BRF - Brasil Foods S.A. Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: BRF-Brasil Foods (BRFS)

BRF - Brasil Foods S.A. (NYSE:BRFS)

Q1 2013 Earnings Call

April 30, 2013 8:00 am ET


José Antonio Do Prado Fay - Chief Executive Officer and Member of Executive Board

Abilio dos Santos Diniz - Chairman

Leopoldo Viriato Saboya - Chief Financial, Administration & Investor Relations Officer and Member of Executive Board


Isabella Simonato - BofA Merrill Lynch, Research Division

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

Thiago Duarte - Banco BTG Pactual S.A., Research Division

Alexander Robarts - Citigroup Inc, Research Division

Fernando Ferreira - BofA Merrill Lynch, Research Division


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, 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: Seasonality, consumption, vacation, holidays. But our quarter was strong though, considering our recovery cycle that has been designed ever since late last year and was very much in line with our expectations despite all the difficulties and some weaknesses identified in the market, the consumer market in the world and also in Brazil.

So when we look at the marginal contribution for these results, no exception whatsoever, all the company's businesses had a positive impact to this performance, this positive performance between the first quarter of last year and this quarter. We can see this contribution of BRL 89 million from foreign market and BRL 175 million as contribution from our businesses in Brazil, basically known as domestic service or food service domestic market and dairy products.

Another highlight is the peak performance of our revenue. The company, especially last year, we spoke a lot to you last year about our focus, strong focus to recover our critical mass or our size after TCD. That was done. And now we compare a quarter where we have total impact from the brands sold and also temporarily suspend the brands vis-à-vis a quarter in which the company was still in the previous stage. We can see the growth of almost 14% has to be really highlighted.

And in summary, we already have 5% less in volume and almost 25% more in price. I'll remind you that the 5% drop in volume, if we didn't do anything, the effect of TCD to the organization will be 13% in volume. So we substract TCD. In both forms, both sale and behavioral, that would mean 13% less volume in the margin, and we're showing only a drop of 5% in volume. And in the topline, virtually, we don't see at all this -- or considering what the company had done up to now.

As to breakdown of our business, we had some changes. However, when we look now on a comparative basis, it is very small. You might recall that what we sold from BRF was basically processed products, not only capacity, but also brands and categories that in the vast majority were processed. And it never brought lack of balance in the organization when we look to current mix. This mix is enriched within categories. It has been coming richer and richer, be it through brands or our average portfolio with launches in order to make our categories stronger. In other words, our results also stems from the strategy outlined in order to go through this new balance to our top line. So when we look at the organization today, it is not so different compared to what it was, but we did have to do -- or to work on huge efforts to be where we are today.

Now this is our income statement in a graphic representation. All tickers are absolutely positive vis-a-vis last year. I would highlight first the expansion of our gross margin of 2.3 percentage points, which is very necessary. Our gross margin was very much compressed. And on top of this gain in gross margin, we also had additional gain in convergence to EBIT and EBITDA of over 1 percentage point stemming from very consistent effort in savings in SG&A, in other words, our commercial and administrative expenses. When it comes to net sale, they had a drop of 1.1 percentage point vis-à-vis last year, and were below the barrier of 16%. Until very recently, it was something we had never done before. In other words, we closed the quarter with adjusted EBITDA margin of 11.8% or 3.4 points above the previous year and also stronger net income compared to last year, BRL 359 million vis-a-vis BRL 153 million announced in 2012.

Moving forward, think about cost of goods sold, and we think it's important to talk about that for a couple of minutes. It helps to understand the current cycle of the company and what we'll face in the future. I don't know if you recall it. Those of you who saw our fourth quarter earnings presentation, we talked about the 16% increase in our cost, and they happened to some extent over the second half of the year. Visually speaking, it's easy to notice because it was relatively flat over the first half of 2012, and then there was a big rise over the second half of the year, which coincided with a moment when we first started to increase our prices to transfer the inflation effect that we had been feeling. And we also mentioned a phenomenon that did really happen, which is the carryover effect of our cost from last year to this year. When we look at the price, the cost is slightly higher compared to last year with no mix effect. Notice that the mix in the fourth quarter is richer. It is already a COGS per kilogram that is naturally higher. If you were to deduct the mix effect trying to have COGS under the same basis, between the fourth quarter and the first quarter, price or cost increase would be even higher. And this explains, to a large extent, why we had such a margin compression, particularly in the foreign market comparing the fourth quarter to the first one. The first quarter, year-on-year, like I said, everything is better, all business units, all markets are rising. When I look to the fourth quarter and then the first quarter, what is different is only the foreign market, but above all, related to cost. We had a cost crunch already expected. We also said that about a month ago and precisely, it came from corn prices. It was an effect in between crops. And because we had been carrying over short stocks or short inventories, we affected staple categories that are basically what we export.

