BRF SA (BRFS) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to BRF S.A. conference call to discuss third 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 the 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, Global Chief Executive Officer, Lorival Luz, Chief Financial and Investor Relations Officer; and Alexandre Almeida, General Manager of Brazil; Patricio Rohner, OneFoods Chief Executive 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.

Thank you for attending today's conference call.

I'm very pleased with the results we present in this quarter, mainly reflecting consistent operational improvements in the base indicators of virtually all of our markets.

As a result, this third quarter marked the recovery of our profitability, with an EBITDA of BRL 1.074 billion, which is the highest since the end of 2015, a margin which is higher than historical levels.

In Brazil, we continue consistently the growth trajectory that began in May of this year.

Once again, we gain market share, totaling 54.6% of the market in this quarter.

In addition, I would like to highlight the volume growth of approximately 9% on the yearly comparison and 4.5% against last quarter, due to both improvement in our service level as well as a much better commercial execution.

I would like to speak a little bit about Banvit, a company that has proved to be another very successful case of our M&A strategy.

In line with the company's globalization plan and the OneFoods long-term strategy.

The success of our post-acquisition integration efforts by the OneFoods team coupled with a favorable market condition led our Turkish unit to record highest results in its first quarter, we present the numbers.

We present an EBITDA margin of 23% this quarter.

We are forming the potential of the operation as a very important avenue of growth for BRF and OneFoods.

In the International division, we evolved our volumes sequentially, in response to more asserted business execution.

This reflects our management program global optimization, where we're seeking to maximize the profitability, take advantage of commercial opportunities in different regions through a dynamic product relocation.

In addition, I have just returned from a trip to Asia, where in China, we celebrate the signing of MOU with COFCO Meat, which has the aim of increasing cooperation between companies around food quality and safety issues.

China is an absolute priority market for us.

And through this cooperation, we can combine forces and contribute more effectively to quality and food security in the country, maintaining a growth demand for protein.

From a cost perspective, we saw grain prices at its lowest levels in the third quarter, as a result of our record harvest in Brazil this year.

We will enter 2018 with a very comfortable level of inventory, which will give great visibility throughout the first semester.

However, we believe and are expecting a lower national harvest, which should then lead to an increase in the grain price level compared to 2017.

I would like to finish my speech with some strategic highlights that also marked our quarter.

We have announced the reopening of Jataí, our plant in Goiás, as of January 2018.

This is a unit dedicated to Halal food production, with a capacity of 40,000 tons per year, should employ more than 50 direct employees.

In addition, we have finally, received the release of the Mineiros plant by the Ministry of Agriculture to resume our exports operations.

This is symbolic landmark for the company after what we went through in the second quarter.

Lastly, I also like to celebrate the arrival of Alessandro Bonorino as our Head of HR and Lorival Luz, who joins me in this conference as our CFO and IR.

I also like to announce Elcio Ito, who was previously occupying the role of Chief Financial Executive Officer to the Vice President of Integrated Planning and Supply from the start of next year onwards.

I would like then to give the floor to Lorival, who will comment a bit more in detail the financial highlights of third quarter '17.

Okay.

Thanks, Pedro, and good morning to all.

First, I would like to report some important financial data regarding this quarter.

As already mentioned by Pedro, the third quarter results show a consistent recovery in the company's profitability, where we reached an EBITDA of almost BRL 1.1 billion, an increase of 87% against the second quarter of this year and 21% against the same period of last year 2016.

The EBITDA margin reached 12.3% above the company historical average, which is a important milestone for us.

The third quarter also marked the reversal of a trend observed in the first semester of this year.

And now we generated a net income of almost BRL 140 million in the third quarter of 2017.

Now I will highlight the main drivers of these results.

First, and it is important to highlight the growth of our volumes of almost 10% in this quarter.

Mainly, in Brazil and in International division, where volumes increased by 9% and 6% in these 2 regions.

We also demonstrated increase in our margins and a recovery in our margins in OneFoods, but still supported by the strong performance of our brand expansion operation as read by Pedro here.

Another important thing to highlight here, it's really our discipline on our Zero Based Budget initiative, which I can say that is truly embedded in this company.

This discipline on our way to manage our SG&A, led us to report the lowest level of SG&A as a percentage of the net revenues this company saw at reaching 15.8% of the ratio in that.

