BRF S.A.
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Operator:]

Good morning, and welcome to BRF S.A. First Quarter Year 2013 Conference Call. This conference call and the presentation are simultaneously transmitted via webcast in our website, www.brf-br.com/ir. You can also have a full version of the slides to be downloaded. [Operator Instructions] Forward-looking statements related to the company's business, prospectives, projections, results and the company's growth potential are forecasts 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, and thus are subject to changes. As a reminder, this conference is being recorded. At this conference are Mr. Abílio dos Santos Diniz, Chairman of the Board of Directors; Mr. José Antonio Do Prado Fay, Chief Executive Officer; and Mr. Leopoldo Saboya, Chief Financial Administration and Investor Relations Officer. I would like to turn the call over to the company's management. You may proceed.

[José Antonio Do Prado Fay:]

Good morning, everyone. I think everybody woke up now with the noise in the room. To begin our earnings presentation, I would like to give the floor to Abílio so that he can state the opening remarks. Thank you.

[Abilio dos Santos Diniz:]

Good morning, everyone. This is the first time I'm participating in the earnings presentation of BRF. Actually, it is the first time I do it outside my original home, which is GPA, and I hope I can stay here for many and many presentations. I'm feeling very happy here, very pleased and very welcome, and also very grateful for the investors, for all their confidence. My intention, my humble intention is to contribute to make this company even bigger and greater than what it already is. I welcome you all, and I can see some people here. I don't think you cover GPA. I don't see so many familiar faces. But anyway, I hope to manage to have a good relation with you as well. I always give a lot of attention to the market. Back in GPA, I always had a huge identification with the market. Since 2005, 2/3 of my participation in GPA are related to the market. So I want you, in BRF, to count on me for full transparency. I know this company is very transparent already to you. So let's move on now to the earnings presentation and after that, I'll be happy to take any questions you may have or any comments. And please bear in mind, that I'm only a 3-week veteran at this company. So tomorrow, I'll be celebrating 3 weeks as of my new position here. So I'll be here at your service. Fay?

[José Antonio Do Prado Fay:]