And beginning to explain the foreign market and also the cycle to the future. The next chart, for instance, shows historical corn quotations. It's important to understand when we are in the cycle, where we are in the cycle. The first historical message shows what we've been speaking of for quite some time now. After 2007, there is a change, not only in broad movement, but also in the frequency in movements.

Corn, for instance, it has very high historical levels. In Chicago, these are the international quotations by the way, well, it was attenuated starting late last year, but this international relief did not come to a domestic relief. Actually, it was the opposite because Brazil was only -- the only corn supplier to the world, there was additional demand. They wanted Brazilian corn, and quotations in Brazil increased before the end of the year. And actually, this relief started around February. So ever since February, we can see a decreasing cost curve, and that might be an impact in the second quarter. In other words, just to highlight, our COGS in the first quarter was mainly due to cost of acquisition from late last year and also the beginning of this year, January and February, having an impact on cost and also having a stronger impact. But most significantly, the foreign market, then the domestic market that could handle the circumstance doing to higher value-added portfolio and also additional market moves.

Moving ahead, we show meal with a very similar story. The drop was slightly stronger just to explain the red dot in the curve. This is not our projection. These are future quotations, forward-looking contracts of the positions that the market sees today. So new world crop, particularly the new crop from South America that is substantially from the U.S., we expect the cheaper new crop. According to these quotations due to the good harvest and also due to consumption, product consumption and also some uncertainty when it comes to a drop in consumption for feed in the world. And despite this crop, from now onwards though apparently it is significant, but the mass of expenses of the average costs, we expect to see with soybean meal and corn in 2013 will be not different from 2012. We ramped up and now we are going downwards. But on average, expense or average acquisition and consumption costs will not vary so much compared to what we had in the previous year.

Now I also highlight our expense ratios. We are being very tight about BRL 1.1 billion expenses on a quarterly basis or 15.3% of our revenue, and this is where we also find part of our synergy visibly seen. Well, we have the merger and the synergy in COGS, which also happens, but it's not visible today due to a very intense change in the levels of cost. So there was a gross margin compression that we are beginning to decompress and cost synergy will also come back and have an impact on gross margin. But in SG&A, we already begin to see gains stemming from the merger, and we're absolutely on track with our synergy capture plan that we constantly mention to you.

Now what about CapEx? I also have to mention very briefly these tickers, they are important to understand how they talk to our guidance and also how we think about the future. Actually, consider the tickers as we disclose CapEx is the summation of investments and fix capital plus biological assets of BRL 516 billion. And to add to this, acquisitions have increased. So basically, federal foods fading in the first quarter around BRL 75 million out of the BRL 107 million. But I have to explain that out of the BRL 516 million, for comparative purposes, with a pure CapEx investing by the company in organic growth and other projects, we have to take part or 88 for logistics and also another part in support, which is our Curitiba facility. So this is mercantile lease. It is not cash leaving the organization, but it has to be posted as CapEx. And there is an offset accounted party that cancels the capital effect, which is long-term accounts payable, which are built-to-suit. So to all effect, if I did a BRL 127 million of lease and BRL 121 million of biological asset, pure CapEx this quarter would have been -- or was approximately BRL 270 million. So these are the tickers. When we speak of BRL 1.5 billion investment in CapEx for the year, it is comparable to this BRL 2.8 million for the quarter. So that's important to make that reference, so you know that we are below our pace, our investment rhythm. So we can get to BRL 1.5 billion that was mentioned as the company's goal for the fiscal year.

