

The next question comes from Sarah Leshner, Barclays.

I had a question that's related to the debt level question.

In addition to the 2.5x target that you have for next year for leverage, I was wondering what other points have been important for the rating agencies and in maintaining your ratings several notches above the sovereign, particularly in light of the fact that we've heard that some of them are reconsidering the methodology that they have for corporates that are rated, above the sovereign like you are?

Yes.

I'll refer this question to Elcio Ito, our Chief Financial Officer.

Thank you very much for your question.

I think there are several -- the plan here is get to 2.5 by the end of next year.

As Pedro highlighted it, composed of the upgrading performance improvement.

And all these series of initiatives, which tells us how committed the board level -- from the board level to all the management level, committed to bring down leverage to normalize where we feel comfortable with and that's the target -- our long-term and strategic target of 2.5x.

So I think, in addition to what should be a reversal of operating results which should improve denominator -- the numerator and the denominator at the same time, we have all these other initiatives, which had a commitment from the top level of the company from the board to the CEO and to the rest of the team to get to this target.

So I think, many different from CapEx to working capital to sales, noncore assets.

I think, there are a lots of initiatives already in progress here.

Okay.

And just to clarify, my -- the final part of my question was regarding conversations with the rating agencies and whether your impression is that they are going to give you the time and the expectation, I guess, that you will be able to execute on what you just described and so you expect that your ratings could remain where they are?

I think we are in a process and we always have very transparent and open discussions with them.

As we just released the results, we will continue to have the same strategy and the same openings with them.

I can't anticipate what their decision is going to be, but that's where we're seeing the bases go into the future.

Our next question comes from Gustavo Gregori, Bradesco BBI.

Pedro, 2 quick questions.

The first one would be in the -- when you guys reported that your net debt figures, you're already including the trailing 12 months Banvit EBITDA.

Is that correct?

And if so, where can we see the numbers for Banvit separate from BRF, so we could get the same calculation?

Thank you, Gustavo, for your question.

Our numbers do incorporate Banvit as of June, okay.

We are not prepared yet to give disclosure of those numbers, because we are in the middle of a process of mandatory tender offer in the Turkish Stock Exchange.

So we anticipate we're going to have numbers for our Turkey opportunities starting the quarter 3 as we conclude the necessary steps of the tender offer.

But you are right, the numbers have been consolidated into BRF numbers as of June.

All right.

So -- but in terms of debt, you are already consolidating the entire debt, but in terms of your financial results, you're just getting the month of June in the results.

Is that correct?

We are incorporating on a pro forma basis the last 12 months of the EBITDA of Banvit as well.

Yes, in 4.9 figure.

But my point is, in the DRE that you guys released in your income statement, that only includes 1 month of Banvit results, right?

That's correct.

Okay, perfect.

And then just a final question would be, you mentioned potential noncore asset sales.

Do we have an idea of roughly the size of these assets that you would be able to sell?

We're still assessing the portfolio we have of noncore assets, but we should see them not as the most important lever towards reducing to decide capital structure, but just as an additional complementary step to indicate our commitment towards that ratio.

As a big company that we are, we tend to have some real estate-related assets.

We tend to have assets that are not really correlated to our noncore -- core operations.

We have forestry assets, so it's something that we are carefully assessing as we speak.

All right.

Understood.

And then, is it safe for us to assume then that BRF won't pay out any dividend or interest on own capital until the debt is closer to that 2.5 target that you guys see as optimal?

Gustavo, the way I would reframe your question is we are committed and the board is definitely committed to as the most important priority in our financial -- to really restore our position to the 2.5 indicated leverage.

So that will have a consequence on the dividend policy, that will have a consequence of how we are managing CapEx, OpEx and also all the measures we are contemplating.

(Operator Instructions) This concludes today's question-and-answer session.

I would like to pass the floor, again, to Mr. Pedro Faria.

I'd like to finish our call by thanking you all for participating.

As I said in my preliminary speech, I consider the second quarter '17 to be a very important transition point for BRF as we enter in a much more favorable trend in the second half and into 2018.

I would also like to thank the opportunity to share the floor today with most of my colleagues.

We remain fully available to you if you have any other questions or issues to be debated with our IR team.

Thank you very much for this call.

That does conclude our BRF S.A. conference call.

Thank you very much for your participation.

Have a good day.