This definitely demonstrates the team's austerity in the management of our expenses and our continuous efforts on our Zero Based Budget plan, which as I have mentioned, it's truly embedded in this company.

In addition, we took another important step towards the goal of reducing our leverage of cash generation of BRL 436 million as per the CapEx of the company.

The recovery of the EBITDA, combined with this cash -- strong cash generation and strong cash position that we have and the lower level of uncertainty gave us the confidence that to, in October, pay down the revolver facility in the amount of BRL 650 million.

This amount we have drawn in -- back in the first -- in the second quarter of this year.

It is important to note that this revolver remains available for the company in the total amount of almost $1 billion.

I'd also like to note that in September, we joined, what we call PERT, which is a special tax utilization program with -- that impacted us on the EBITDA positively in around BRL 90 million.

Also, excluding the positive impact on PERT -- of this PERT, our recovery EBITDA reached the BRL 1 billion level.

Finally, to conclude that the company financial management continues to be a strong priority for us.

We are focused on identifying opportunities to strength our balance sheet, aiming at extend our debt profile and reduce our leverage, maintaining our discipline in the CapEx and OpEx, ensuring the company persistent growth.

Based on that, I would like to pass the word to Mr. Alexandre Almeida, who will give you more details and highlights on our Brazilian market integration.

Thank you, Lorival, and good morning to all of you.

As Pedro mentioned, we reported good result in Q3 in Brazil, mainly an improvement in our volumes.

This provision in Brazil is based on 3 pillars.

First, execution at the point of sale.

Second, improvement of Latin America distribution.

And third, disciplined execution of our brand strategy.

Regarding the execution at the point of sale, it's embedded in our program called ideal store, when we aim to improve market-to-market exposure and the availability of our products in the various formats of Brazilian retail market in our local regions.

Regarding the numerical distribution pillar, through disciplined approach to the market, we reached a monthly average of 175,000 customers served in this last quarter.

We achieved a growth of 5,000 clients over the previous quarter and 10,000 clients over the first quarter of this year.

Third, as for the brand strategy.

We continue to advance in the categories of our portfolio and price position between our main brands, Sadia and Perdigão.

As an example, we gained 1.3 points of share in the ready meals category, driven by the successful return of the Perdigão Lasagna line.

Another category I would like to mention is filled products, in which, since the beginning of the year, we have been working to increase our presence in new and existing customers.

As a result, we performed a double-digit growth in this category in the third quarter.

Internally, we continue the development of our third brand, which will bring additional operational gains from the leverage of our plants.

And we also saw a segment of the market, where we are not yet present in Brazil.

This brand, we initially have 13 SKUs in 9 subcategories.

And we will be in the Brazilian market from February 2018 on.

With this, I finished now all my comments.

And we can open the Q&A.

Thank you very much.

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

I believe this topic and question was approached on your Portuguese call.

But you're seeing some share price pressure on your shares this morning, I think, it would be helpful if you could just talk a little bit more about the gross margin pressure in Brazil?

I think with the expectation or knowing that grain prices have come down notably on a year-over-year basis, that didn't more than offset the FIFO effect in the negative mix impact.

So could you just talk a little bit more about the components of that?

And maybe more importantly, looking forward, I guess, heading into the holiday selling season, how do you expect the mix impact to change.

And I guess, even next year with a better consumer and some of these brand launches, how do you expect that to turn and maybe recover margins going forward?

More on the gross margin line.

I know you're doing a great job on the EBITDA margin line, but what's happening on the gross margin line?

Lauren, thank you for your question.

This is Pedro.

I'll give you a perspective on few of your questions and then Alexandre will dive into details of gross margin Brazil.

So I think first of all, the margin -- the gross margin we are reporting in the third quarter, I don't -- I totally don't believe it is equilibrium margin, and we should see a sequential improvement of that as we go along.

I believe very much that the way I would look our numbers, actually we are hitting a very strong result in terms of contribution math and actual financial results, with a margin that is still below, what I believe, should be the equilibrium.

But I think, also, it means, we were very successful in our strategy of liquidating stocks, making sure that we occupy the space in the market, and that we resume our trajectory of market growth reporting, I think, very healthy volume growth throughout all of our categories.

You -- actually, you want to know what we are expecting for the season, the strong Christmas season.

I am moderately optimistic about this campaign.

Because we have seen one very important element already turning around, which is the propensity of consumers to down trade.