Let us get started now, moving now to the earnings presentation per se. We'll begin addressing the new cycle as a company, and it's impossible to address a new cycle at the company without thanking first the safe and competent leadership by Nildemar in our leadership. We had several years of Nildemar as Perdigão leader. But that's not the point. He was also a BRF leader. He also played a leading role, and the company's management is very grateful to him. And now, we are under a new leadership, a new vision, looking to the future and to some extent, uncovering and releasing our capacity for growth under the leadership of Abílio as of now. It is the first quarter that we have Abílio with us, and he already started on the right track. We have a good quarter to present to the market and expect it to keep on doing so. We know that we have volatility, but luck is also important in life. So to address very briefly the cycle. Over the last 3 years, the company -- well, almost 4 years on May 19, more precisely, we signed a protocol or the Memorandum of Understanding merging our companies. So over this timeframe, we had several activities oriented to execution with huge concern of not having any rupture. We manage a very long chain, and loss of this chain control is something very severe in our business and also very challenging to recover. We had this concern of taking all these actions that were not simple at all. We started the merger first with the treasury onwards. Our first action was to merge the treasury and then we started with administration, followed by systems and then we started working lastly to join our front end, which is the commercial area, and we are about to complete it. We are not done yet. We expect to have it completely delivered in June when it comes to administration. In other words, it means all our warehouses may be working with multiproduct and multi-brand. Yesterday -- well, a couple of things are very problematic. Yesterday, for instance, we had the first unload of Perdigão brand in one of the greatest Sadia system in Jundiaí. So as of now, Jundiaí is also working with multi-brands. And by doing so, we'll be completing our merger that took a lot of effort and also a lot of in-house vision by the company. And that's what really drives us to a new cycle. So that's how we can speak of a new cycle to some extent. Until July this year, we'll be completing in Brazil our integration. Please bear in mind that we still have a strong focus in the foreign market. We're doing absolutely the same in Argentina with the same SAP, our single platform. So we continue with a series of tasks. But in Brazil, by midyear, we expect to complete the space. The company is very much oriented in-house, very much oriented in not losing its chain or its pace or revenue or results and meeting all the resolutions we expected to achieve. Over this timeframe, we had a top line growth of 30%. We grew and we grew a lot. And our ADR grew 288%. So the company was really oriented in-house, but we managed to deliver. And this is one of our assumptions during this time frame. And as of now, turn the page, and to some extent, we also get the company ready for this new growth. In other words, like I said in previous circumstances, we have to revisit our company. We already had a project to work on the organization again, and we've thought about the post-merger phase. And just as any organization or company, it takes some time and it has to be pegged to our strategy. Our strategy over the last 4 to 5 years was to grow but basically, taking care of -- in order not to have ruptures or loss of control in our categories. So it has to do with people. We had to change our organization chart, and it will be changed in the following months. And we also have product launching. We had to work on several product launches in order to reorganize our product portfolio. In 14 categories, in 14 categories, key categories, we had some kind of caddy role and that took a whole chain in our portfolio. So as of now, we'll be changing the portfolio, but this time, more oriented to innovation and pretty more focused on consumers rather than we did up to then, where we had very good performance. We launched over 400 products in this reorg, and that took a lot of our research and development people. And we are about to have a new PD in Jundiaí. It's really state-of-the-art, really high-end. We invested BRL 60 million. In other words, the company is putting all the assumptions of the acceleration growth process. Next, we also have our consumers and retailers, our brands, basically. We have all sustainability indexes. We are GRI level A, ISE for quite a long time. So the company has a lot of responsibility and deep concern with businessship and new representing investors, and we want you all to keep on betting on us. And by the way, I would like to thank you. Thank you, investors, for your trust in the previous cycle. The company was always supported by investors ever since the follow-on we had to capture our Sadia payment, $2.5 billion that we got from the market in 2009, 3 or 6 months after Lehman Brothers. So it does show investor trust in the company. So now, let us start addressing our results. I'll give you some highlights, and next, Leopoldo is going to give you more details. We had a good quarter. We consider the quarter to be a good one. This quarter was very intense when it comes to the company's actions. So if I were to summarize this quarter, what would I say? In the domestic market, the price that we had by the end of the year, because by year end we had a fusion, and we even discussed it in our previous call. Grain should go down during the first quarter, but that didn't happen. Actually, it didn't happen. There was a slight effect in Chicago, but not in Brazil. That's not exactly what happened. Later, we can go deeply into that. But that maintained the pressure we saw in December that we will keep on having cost pressure over the first quarter. And then we made huge efforts for prices, promotions, in the point of sale in the domestic market, so we could overcome that barrier. We have a good scenario right now, and we are keeping an eye open on volumes. We are concerned because the market is being challenged to absorb volumes. As for the foreign market, quarter-on-quarter, first quarter of last year and first quarter of this year, there is a price increase that is very significant. We made huge efforts again in terms of price increase. And foreign exchange is also beneficial. If you'll recall the first quarter of last year, foreign exchange was way lower compared to what it is today. So we have these 2 drivers that helped the market, and later on we can break it down by region. Food, services, saves a lot of expenses. Expenses are very much controlled food services, and they can have a bottom line very much protected. There is a significant price rise as well to offset these costs. And also in the first quarter of last year, we had excess inventory. Food service, therefore, had to go to some settlement in -- or sale with tempered results in the first quarter. For dairy products, we've been working since September last year to work on the composition of dairy products again. It's a slow process. We're still beginning to reap the fruit of this work. Basically, we need a right-sizing of UHT category, which is very significant to maintain our relevance in the milk-producing region. But from the moment we work on the cheese category, we have possibilities to do that. Without cheese, we wouldn't have a significant cheese category, but it would be difficult to do what we're doing right now without losing relevance in the milk-producing region, which is very important to a leading company or has a leading role. It is very important to be relevant in our milk-producing region. So dairy products have this action to structure what is currently being done. And on top of that, we still have a long way to go. But I'm very happy with our results for dairy, but we know that we still -- we are on the right track. We're doing fine, consistently improving our dairy results, but we still have a way to go in order to turn dairy categories into a big driver of value with the company as a whole. So as opening remarks, that's all I had to say. Now I turn it over to Leopoldo to get into details, and then we can talk again later and also we have the Q&A.

