BRF SA (BRFS) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to BRF S.A. conference call to discuss the results of the second quarter of 2018.

This call is being broadcast via Internet at our website www.brf-br.com/ir, where you'll also find the company's presentation for download.

(Operator Instructions)

Forward-looking statements about the company's business perspectives, projections, results, growth potential are assumptions based on the management's expectations regarding the future of the company.

Assumptions are highly dependent on market changes on the country and industry's economic conditions in our international markets.

These are subject to changes.

As a reminder, this conference is being recorded.

This conference will be presented by Mr. Pedro Parente, Global CEO; and Mr. Lorival Luz, Global VP, CFO and IR Officer.

Now we would like to turn the floor over to Mr. Pedro Parente, who will start the presentation.

Good morning, everyone.

So let's start the presentation for the results of the second quarter of 2018.

This is a quarter that has brought a very challenging environment for the company.

But as you all know, this is not only for our company but also for different industries in Brazil, especially because of the truckers' strike.

Now about our company.

This challenging environment also is a result of a series of measures that have to do with protectionism starting in December of '17 by the Russian government measures banning imports of Brazilian protein.

After that, already in this quarter, the second quarter of 2018, there was another measure by the European Union delisting 20 plants here in Brazil, and these are BRF plants.

And in China, in June, also in the same quarter, they have applied temporary antidumping tariffs over imports of Brazilian poultry meat.

These protectionist measures do have an important impact in our operations in the domestic market.

We then had an oversupply because of the banning of exports, especially banning coming from Europe and Russia.

I have already mentioned the truckers' strike.

We'll have more details about that later on.

And also as we have informed, we have performed some adjustments in our production change so that we could adjust the demand level, and that has then caused some restructuring cost.

And also, as you know, there was an increase in grain cost that has also affected our gross margin.

But we do have here a scenario of opportunities to recover market, and this is on the slide of the presentation.

And you might experience some delay when we change the slides.

So please bear with us there.

And this happens in this type of conference.

So as I said, we have market recovery opportunities in Brazil.

We may have a recovery of market prices of In Natura and processed markets that reflect these supply adjustments.

Also, we had a market opening in South Korea.

And also, we have positive signs regarding the reopening of the Russian market to the Brazilian protein.

And now before turning to the main figures, and I think that in light of this challenging environment, we -- one might ask if the goals that we have especially announced, especially the one regarding leveraging, those could be harmed because of the figures that we are going to mention.

And I would like to say that we are working on the company very much dedicated and -- starting May and June, and we have some special measures -- drivers to generate value in the short term that will have a positive impact in our EBITDA, and that will be little bit over BRL 500 million for 2018 and over BRL 1,200,000,000 for the year 2019.

I will go into further details, and also Lorival will talk more about that -- those initiatives.

The plan of action that obviously we have seen that the results are way beyond of what we can deliver, but we are working exactly to make sure that our leverage goals that have been announced in the beginning of July and also our divestment program that has been mentioned.

And the figures show an EBITDA -- adjusted EBITDA for the second quarter of 2018 of BRL 373 million, a figure that is lower than the second quarter of 2017.

And we had nonadjusted EBITDA to the adjusted EBITDA difference nonrecurring factors that cause an impact.

We'll go into the details of these figures, but we just want to mention that nonrecurring factors and also regarding Operation Deception and hedging of our debt also direct impact of the truckers' strike.

The truckers' strike still has indirect impact over the year, but here we have direct impacts in this quarter and other factors that are less relevant.

We have had a net loss of BRL 1,574,000,000, that's negative.

The same factors, the nonrecurring factors regarding the EBITDA now can be applied to our net income.

In addition to that negative result of FX and real depreciation, all these factors in addition to others also made us adjust our net income by these nonrecurring factors.

And also because of the FX variation and -- we would then have adjusted loss of not BRL 1.5 million but rather BRL 340 million still negative, if it were not by those nonrecurring factors.

There is another positive figure, which is our free cash flow variation we had in the second quarter of 2018.

Free cash flow still negative of BRL 63 million.

But when compared to the second quarter of '17, which was BRL 713 million negative, we have a positive variation in our free cash flow of over BRL 650 million.

Still more relevant is the free cash flow when we analyze it in the first half of 2018 and the first half of 2017.

In the first half of 2018, we had a free cash flow negative of BRL 300 million.

And when compared to the free cash flow negative of the first half of 2017, that shows a positive variation of over BRL 2 billion in our free cash flow generation.

The positive figures that we would like to mention are the number of active clients.