I think the third quarter marked -- I think the first moment in which we saw actually a reversal in debt, fueled the repayment.

But I think, consumer confidence is back.

And I think we have a very strong positioning for the festivities campaign.

We're seeing early results of that in our operations.

So I am quite optimistic for this Christmas season.

I would now give the floor to Alexandre, so he can comment on what he sees for the gross margin.

Okay, Pedro.

What we had Lauren, talk about our gross margin, of course, it's affected by the mix.

We hear deliberately increased our volumes in the In Natura segment.

Because this is very important for us to be present in every single location of -- in our end customers.

Also, I think we had a great success in the volumetric categories like (inaudible) product.

And we cannot separate that performance of BRF in Brazil of the market.

The market is not growing.

And we are -- we were able to grow in this scenario, keeping the relativity in price between us and the competitors.

So we still have the premium prices in the market.

And this is very important for us.

And we'll continue to do so.

The market in Brazil for food had a deflation in prices and is, of course, affected everyone.

Our strategy was first, to regain our footprint, our share of the market, and then take advantage of the recovery of the consumer market.

We almost start to see just now because that would benefit the premium brands.

And regarding the future, as I mentioned in the Portuguese call, I don't see any future price pressures going down.

On the opposite, we are already prepared to announcing to the market that we have a price increase in the -- already in the January 2018, without any immediate pressure on the cost side.

So we should evolve on that side also, not only on the total margin, the absolute market, what is really we pursued during this year, but also on the percentage of basis margin for the future.

And can I just quickly ask as a follow-up then with the new brand launches next year coming.

And then I guess, you're thinking about the consumer environment 2018.

I'm guessing your expecting more of a positive mix impact or will some of this brand launches have a negative effect on your mix?

No.

I think for the third brand, it is a strategy of additional gains.

It will not compete directly with Perdigão and Sadia.

And we'll be present in a segment that we are not really solving today the low-price segment.

In that sense, if you go and talk about overall margin, it may have a percentage base, it may have a negative impact.

But it is -- the volume will not be significant, but the additional benefits on diluting costs and making usage of our spare capacity in the plants will more than offset that.

And we really -- we'll not take -- it will not take part of Perdigão and Sadia markets.

So it's another kind of view to this third brand.

It's really how much it will add to our result, regarding better utilization of assets and also better utilization of raw materials.

The next question comes from Pedro Leduc, Banco JPMorgan.

Still on the Brazil side, 2 points.

First, we saw volumes rebounding some with market share gains, at the same time SG&A savings bring an important margin component here.

Can you talk a bit how you're smartening up the SG&A, and if it's -- it doesn't seem to be like spending less in marketing, given the market share for that.

Also on the market share side, what you're seeing as you already went through the gross margin component, but just wanted to reemphasize that, that you still -- to see the lower grain cost benefits on the longer cycle and in those like hard products for the fourth quarter.

So these 3 points on Brazil.

The market share, the SG&A path and the gross margin cycle for the specialty Christmas products.

Pedro, thank you.

This is Pedro.

I'm going to touch on a few of your points and also like to listen from Alexandre as well.

So the SG&A side, I think, it's important to say that this is the cumulative impact of very strong discipline on OpEx in the company.

It has no specific significant driver.

But I think it leads back to our internal organization, where we centralize a lot of our core processes, where we restart a bit of our operations scattered around the globe, and we're able to drive significant synergies.

I'd like to believe the company is as lean as it's ever been.

If you look back into a long-time series, I don't think you'll see the company running as lean, as efficient as it is today.

I think this is permanent.

This is here to stay.

And this will help the company going forward on its competitiveness.

When you think about more discretionary items for SG&A, I'd like to remember that actually, the third quarter was quite active one in terms of brand activations, campaigns, trade.

And also, we are actually increasing the size of our workforce.

So all of these are obviously helping us drive volume growth.

I think we have the healthiest volume growth that I've seen in a little while.

And we were pretty effective in the campaign.

We are tracking, for instance, brand preference indicators.

They all point to sizable gains post weeks last, making sure we know the appeal of our brands, the trust, the quality is very much intact with consumer.

So I think, I expected SG&A, this OpEx to be a new level, and it will be with us for a long time.

And I think this was the result of a cumulative learning of CBD and how to be efficient.

For gross margin, I think, we have to understand, not only the photo, but the film.