[Leopoldo Viriato Saboya:]

Good morning, everyone. So let's resume our presentation after introductions about the current scenario and our earnings. We'll get into more details now. Now moving straight to our performance of adjusted EBITDA. For all effects, our EBITDA was very good, especially when we consider it is the first quarter of the company and historically speaking, it tends to be the weakest quarter for many reasons

[José Antonio Do Prado Fay:]

I believe we should now talk -- start the Q&A. But just talking about the last slide, the company -- it shows how the company has performed. We did have a good performance. We already have the trust of our shareholders because they see the future of the business that was and is being built since May 19, 2009. And now, we are ready to get into this new cycle. So let us start our Q&A session, and then we'll deliver our final remarks. So let us start the Q&A.

[Operator:]

[Operator Instructions]

[Unknown Analyst:]

So I -- [Audio Gap] What is your perspective from now on for prices for processed foods? We understand that on the one side, there's not the best demand and not only for you, but also other categories of basic foods and we see the industry with some -- with little idle capacity. And so my first question is about processed foods. Would that be able to keep in the current levels? And despite of dropping grains and natural products as well, you have shown that there is a better mix, better channel, so the prices for wholesale are also better. Is that going to change also? And dairy products and food service products, what is the trend on your point of view in terms of prices? Will those be kept?

[José Antonio Do Prado Fay:]

Well, I'll make general remarks about prices and those should address your questions. Leopoldo said, as you might remember, is that last year we recovered our margin. That's what we were looking for. We wanted to recover our rates. So right now, we are looking for cash margin. We have to analyze the fact, volume and pricing. The long food inflation, and if you'll have lived inflation in the past, you know it takes time and it corrodes the prices. So that is taking time and it's being -- the prices are going up. Food prices are going up for a long time, and we had the increase of prices of meat and then they have stabilized at a high price, and then vegetables and all basic food also come up. And consumer is feeling that. So right now, the consumer is very sensitive to price because the food inflation hits everyone. It is a very important matter for families' budgets. So our price strategy is to be horizontal, and that's when we are concerned with volume. That is what we are focusing on, and several of our categories are showing lower volume. Sometimes we have the same value to some amount, which is not bad, but the volume is a little bit shrinking. So the way we are working with prices is something very sensitive. We have to be very careful dealing with it. And we have abilities of choosing channel, categories, regions, and that is a very important job so that we are able to keep up with our position. Food services is not as different. As consumers become more selective, they go out to eat less. You see that jobs are not being generated as much anymore in restaurants. So the main focus of the company right now is volume and prices. Costs are being pressed. We see a drop in grain prices, and that comes -- and those prices come from a high price. So it's not a very high drop in our short-term costs, they're not relieved by it. Maybe in the long term we will have a better effect. But this mechanism of price, I believe that today, to increase price and the process of price increasing is not our first choice as it has been in the past. And actually, it was not a choice, it was something that we needed to do. We were not able to support our costs if we had an increased price. But right now, our modus operandi is to use leverage. It's an interest that the company has to hold on to our current results.

[Operator:]

Isabella from Merrill Lynch.

[Isabella Simonato:]

In terms of the export market, as Leopoldo has shown, do we see an improvement in costs, but also, a more complicated demand in the main markets? What is the scenario for demand improvement in those markets? What is the impact of the Avian flu in China that could have in your products in general? So at the end of the day, how can we expect the margins to go back to normal in this category?