We have a constant growth in this number of active clients.

In the beginning of last year, we were at 163,000 clients.

We have ended December of last year at 186,000.

And we are already getting closer to 200 clients -- 200,000 clients served.

And we know this is a very important figure because it allows us to have a perspective of market share gain.

And that's what we have been seeing in order to reach the total market share in Brazil of almost 47%, 46.8%.

Another priority market for our company, which is the Halal market, we also have a growth in our market share, and we have reached 43.6% in June.

And we were at 40.9% in May.

Therefore, these are positive figures regarding the company's performance.

Now to go back and talk about our main priorities.

I would like to mention once again that the company's management is totally focused and totally dedicated to these drivers.

We are working hard since June.

And these main drivers, and you may find them on Slide #5.

The first of them we have announced, which was the restructuring plan.

And our objective is to reach a monetization of at least BRL 5 billion and to bring our -- bring down our leverage.

We are now announcing the second driver that we are calling the short-term leverages or short-term drivers.

We will have detailed information about that.

And here we have included the optimization of ag operations.

Also, we want to improve price execution, reducing sales disruption.

That is the demand that we have from our clients.

We are able to meet and maintain those demanded products we want to have them in our stocks.

We also will improve our manufacturing excellence and also will optimize our direct and indirect purchases process.

And I think it's important to draw your attention to this group of measures, because they depend only on the company that is we do not have to count on the market or on the price drop of raw material.

These are measures.

And to each of these measures, we do have a detailed action plan, and they will be evaluated and followed within the methodology of the management system, and I will talk about that later.

As I said, these drivers of generating value in the short term aim to cause positive impact in the EBITDA of BRL 500 million or BRL 515 million still in 2018 and at least BRL 1,200,000,000 in 2019 once again, and that's going to be talked by Lorival shortly.

And we will go into details about these measures.

We also mentioned our operating and financial restructuring plan.

We have a detailed strategic planning as part of this plan, and there's some important things that I would like to highlight when we speak about our management system.

We would be completing this by September 2018, and we will probably have an investor -- Investors Day in the first 15 days of October so that we can communicate our strategic planning to the market.

We also speak about our reorganizational structure.

We have filled some important positions.

These new people are coming to the company.

But there are still 2 open positions, and we intend to inform the market in the coming weeks when these positions are filled.

So the organizational restructuring of the company is already functional according to what we think will be best for the company.

And we have the BRF management system that will allow us to organize all of these initiatives, and we will give you more on that in a moment.

Our goal is to achieve the results that are desirable for our company.

Please go to Page 6. Here we give you some details about this value creation levers or drivers for the short term.

For the benefit of time, I do not get into too many details about all of them because Lorival will be doing this -- will give you more details.

And here, we present you the expected impact to be derived from these measures regarding strategic planning.

Once again, we highlight our major markets: Brazil, the Halal market and Asia.

And we clearly established our absolute commitment.

No relativity here regarding safety, quality, FX, compliance.

These are absolute commitments that the company takes on.

They will be rigorously followed.

Regarding our BRF management system.

What we seek with this management system is total integration between strategic planning, pluriannual plans, et cetera.

So these 2 will not be separate instruments.

In practice, they will be one single instrument.

Our strategic planning system will be a tool for strategic management, and we will detail the goals of our annual budget to the level of execution.

And the third point, which is absolutely fundamental is that in the management system, our goal is to ensure discipline and rigor in executing the annual plan.

We all know that putting together a strategic plan is very relevant, and it is very good to have a solid strategic plan.

But as important as and certainly more difficult is to ensure discipline and rigor in executing this strategic planning.

I would also like to draw your attention to the fact that the BRF management system will allow us to deepen the use of a Zero Based Budget across the company so that we can have permanent control of all of the costs that the company incurs.

These are my initial remarks.

I now turn the floor to Lorival for him to continue with the presentation showing details of our numbers and of the measures that I mentioned before.

Thank you, Pedro.

Good day, everyone.

I am on Slide 10.

I will go on -- go over the results.

We see that in this quarter, we had a volume 4% higher year-on-year, driven by an increase in volume growth of more than 10% In Natura.

We already had an impact on the average price of 2%.

There is a reference of the adjustment, as Pedro mentioned, and there is an impact also regarding export restrictions imposed by the European Union, Russia and the impact that we started having with an extra tariff on our poultry meat in China.

Another important factor is that in this quarter, we also had one of the FX reported regarding adjustments made related to the restructuring that we had announced, an impact vis-à-vis the prior year considering an increased price of grains.