And I think, always, we have a hard time explaining that we -- what we see today in our balance sheet, I think it's just a picture.

But if you think about just the price of grains today, if you think about the price, which we're realizing the market, and we just can't disregard the impact of stocks and inventories.

You will see a margin already higher than what we presented.

So there's a lagging impact here that we always like to communicate.

And of course, the fourth quarter brings very good mix.

We are, like I said, modestly optimistic about share gains on the festivities.

And I think for also, very welcoming event.

A lot of our festivity products, they will come already with the cost embedded that reflects a new lower level of grain prices.

So it should be a boost in terms of individual contribution.

Margin of those products, vis-à-vis last year in a meaningful way.

So I like to leave Alex, Alex to go a bit in more details here.

Okay, Pedro.

As I commented on the Portuguese call, we are having this reduction in SG&A, not by the reduction of sales force.

On the contrary, we have people on the sales team.

But also, focusing more on synergy, as Pedro prior mentioned on the administrative expenses for the Brazil.

An example, we have 5 regional offices in Brazil.

But we are changing there in front, almost our concept of business units, who are really sales ops, of course, focus then on the market and reduce the cost of serving the markets.

So this is just an example to show how we are combining the growth, with the more action on the market with a reduction of SG&A and that for us is given.

So we cannot move from the track that we have set regarding expense.

So I don't know if this is not for you, but if you need any clarification.

The next question comes from Eduardo Ordóñez, BankInvest.

From a credit perspective, can you comment a little bit on the trajectory for credit metrics.

Because I recall the S&P report after the downgrade mentioned something along the lines of 3.5x gross leverage, by the end of this year, so any comments in that direction are welcomed?

Thank you for your question, Eduardo.

Just like to before I hand over to Lorival, we continue -- firmly committed to the guidance we gave in the previous quarter of reaching a adequate capital structure symbolized by net debt to EBITDA of 2.5x by the end of last year.

So I think the trajectory is very healthy.

I'd like to point to our discipline in CapEx and OpEx, all leading to strong cash flow generation, inventory is coming down as well, which is part of the strategy.

And of course, the monetization of stocks held in treasury, all of them helping us in the discipline of the capital structure.

Lorival, I'd like you to add to my comments.

Yes, just to add, Pedro.

As you have mentioned, we are working forward the targets of going below the 3x net debt to EBITDA by the end of next year, with a number of initiatives, which includes or is the disposal of some non-core assets, and we have the discipline on our CapEx and also discipline on our working capital initiatives in all the lines of work for receivables, payments and also inventories as just mentioned though Pedro.

But it's not only that.

We are also working on strengthening our balance sheet, which will include initiatives and the lengthening of that profile in order to definitely reduce and avoid any kind of liquidity risk going forward.

So there are a number of initiatives that we are -- the company and the management team is fully committed in order to improve the credit metrics and definitely, be at a more -- confident on the credit metrics that definitely will be recognized, not only by S&P, but by -- but also by all the rating agencies.

The next question comes from Pedro Leduc, Banco JPMorgan.

On OneFoods, this one.

And we saw here as well a nice sequential margin improvement between the lines -- or not between, but actually rolled that new Turkey operations came in with a 23% EBITDA margin, substantially higher to what they were reporting at least on a yearly basis.

And you also mentioned a price increase in Saudi Arabia, if I'm not wrong.

Just on these 2 then.

On Turkey, this is maybe just a seasonally strong operation for the quarter, or you see that improvements already coming in with synergies, cross-selling or potentially sourcing, so we can see bandwidth running at higher margins than before, first part.

And then the second, raising prices Saudi Arabia or other places there in the Middle East, is there room for it, now that -- is it inventories that have cleaned up, you see a better demand environment.

How are you seeing volumes react post the price increase?

Yes.

Thank you, Pedro.

Let me try and give you my perspective and Patrício is also on this call.

He can take you through greater details.

So make no mistake, I think, our entry strategy in Turkey is something very exciting.

It gives us potentially one of the biggest levels in terms of growth.

And what we've seen is, I think, a flawless execution of post-merger integration.

The results that you're seeing, yes, they're benefiting from, what I think, is a favorable moment in the Turkish market.

But I think this is a favorable moment that has some longevity to it.

Because it comes on the wake of massive consolidation and capacity constraints after very rough years for the poultry production in Turkey.