[José Antonio Do Prado Fay:]

So in the foreign market, we have some specific points of attention. Europe had not a good performance. It was a bad performance. And now it has a seasonal trend of improving performance because we will have the barbecue season, and we'll be able to have a better performance there in terms of rates and margins. But in terms of volumes, we are not very excited about more volume in Europe. In the Middle East, we need to keep the performance going. The performance has been good. Argentina is showing some signs there, although our business there, I think, difficulties due to the Argentinian scenario. But our great organization efforts have been reducing costs, and I believe things are going on a good phase. It might take some time, but they are just moving. And costs should start dropping. So how do we sell in the foreign market? Griller and some processed foods and they are more sensitive to prices of food stuff. So those results should be slow but consistent. And that might be our recovery -- or I don't think it has much to do with prices. So United States right now is in a not well-defined market. We have to wait to see where this is going to go. We have -- we do see some concerning signs. China has decreased consumption. So I believe the world is in a stress point. What we see is that we have the possibility of comp dropping in the short and medium term.

[Luca Cipiccia:]

Luca Cipiccia from Goldman Sachs. My question has to do with your comment on volume pressure in the domestic market. This growth of 23% x TCD, it suggests actually that growth was still good. So I just like to have a better understanding when you made this comment, what exactly are you referring to?

[José Antonio Do Prado Fay:]

Actually, I think here we have to highlight the great company performance when it comes to TCD. In the past, we used to say that there was a big issue, a big point was to go through execution or performance. Because of this, we had 4 key categories and 2 very important, and we had a strong CADE ruling, which is ham with the Perdigão brand away from the Perdigão market and cured sausage, Perdigão was a leader with almost 24% of the market and there was also an exit. So we had to rearrange our sales forces in those products in order to offset Sadia and Perdigão portfolios. And we lost all the entry brands. The company did not have any entry consumption brand. So this action was very well done. If you exclude the Sadia and consider the same basis, the company's growth is really big and volume recovery is significant. So this was very well planned and very well done. And this is the reading when you see -- just as you read, if you work on the same basis, you will see the company's growth was significant, very relevant. The domestic markets, as I said before, I am concerned with consumers. In other words, I'm concerned how we can make this -- or how can we handle this high inflation rates and consumers have to pay automobile and services and when we support well being in the core categories that consumers have started to buy, we were discussing that just yesterday. So not even class A, B or C, lower the number of categories they buy. For instance, class A used to buy 54 categories of the Neilson basket and then they stick to 54, but they buy less. And to some extent, we also see it happening in our customer portfolio. There is a smaller drop size. We don't lose customers. We don't lose consumers, however, there is a reduction in consumption or a repositioning or another arrangement in consumption. And then we have to see how long this process will last. But we can see all consumer companies showing this slowdown in consumption of nondurable goods.

[Unknown Analyst:]

Frederico from [indiscernible]. I would just like to have a clarification related to volume in domestic markets. When you say you're concerned with volume growth in the domestic market, are you consider your older pace or other brands as well? Aren't you only go looking to the 23% growth or base adjustment and only concerned with the 7.5% drop? Is that the reading over the year?

[José Antonio Do Prado Fay:]

Absolutely. One of the precious point of the company is scale. And one of the things we strongly highlight to ourselves is that although we are losing almost 1/3 of our volume in the domestic market due to the ruling we follow, we should get ourselves strongly organized in order to recover it. The scale certainly is one of the company's pillars, and your reading is right.

[Unknown Analyst:]

Perfect. I just wanted to understand if you had a very strong slowdown down the road. Another question, Leopoldo, if we put together, just as you do revenue, adjusting basis for the domestic market, do you have a reading for EBIT growth under adjusted basis as well? Could you share that with us, please?

[Leopoldo Viriato Saboya:]

We don't have information or reconciliation of EBIT under the same basis. However, I can assure you that growth is equivalent or maybe even greater. At that moment, we also had a general effect of results. Remember the EBIT result? If I'm not mistaken, it was 9.4 of EBIT margin, which was not a bad one. Far from being bad, EBIT around 13. So when I work on the base adjustment, we don't see a change of the delta effect between the adjusted first quarter year-on-year.