With regard of spot price of corn -- corn meal in the same period of last year, we had an increase of almost 50%, 5-0, if we consider the price of this year and the price of last year.

Obviously, the impact on our costs is not that high.

There is another process in the production chain, but there is clearly an impact on our cost, cost pressures that are seen in our result and in the cost of our products.

Another important factor was the impact of the truckers' strike.

And I will detail this more on the following slide.

So that impacted our net income BRL 1,574,000,000 of loss, but we had a positive impact regarding better management of our cash flow.

The highlights here are that in this quarter we had another adjustment of the (inaudible) total return that impacted BRL 58 million negatively on our results.

And also compared to 2017, in this quarter, we do not have assets related to IR of the period.

We had BRL 395 million compared to 2017, and that brings an impact when we look at our net income.

Moving on to the next slide.

We talk about our adjusted EBITDA, and I would like to highlight in more detail.

BRL 288 million, which is the impact from Weak Flesh and Deception Operations.

It was only BRL 288 million we had inventory adjustment at market value about BRL 200 million.

In addition to the inventory changes, we had expenses related to consulting, lawsuits, procedures (inaudible), with attorney's fees, et cetera, another BRL 40 million.

And the impact of idleness, about BRL 41 million -- BRL 40 million, but this is related to inventory adjustments.

Inventory of products, adjustments that we have to make.

Another relevant line item is debt designated as hedge accounting.

When we have a debt in dollars and designated as hedge accounting in the past, well, this quarter, the amount is higher, given the maturity of the bonds that matured and that were paid in the month of May.

And that is why we have a higher amount here.

This operation is very positive for the company.

This hedge accounting was designated back in 2011 and '12, and that bring less volatility and large impact on our results along the quarter.

We also had an impact from the restructuring plan that we announced.

So we announced about 40 days ago.

So BRL 144 million.

About BRL 65 million were related to contract terminations, many contracts were terminated.

And we also had the payment of indemnities to integrated partners about BRL 30 million, an increase in the adjustment of materials inventory, raw materials.

We closed down some production lines, and that entails some adjustments.

And these inventory adjustments, raw material adjustments, packaging that was not used, we also had an adjustment here of about BRL 50 million.

All together, BRL 144 million.

And also regarding the truckers' strike, we had a negative impact of BRL 75 million.

This was an impact on logistics, about BRL 15 million, and we had losses.

Related to the truckers' strike, we had some additional costs that we incurred during that period, about BRL 60 million.

So this impact will still be seen in the coming months, in the third quarter, related to the yield of our production because we had an impact in terms of the flow of food that was not ideal during the truckers' strike.

So the total -- this is the total of nonrecurring items, BRL 660 million.

Let's quickly mention and highlight the discipline in managing our cash.

Free cash flow of the company, you can find it on Slide 8, BRL 650 million in the quarter, BRL 2 billion for the half year.

On slide -- on the next slide, we talk about the debt of the company.

We closed the second quarter with 5.69x net debt over adjusted EBITDA.

We, of course, have to manage the company, and we communicated the plan of BRL 5 billion to bring the leverage down to 3x in 2019.

In the bottom chart, we show you the debt profile.

In the bottom left, second quarter is what we have in the balance sheet.

We have the number for 2018.

We have about BRL 2.5 billion in for 2019, BRL 1.8 billion.

However, we renegotiated some of this debt along the month of June.

And so here we put the pro forma maturity of this debt for 2019.

As you can see, we see a relevant reduction, BRL 1.8 billion for 2018, BRL 3.3 billion for 2019 so that in the next 18 months we have exactly BRL 5 billion, which is the amount that we expect can be covered with our cash generation.

And now we'll start working on our debt profile for 2020, 2021, trying to roll over this debt profile without having the risk of refinancing and having more liquidity for the short term.

Now highlighting a little bit Brazil.

We've had an excellent quarter regarding the commercial execution with significant increase of our active client base, reaching 195,000 active clients, and last year, we had 171,000.

So we are going towards our goal of 200,000 active clients.

This is a relevant growth in In Natura products and also processed foods.

There was a growth in other channels with a relevant market share of 46.8% and also a growth of almost 1 percentage point.

The average price here year-on-year where we -- that's where we have impact.

And I refer you to the right chart.

You have here the processed foods.

And In Natura, in the past, we had 74% of processed foods and 26% of In Natura, and now we have 30% and 70%.

Therefore, we have an impact in the average price.

But here, I would like to highlight the growth and the price increase that we had in the first half for 2018, and this increase is of around 10% when we compare the price increase at the closing of the first quarter in 2018 to the second quarter of 2018.