So I think, the scenario is unique.

Fourth quarter should be seasonally weak.

It's the fishing season.

We should be used now to have part of operation, who have the weak fourth quarter.

But then resumes, I think, the good trajectory should resume for next year.

Then I think, what's most important and in line with your question, there's a sizable chunk of synergies that we are able to extract on top of bandwidth for existing operations.

And I think, still a lot of interesting things to come, for instance, cross-selling to the Gulf, and of course, better optimization of the entire BRF footprint.

So I think, for what we managed Banvit seems to be a home run in our long-term strategy.

For the scenario of the Gulf, I just came back from extensive visit, with Patrício there.

I think we are finally now in the position to see some healthy price increases taking place, both as a result of our strategy of getting region inventories.

I think the market share trend in the Gulf is very healthy for BRF.

And then I think what has been a very limited supplies into the region, meaning that a lot of the players have now lost their resilience there.

And I think we will have a much better scenario going into the fourth quarter and the start of the next year.

So maybe Patrício can complement with greater details.

Perfect.

Thank you, Pedro.

I will complement quickly to Banvit.

Banvit is, let's say, what happened in this quarter for Banvit was planned, even during our negotiation with Banvit.

Our talks about how they were going to phase that high season and at the end what happened is, only 2 or 3 companies that were having their production to the higher level to really tackle the high season.

All the other Turkish companies, they were not ready because of cost, because of many other restrictions.

And that's why this is one of the fact that Banvit was part of our prework together with the people.

The second is we put in Banvit and proportional resources.

So all the changes that we were doing or we are doing in Banvit production strengthened improvement that they were not capable to do it, although, they have an amazing team.

In other word it's mainly production, that started even this results during July, August, even especially, in September.

The part of the synergies improvement and all these quick wins, that were plugged from the first day.

So from the first day, we managed to reduce the cost of Banvit, to improve the efficiency of Banvit in whatever was doable in the very short term.

And now really stemming the big synergies, which is the go-to market, which is the distributions, which is the dealers, which is the distributors versus copartnering and so on.

So this is something like is going to come.

That's why, as Pedro said, Banvit is one of the amazing big steps that we have done.

If we can call all the movements from 2014 till '16 was a fast evolution in the GCC.

This one is a big jump.

It's a kind of revolution that will take us to the next level.

When we go to the Saudi scenario, to the GCC scenario as you mentioned in the question, there were a crisis.

For us, a new normal.

Let's say, what is happening in Saudi, in the GCC and so on is that 3 years ago was infrastructure.

The government had started cutting a lot of infrastructure investment and so on.

And at the beginning was more a financial crisis, no cash in the market and so on, then became economic.

Because this one was affecting the small groceries, the middle-size supermarkets, restaurants and so on.

Even the traveling among the region, the high season in (inaudible) versus in Dubai, and so on.

They were much lower.

So what we are having today is a new normal internal program, hence, with less subsidies with more costs, more taxes and so on, which is -- was coming in the last year, 1.5 years.

And what we are having is a consumer that accepted already this situation.

And we can see improvement in the last 2, 3 months, very tangible improvements in the consumers' confidence.

So they are spending more.

They are coming back to the countries.

They are going out for dinner, going out for lunch and so on.

And this is something that is a game nice companies.

It's a game that is more difficult.

So it's a game that the markets where they want to go for more transparency.

You need to be more professional and you need to be more local, which is all our value proposition.

We have the local distributions, we have the local factory to supply to that region.

We have Brazil with amazing cost advantage and the quality and so on and the scale.

And now, we are plugging Turkey.

Turkey didn't come yet.

Only very few initiatives.

But this is one of the main things that will come to our machine to put it this way of local distribution with regional services, with global services and synergies.

This concludes today's question-and-answer session.

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

Okay, ladies and gentlemen.

Again, thank you very much for attending today's conference call.

Like I said in the beginning, I am very grateful to the team for what I believe, a very consistent set of results.

We've seen improvements across the board.

We believe we are on a path of progressive consistent better results.

I believe we should be reaching equitable margins by next year.

I believe the company is well positioned to take advantage of market opportunities.

And I like to emphasize how much we're able to strengthen our internal processes, the way we operate to better benefit from this more favorable scenario.

With that, I'd like to conclude the call today.

Thank you very much, again, for participating.

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

Thank you very much for your participation.

Have a good day.