[Thiago Duarte:]

Thiago Duarte, BTG. Two questions. First, I miss the figure, which is the number of synergies, I missed the figure in the first quarter. And first, I would like to congratulate Abílio's presence here, and would like to know from him what fronts are being worked on. And when he talks about the growth of the company, what he foresees? And then I would like to know from him a little bit more details around that issue?

[Abilio dos Santos Diniz:]

Well, I've been with the company for 3 weeks, but Fay has been teaching me a lot with the private lessons. And I've been able to understand the company. And really, I'm really proud to be here and proud to all of us Brazilians to have a company like BRF. And I would like to take this opportunity to highlight the work that has been done so far since the merging and essentially to follow CADE's determination, and that all has been done with a lot of competence and with a lot of professionalism. I'm just coming in and when I look back and see all the work that has been done by Fay and the whole team, we really have to congratulate them. Probably it was not easy, it was not simple to follow all the guidance and the rules. But the company now is ready to be whatever it wants to be. The company is ready to be what we can make happen. The opportunities in the domestic market are huge. And although our share is already very relevant, but we still have room to grow, not with the position, but we can grow organically and especially improving growth -- improving other things that can be done best. We have room. We have the launching of new products. A lot of things to do in the domestic market, but a company that is in such a position in its original country, in Brazil. And being -- Brazil is a country that can be considered the barn of the world, we believe that our mission is really to supply the world. We supply Brazil and the world. It's inevitable. And this is good for the company and important as well. If you study the history of companies, you'd be able to see that the ones that became international, internationally well succeeded are also well succeeded in their country of origin. That company then takes on new challenges, new habits, it goes to new people and new countries and the domestic market of that company is also benefited. You can check all the well-successful companies in the world have gone to that path. Obviously, what we want in the international market is to still sell commodities. Of course, we are not going to decrease that, but we will also want to sell brand. And I'm amazed to see because right now, at this stage where we are, I saw 2 representatives of an investment fund from Saudi Arabia and was really impacted to see what they talk about our brand, Sadia. We are very strong in the Arab world without going into countries such as Indonesia, which corresponds to the fourth population in the world, also Malaysia, Philippines. I just mentioned Indonesia because that's the fourth country in the world in terms of population and it's a whole new world to get into. We also can do a lot of things in Europe. Europe has a lower consumption, but they also have consumption. Even in United States, there's a lot to be done. It's a challenge that's something that the company will face and will take on. But you may be sure, we'll carefully look at every investment we will make, and we'll analyze always the return for our shareholders. Each cent of our CapEx is going to be analyzed in terms of returns to our shareholders. And I, as the Chairman of the Board, will make sure that happens because I wanted to make sure that the shareholders are really having a good return. And the company is ready to grow. The industrial area we have wonderful products, so I'm sure products are excellent. You all know about it. And when we have a good product, what is important is to know how to sell it, both in the domestic as well as in the international market. I have nothing to tell you where we are going to go first or more or less because we do have room to grow domestically. But the world is available to us and the company is here to do what it knows what to do. Just adding to Thiago's question, talking about the synergy. If you remind, we told you that we are going to bring you details of 2012. So from now on, we are not going to bring more details. But since this is a special meeting, we'll give you some figures. Just to make sure you know that we are on track with our target of BRL 1 billion. We are -- in our synergy, we are around BRL 248 million. That's what we are having in terms of synergies with the projects identified in the beginning of the merging. So we are on track with our targets. Okay, another question?

[Operator:]

[Operator Instructions] Our next question comes from the audio of Mr. Alexander Robarts from Citibank.

[Alexander Robarts:]

My question is also about the synergy. I would like to better understand it. I know that a key source of synergy this year is the integration of the distribution network of Sadia, Perdigão. Can you tell us a little bit how that integration process is going? We've seen -- have we seen an impact of benefit from that integration? And the second question is related to the foreign market. In the fourth quarter, you talked about the transformation process and the purpose of increasing the deceleration in the foreign market reaching 30%, can you give us an update on that process?