That shows a good discipline of the market and acknowledging the cost increase that we had, the cost transfer that we had, the logistics cost that we had -- that had to be transferred and also the impact from the truckers' strike.

This is an important factor here that we should mention.

Now on the next page.

I won't be repetitive.

I just would like to highlight that these figures show our relativity in prices when we compare the processed foods to the second player.

So you see our share, the share of processed foods.

And also this is the number of active clients to the bottom left chart.

It's important to say that the company is already focusing on launching products.

This is very important so that we can continue positioning our brands correctly with the right value and with the right principles that they do have.

So we are launching the new line, Sadia Bio.

This is 0 antibiotic, 0 performance improvers and 100% vegetable food, and it has an innovation.

Our clients will be able to follow the whole process and know who were the growers, who were the producers of that food that they're buying.

So this is a new product.

I think this is going to tackle new market range.

We'll have the right pricing meeting a demand of the consumers.

That's a more selective consumer that really looks for this type of product.

So this launching is going to happen very soon.

Now talking about the Halal division on the next slide.

We also had a strong volume growth.

Our market share also has increased maintaining our leadership in this market.

This market is very relevant.

It's a priority market for BRF.

We -- it's important to have this relevant share position in that growth.

The results were very strong, BRL 186 million in EBITDA just in this market.

In the past, this growth was of BRL 30 million, net of Banvit effect, responsible for BRL 97 million in EBITDA.

So this is very relevant, very strong results in this market.

And I think that brings relevant results to us.

In the international division, we see a greater impact, a drop in volume in general of 13.7%.

If we analyze specifically Europe and Russia market, we see a drop of 65% in volume going from 90,000 tons to 36,000 tons.

This is a very significant figure.

And just in this market of Europe and Russia, there is an EBITDA drop of BRL 60 million with negative EBITDA of BRL 8 million.

And then the EBITDA of that division closed at 0 with BRL 3 million.

Also adding the commercial dynamics that is very challenging in Japan as well we have high inventory level of 150,000 tons and then the prices is of $1,800 per ton.

So this is the main challenge that we have for the next quarter and also this challenge has been announced as one of the divestments in Europe and Thailand and the international market.

In the Southern Cone market, we still have our trajectory year-on-year that we had in the past quarters.

I will go briefly through those data because we have already started divesting the assets from Argentina.

Now going back to something that Pedro mentioned as our main priorities, our main priority areas.

I will go into details about this plan of BRL 5 billion.

We are working with Europe, Thailand and Argentina divestments.

Some mandates have been already executed with investment banks.

Some investors have already received information last Friday.

Europe and Thailand will be sent next week, that information.

And we have scheduled in the classic process of M&A, and we expect to conclude these transactions over this third quarter.

There are some stakeholders interested in the process; that is very relevant, and that really provides us a lot of confidence on those transactions.

About nonoperating asset, we are preparing an auction.

That should happen in the beginning of the third quarter as well.

We have inventories of raw material frozen that's a relevant amount.

And we are working with a lot of discipline to have a commercial execution in local and international markets in a productive fashion that's already providing us significant values in the cash of the company, and this will be reported over the third and fourth quarters of the year.

About the securitization of receivables, probably you have seen we released the material fact where we have already authorized a mandate of syndicate of banks to structure a FIDC in an initial amount of BRL 750 million, and that should happen soon.

About our industrial footprint, also we have had mandatory vacation leaves, layoffs and also adjustments in the turkey production lines, the 2 plants we already mentioned.

About the indebtedness, I already mentioned.

I talked about the extension of the debt, and this is following same lines.

In the short-term drivers, as Pedro has mentioned, we are also working to identify item by item because there are too many details in agriculture, and we are focusing on our plan, on our execution so that we can have the best practices and also to adjust all our productive chain through the markets that we serve considering that we have the closing of some relevant markets.

So we have to produce or we do not have to have the production costs for those markets.

So we are adjusting ourselves that then -- we then have to see what is the right cost of production to the market we serve, we cater to, and we are working on that.

Also, we are working on the best practices of price execution and the better management of our inventory change, the production inventory, not only to decrease shrinkage and also to reduce costs.

We are working in order to ensure manufacturing excellence.

Vinícius just got to the company, and I think he brings aboard a lot of experience and a lot of competence to work in this area in manufacturing and also to work with our supply team aiming greater efficiency in our operations.

And also we have our strategic planning, as Pedro had mentioned, it has -- with the organizational structure.

We have already disclosed it.