[Leopoldo Viriato Saboya:]

First, talking about the foreign market. The acquisition of Federal Foods had to group as we already had developed the distribution in Europe. Also, there we have another standard, our service to the market there we have B2B and retailer food service. This is our Europe brand. We have talked about it already. In Argentina, we have a very sound distribution position with Patch [ph] and they have 50% of the hamburger market and that they are leading -- leaders in Argentina. We talked about other areas as well. And now we are in the Emirates, and we have these 2 main areas

[Abilio dos Santos Diniz:]

Right now, I would like to take this opportunity to say goodbye to you because I need to leave. I, once again, would like to highlight that it's been very good to be with this company and also to have this role in the Board of Directors, and I'm feeling very well. And I see the company has a good prospective, and I can help to make this one of the most important food companies in the world. I believe that in the next time we are together, I'll have more learned lessons and will be able to talk a little bit more to you. Thank you very much.

[Operator:]

Our next question comes from Mr. Fernando Ferreira from Bank of America.

[Fernando Ferreira:]

You were talking about turning BRF in a global company. So I would like to know if BRF-15 plan is still intact or if that strategic plan also can be revisited in the next month?

[José Antonio Do Prado Fay:]

BRF-15 plan was extremely important in this period of time because we needed a guidance to the company and it equates guidance because we were joining companies such as Perdigão and Sadia, and each one of them had their own plans. So if we haven't created a common plan, which is BRF-15, the company would have a hard time going through that period with that growth strategies, delivering growth with no ruptures. So BRF-15 was very important. And in our planning, we are already from -- going from the third to the fourth year. We are starting to write another plan, a new plan. That's why Abílio comes in, in the right time. We'll have a new Chairman with new strategic guidance for our company. Anyway, everything that we have discussed, internationalization is still one of the main focus of the company. As we have been saying for a long time, we need to become more globalized. We have been investing on that and we have been preparing the company for it, because during the merging, we're not -- not only had a merging, but also we created the infrastructure for growth. It's not enough to have the intent of becoming international, but we also need to create infrastructure, and that comes from the ability of the company of managing the business globally. That is to manage plants, the people, sales, and that's why we are still in that major IT effort to be able to have the company under the same SAP and ERP next year. So we are rewriting our strategic plan and with Abílio with us now in the board and the board changed a little bit, that's good because he's coming in, in a moment when do we not have any ruptures regarding BRF-15 and we are just writing a new period in our history. We have time for one last question. Nobody from the Internet? I don't know if you have any questions from the audience. There are no further questions, so we'll give -- oh, there is one last question -- no, no? No, no further questions. So may I just do some closing remarks? I would just like to mention that -- well, if I were to summarize in a sentence if we are positive or not, we are bullish vis-à-vis the future, but we are cautious. We are bullish because in-house, there are many things that give us a very clear vision of our capacity of articulation of the company's cycle. But why are we cautious? When we look at our fundamentals, think about this deep issue that has to do with volume and food inflation, bidding consumers and consumers trying to find the right track. Cost shows good signs, however, it still shows a couple of things. Chicago, for instance, that are high in corn, which is surprising. But when you look at the fundamentals, the American corn crop is extremely delayed in plantation. We have about 5% today of the planted area in the U.S. where we should be with 37% or 38%, so that's an important warning sign. When you concentrate the automation capacity of agribusiness, well, this is really huge. They can recover over time or they can catch up, but when you concentrate planting, you also concentrate harvest. Any accident or environmental or weather accident during harvest always has a huge impact, so we have volume. We also have cost. We are positive, but at the same time, there is volatility. And on top of that, how should I put it, we also have, well, the in-house things. We have some temporary expenses related to the merger. In summary, I'm positive about the year, but we have to be cautious constantly whenever we have to define or set cost and also come to a reposition of consumers trying to preserve their well being. Thank you very much. See you next time.

[Operator:]

BRF, as a conference call, is concluded now. Thank you very much for joining us. Have a good day.