We have here 2 positions, which I am still in acting position as CFO.

And Pedro also is very much dedicated to the management strategy.

And so we have the team almost complete, and these people do know the industry, they work in the industry, and they come to BRF with great expertise in their competence areas.

But above all, there is an alignment among all of us in order to aim this common objective, which is to recover BRF.

Therefore, having said that, I end my presentation.

As I said before, we then turn to our Q&A session.

(Operator Instructions) The first question is from Isabella Simonato from Bank of America.

I have 2 questions.

The first one is about the guidance of BRL 500 million in gains over the half of the year.

And how does that work with the EBITDA guidance with the BRL 5 billion that you have announced in the restructuring plan?

We could more or less understand the EBITDA for the year, but I wanted to understand that.

Considering that or maintaining that guidance and that -- these BRL 500 million are new information, I want to know if this BRL 500 million are above of what we already had in the EBITDA guidance?

Or if you in fact see a more complicated organic results and maybe even more in the international market than in Brazil considering the performance of the second quarter and those BRL 500 million are now trying to offset the difficult organic performance maintaining the level of leverage at the end of the year stable?

Or if in fact, the announced plan before already was contemplating that type of efficiency?

That's my first question, and I'll ask the second one after your answer.

Thank you, Isabella.

You know that we do not provide EBITDA guidance.

I understand your numbers.

But as we have mentioned before, we are maintaining our leverage goal, as Lorival has mentioned.

And these measures that we are announcing that we are calling value-generation drivers, in the short term, they show that the company is really taking seriously the commitment taken with this leverage level and that we will meet the target.

Once again, I do understand your figures, but we do not have guidance for EBITDA.

But yes, it's important that you may be sure that the company is really committed to meeting that leverage goal that we have established.

Okay?

And my second question has to do with the performance in the international market.

I think with the exception of Halal division, all of others had a negative EBIT.

In other words, the performance fell below the expectations and below recent quarters.

I think that European ban is difficult to reverse.

There's also the China issue.

So looking at the main regions, what kind of improvement can we expect along the second half of the year and for 2019?

Isabella, this is Lorival.

Well, regarding international market, indeed, regarding Europe, it is difficult to reverse the ban in the short term.

We don't have any expectation that this will happen in the next quarter.

As mentioned in the beginning of the presentation, we have heard that there is a possibility.

There is some signaling of a resumption.

This could be an upside, a positive expectation that we might have for the second half of the year.

The Halal market is an important driver to us.

And in this market, we have positive expectation.

We already saw a very robust result in the second quarter, and we continue to be optimistic regarding that.

And regarding the Brazilian market, we are focusing on a strong execution expanding our client base.

And with the prices that we had in the second quarter as well as the discipline, all of that put it together points to a positive outlook.

So we have a more positive expectation regarding Brazil, the Halal market.

And again, the international market as a whole could bring this good news regarding the opening of Russia.

Our next question comes from Leandro Fontanesi with Bradesco BBI.

Just a follow-up question.

We understood that you are committed with a leverage target.

I just want to understand this BRL 500 million.

Will it be part of what you're expecting for next year?

Or is this additional?

And the second point, in the domestic market, you gained market share, and you had a price increase for processed foods.

How did the market react to this price increase?

And is this market share continuing as a trend in June?

Do you expect that to be competitive strong looking forward?

Let's go back to the previous topic.

Two observations regarding the debt.

Firstly, we have a vision that the credibility process means promising and delivering to the promise.

So for us, it is really important that we make clear that the promise made by management regarding leverage expected for year-end is maintained despite the results that we observed in the second quarter, which obviously fell way below the potential of the company.

We knew and we are working to communicate our results but also to communicate that we are working to adopt measures that will allow us to meet our leverage goal by year-end.

Another point, and I've talked about this.

These measures, all of them, depend on the company.

We don't depend on third parties.

We don't depend on market variables.

It's just in the hands of the company, and that's why they are important to give peace of mind that by year-end, we will be delivering this leverage goal once we go forward with our divestment program as we mentioned in the beginning of July and now today in more details by Lorival who mentioned that this plan is unfolding.

Again, we don't give any EBITDA guidance.

Because what really matters to us is that you all understand that we are working at full power and working hard so that the problems that we saw in the second quarter will not be repeated in the coming quarters.

We are adopting measures across the company to deliver to the leverage promise for this year and for next year.

As for the second question, I turn the floor to Lorival.

Regarding your second question, we continue with very positive perspectives regarding market share.

This has been quite consistent in recent quarters.

And regarding price increases that I mentioned, in the quarter-on-quarter comparison, there are 2 factors that I would like to mention.

First, like I said, it is important because we had an increase in the production cost for the whole industry.

Given the price increase of grain, which is only natural, that manufacturing costs will have to adapt to the increase in grain price, and that will reflect on the price cost.

In addition, for that very same reason, the market reacted very positively because if you remember, in the first quarter of 2018, there was a certain deflation compared to the prior year, a deflation of prices.

So the market reaction was extremely positive.

And even the reaction of the retail segment was positive.

The standards have been maintained.

And this is the kind of gauge that we have also for the third quarter.

So we have a positive expectation regarding that in terms of price adjustments.

This will be maintained.

The new prices will be maintained for the third quarter.

Our next question comes from Victor Saragiotto with Crédit Suisse.

My question goes back to costs.

We saw the company being able to grow volume year-on-year, and we talked about increasing the capacity and fixed cost.

But when we look at that IDR reduction of materials and inputs and when we divide by kilos sold, excluding nonrecurring items, we see a significant increase, even with this volume increase.

So did this pressure come only from the grain increase in practice?

Or is there anything else that we're not seeing?

And how do you expect that this will behave in the future as grain price pressures are likely to continue along this year?

Victor, thank you for the question.

I think you are correct in your evaluation.

I would just like to stress the importance and relevance of this movement to adjust prices, to have more adequate prices because our manufacturing cost is strongly impacted by raw material price increases.

Like I said, the spot price year-over-year into almost a 50% increase, which is a material increase.

And that is why I think it is so important that we adjust our prices accordingly.

After all, raw materials are very important for manufacturing costs.

In addition, Victor, there is another important relationship that has to do with idle equipment.

We see some markets closing, and we have a higher idleness.

And in our cost analysis, there is also an impact.

This will be adjusted over time.

We closed down some plants and some manufacturing lines, as we announced.

We had the impact of the restructuring.

And although we mentioned that there are BRL 70 million related to the truckers' strike, there's also an intrinsic cost in the operation that we cannot really highlight as connected to the strike.

I'm going to give you some examples of that.

For the moment, you have a limitation.

And you have delay in the slaughtering of animals.

You lose yield, you lose performance, and you miss the right moment and the right timing to slaughter.

And this is normally included in the cost, and it is difficult to break it down.

And we cannot link that as an impact to the truckers' strike, but I did have an impact on yield.

Repeat?

Sometimes if you take 2, 3 more days to slaughter animals, there is an impact on weight, there is an impact on the commercial sales price.

So yes, that happened in the second quarter.

I just wanted to give you more color on that and to clarify.

But above all, we are taking action, all of the necessary action for us to start capturing these BRL 500 million that we mentioned in the third and fourth quarters.

Super clear.

And if I may, I would like to ask another question.

Could you quickly comment on the freight table of price lift?

Is this impacting?

On refrigerated foods, I don't think that there's a lot of change.

But for the grain market, it seems that it's a little messy, the market is a little messy after the freight price lift.

Can you comment on how this can impact the company?

This is Pedro speaking.

Well, the freight price lift, it is rather concerning to us.

We have seen a lot of discussions about this across the country.

This theme is being discussed at the Supreme Court as well.

We're waiting to see if this discussion will lead to some change that will be favorable.

But as the company dependent on freight, of course, we are impacted.

Like I said, we are waiting for the evolution of this topic so that we can, in due time and depending on the results of these debates, define how we are going to react and what kind of measures the company will adapt because it is important to clarify that we see this measure with concern because it will entail a general cost increase to the Brazilian economy.

Our next question comes from Lucas Ferreira with JPMorgan.

My first question has to do with Turkey operations.

The Turkish lira is depreciating approximately 40% this week.

What do you expect in terms of business impact in converting this to real.

Can you mix -- can you change your production mix to export more to offset that effect?

And my second question about prices in the second half in Brazil.

You said that you had price adjustments to offset cost increases in the second quarter.

But my question is more specifically about what do you expect in terms of reducing inventories and improving working capital.

Can this lead to additional promotions, price reductions and any impact on pricing?

Thank you, Lucas.

And I will start by your second question about the expectations you stated.

Well, these are positive expectations with the price adjustments for the second half of the year.

Well, there is no negative expectation regarding that.

Now about the inventory levels reduction, as you said, we do have no price reduction effect in order for that to happen and no promotions either.

This will come from a better commercial execution.

It has been discussed in the last few months.

And also, it will depend on the expansion of our client base.

So it is a whole set of best exposure to our client base, a better commercial execution.

And also on the other side, a better management of our productive chain and of our production itself of avoiding discounts that we usually have on a yearly basis then you know it well.

So we do not remember -- we do not have an impact or do not forecast an impact regarding that.

In Turkey, we do have an impact of the conversion because of the Turkish currency, and that will open room for a different flow of exports now in this third quarter for the countries and the region.

And with that, we will have an adjustment of local prices that also will help us.

That's positive for us because we open an opportunity to export.

And when we do that, there is an impact in the local prices and that in turn will affect the whole industry.

So I believe that we will have a positive perspective regarding exporting and a better adjustment to local prices in Turkey regarding our Banvit operation.

Next question is from Lucas from Goldman Sachs.

I would like to better understand the possibility of having more significant impact of restructuring cost and adjustment cost for 2018 and '19.

We have seen that the second quarter, obviously, we did have nonrecurring events and the impact was very significant.

And I would like to know if you can quantify or at least give us a direction if most of the restructuring costs have already been accounted for in the second quarter, we will see more of them?

And also, what about regarding Operation Weak Flesh and Operation Deception?

So anything else on this topic that would be interesting to better understand how much impact the second quarter had on proportional share of the cost?

Thank you very much, Lucas, for your question.

Yes, most -- and I would say that most of that impact of restructuring has happened already in the second quarter, considering that generating factors did happen in the second quarter as well.

So the laying off of people, the contract terminations, closing some plants, so all of that did happen in the second quarter.

We may have some remaining effects of lower impact considering, as I said, the truckers' strike and others.

Because then we have an yield impact, an industrial impact straight into production.

So we may have that.

But I would say not as large as an impact as we had before.

And these are the one knowns so far.

So at this moment, we do not have any other factor that would be causing any extraordinary cost or expense.

So yes, most of those impacts have already been accounted for in the second quarter.

Thank you.

Yes, now just adding to this question, when we talk about the deleveraging goal for 2019 based on an adjusted EBITDA, I would imagine that the difference between the adjusted EBITDA and the EBITDA, shouldn't it be looking at '19?

It shouldn't be as significant, right?

Yes, the trend and according to what we have in terms of visibility so far is that really this will be -- those 2 figures will get closer.

Next question is from Antonio Barreto, Itaú BBA.

I have a question about productive potential regarding biological assets.

I know it's very clear this restructuring plan focusing on the rationalization on the productive potential of the company you have announced, the closing plants and also rationalizing production to adjust your industrial footprint.

But when we analyze the quarterly information, the number of mature companies is almost 16% is very little in the second quarter, and the number of immature breeders have grown.

So it makes us believe that the productive number of breeders in the next quarters will be even greater.

So my question is that productive potential in terms of biological assets, shouldn't that be following the rationalization of the industrial production?

How can we reconcile that with your restructuring plan?

Is this a matter that will be addressed later on and now you rather focus on the industrial production?

Or if you have that understanding to recover the market, then you can maintain your productive potential in terms of biological assets?

Well, Antonio, thank you for your question.

You are right, we did have that in the quarterly information.

But we are now managing a very long chain, and the decisions made a lot of times will have an impact in the quarterly information.

But they are regarding decisions made 3 years before.

So what I can tell you is that the adjustments, both in the agricultural areas as well as in the industrial area, yes, they are very much in line.

But the timing that you see them in the quarterly information, that timing maybe in different moments.

And that a lot of times will cause us to take a few actions or make a few decisions in terms of short-term adjustments that might refer to the sale of live animals or a plant so that we can anticipate that adjustment.

But what I wanted to assure you is that there is no mismatch between actions taken regarding biological assets and our industrial production.

These actions are in line, and that adjustments, we'll see that in time.

Okay?

Lorival, and my second question, if I may.

You really have increased prices at the end of June in 10%.

And when we look at the market variables, all of them have worsened a lot.

When we look at prices of pork meat in the local market, they are down again after the truckers' strike.

And could that somehow impact how much this price increase will be accepted by the market?

I think it's important to analyze the seasonal dynamics.

We also have In Natura dynamics.

We have dynamics for poultry, for swine, and they will have other impacts, and also it has to do with the oversupply because of closing Russia market.

And we will have another dynamics for processed foods and another one for the margarines market.

So these are different dynamics.

And what I can tell you is just a general overview.

In case of BRF, we do have sound brands, robust brands, and we have a distribution capacity and a service capacity that is very well -- that has a great penetration.

So we have a strong price when compared to the first quarter.

So it's important to look at that as a starting point.

So we did have a peak right after the truckers' strike, and we went over 10% probably.

You have seen at the moment 30% to 40%.

And then after that peak, we have a drop.

So that percentage of discount and depending on where -- on this curve you are analyzing.

But when we got the average price of the first quarter and the average price of the second quarter, yes, we do have that positive side to price increase.

Next question is from Thiago Duarte, BTG Pactual.

I have 3 quick questions.

First, so talking about the price increase that's just answered in the last question, is that price increase part of this plan of those short-term initiatives to generate BRL 515 million, more of EBITDA still in 2018?

When we analyze this qualitative description of initiatives, most of them seem to be efficiency or cost initiatives.

And I would like to understand if the price increase is part of that short-term driver in order to improve EBITDA generation.

And still on price increase, I would like to understand how much you believe that the trade-down process of channels, brands, categories, how that has affected your business in the last 2 years?

And I know it has in cash-and-carry the loss of market share of Sadia, the change in category to cheaper categories.

And how much access have you had?

So we are going to look at the results of the third and fourth quarter results in a like-for-like basis.

And we should see in the processed foods an increase of 10%.

And do you think you still have room to amortize the price increase via migration of channels, categories and brands?

That's my first question.

My second question is on CapEx.

Also, it has to do with the prior question.

In the first half, you have a total investment of BRL 845 million.

If I'm not mistaken, including that increase of 16% investment in breeders.

So if we -- it looks like those investments in breeders will come down in the near future.

But when you think about the CapEx, the company is below depreciation.

So I would like to understand what would be the right figure for the next half of the year or the next year.

That would be interesting.

And my third question, if I may.

It's about the Halal division.

When we look at Banvit contribution, it was a little bit less than 1/3 of the revenue in the quarter and basically half of EBITDA.

So it looks like that the remaining part of the business, that is excluding Banvit, is running really at lower margins than those 8.8% you have disclosed.

And I would like to understand that when you change that Halal slaughter that has been demanded by Saudi Arabia from what I understand, you have already adjusted yourselves to this change, but I understand this would cause the price increase.

So if you exclude Banvit, how the Halal division is running in terms of profitability today?

It seems to be a little bit lower than this 8.8%.

And I also want to understand the impact of the slaughtering change process -- slaughtering process change.

And I'm sorry for asking long questions.

Well, I apologize.

I will have to talk to you later because your questions are very broad and are many as well.

But I'll try to be brief and address them quickly.

Price increase, within those BRL 500 million, we are not considering as drivers any price increase to reach those BRL 515 million, effectively basically all of that we have already mentioned.

About price increase and trade down and all of that, I think that we are with the right strategy.

Remember that we are expanding our client base, and that will allow us to have the right opportunity as well.

And we also we have a Kidelli positioning, especially in the cash-and-carry market.

So you will see the figures and details, and we'll help you understand the impact of that trade-down execution and what is really the impact of entry of Kidelli.

About the CapEx, yes, it does have the depreciation.

And if we look at the last 4, 5 years, what was invested in the company in terms of CapEx, you will see that was a relevant amount, very high -- it was very strong investment.

And so now, yes, we do have the impact of the breeders.

But also, we need to optimize the capital that was invested.

We need to invest in the plants in order to have the right return.

So we have to optimize those plants.

Yes, so you will see a better efficiency in the use with higher depreciation and the CapEx.

And remember that part of the biological assets and most of them have come from also the impact of the price grain.

Because when the grain price increases, our biological assets, which are our breeders will also have an increase on the price of the asset itself.

So you cannot consider that as an increase of our CapEx, but rather that reflects the price increase on the basis of biological assets that is live.

With regards to Saudi Arabia, there is a positive effect indeed.

Over there, regarding sales and adjustment of the process, we already have a procedure to meet that demand that I think will be positive to continue to supply this market.

And it involves not only Banvit but also the fact that we are shipping more products in preparation.

But this is a onetime of effect in the case of that market.

Later on, I can give you more detail.

Ladies and gentlemen, we're running out of time.

So we are now closing the question-and-answer session.

I'd like to turn the floor back to Mr. Pedro Parente for his final statements.

Well, in the interest of time, I will, I guess, did all of the relevant messages have been conveyed.

And with this, I would like to thank you for joining us.

Our Investor Relations department continues to be at your disposal if you have further questions and if your question was not answered during this webcast.

Thank you very much, and enjoy the rest of the day.

BRF S.A. conference call is closed.

We would like to thank all of you for participating, and have a good day.