Now also talking about our financial position. We are in a very solid position as we have been all over the year and despite of the low cash that we had last year, we had a debt of around BRL 7.2 billion. It is a very well expanded net debt in its terms and new margins are below straight line. And as you can see here, they were all very well balanced. We can already see a drop in the first quarter going to BRL 238 million. Our leverage and the trend is to have a deleveraging of that figure, and this is good. It is important for the company because it is preparing it for new leaps, new growth in an inorganic, selective and intelligent and well-thought ways. And that's how the company has been working lately, and we are paying attention to all details. And right now, we are opening up to new potentials, which are very important, analyzing our perspective and cash generation for the next year. In terms of products launch, we are still working with added-value products and something in these products, these are a few samples that we have been doing in the last half of the year. I will not go into details, but you can see that they are many.

And now, we'll go into specific areas of the market. Starting by the domestic market then, Fay already mentioned a few words about it. We had a very good quarter in terms of results. And despite of being the first quarter, it was a very sound first quarter. If we compare that equation of volume and price for the top line, the domestic market, if it is compared with last year, is good. But if I do a base adjustment in the same 3B of revenue and I adjust the base of last year to reflect the effects that we had in the next half of the year, that is the full categories and the suspended categories, we had the growth of the same base of 38% in revenue and 23% in volume. That is very significant. That's a large growth considering the organization's size and also our portfolio. And we also did that with a very good profitability. Again, analyzing that equation among price -- between price and volume, they are below the revenue -- I mean the revenue is above. And in fact, price and mix is what I was explaining in the beginning. In the intra-mix, if we analyze the frozen or other processed products, the mix is better due to launchings that we had announced, so the portfolio of brands that we still have in the company. So all of that brings an effective -- positive effect of price going beyond our cost impact, of course, and then we have an expansion of almost 400 points in net profit and net income for this quarter.

And I would like to take this opportunity and mention that from now on, when we analyze this cost against the margin, and let's remind ourselves that in the domestic market, it is not as strong going up and it's not going to be as strong going down. It has this added component. But we are sure it is a moment to better focus on the cash margins so that it can be more fluid in terms of volume, so that we do not accumulate volume drops vis-à-vis the fourth quarter due to cost. And we have not lost in price. But now when we go into more details, region-by-region, you will see that we did not have and do not have room for higher price in dollars due to the prospective of dropping prices. And basically, that is the summary of our scenario.

Just to give you an idea, when I talk about the CPV 16% of increase, 22% was domestic market and 10% was the whole domestic market. And then I'm adding retail, food services, dairy, everything domestic market 10%, and foreign market 22%. That's how we account for the average 16% in the company. So we have a major costing factor that has happened in the foreign markets.

Now the main market, the Middle East was very good in this quarter. We want really to work on the profitability that we have reached there. Of course, when that happens, everyone turns their eyes into the region. In Europe, no one is safe to the price and when we work with food and with chicken, in protein, in a down trading, it is benefited. But even then, we did have a very challenging scenario in Europe. Food inflation in the world is very important, and even more important in countries in Europe that have serious economic problems with high rates of unemployment. For instance Turkey meat, which is a more novel meat compared to chicken, it just takes a hit. And right now, we are working with a profitability and we have good quarters and we expect it to recover, price and profitability.

Eurasia, you can see that their participation is -- has been decreased year-by-year, and increasing volume here is because we have reopened some plants to export to Eurasia. And when this market is opened, the results are good. In the Far East, in summary here, we're talking about Japan. Yes, we do have more adequate inventory levels there, not very high ones, but there is an important factor, which is the devaluation of the yen that added to the high cost of food, froze a little bit of the market, and we had a problem increasing the prices in dollar. And with the prospective that we see all over the world in the lowering prices of raw material, corn and meal, that's when it is difficult to raise prices. But we will benefit from that movement without having to increase prices, just like I said. So the challenge is really to hold the prices in dollars, prices which we have already reached.

Now talking about LATAM. I already mentioned quick food and with all the problems that we had in Argentina. We understand that we are at a good phase and we're able to have advances, integration improvements, go-to-market. We have a specific and strategic product -- projects, even with not that many pricing leverage that the market does not allow us. Africa is also a strategic market for us. We are growing, have a dedicated portfolio, data are very good. But also, we are adjusting our portfolio there in Africa for eventual sale, but in the long term, we are having good results.

So now our last 2 business, food service and dairy. I believe Fay has already talked a little about food. We have that volume compression when I talked to you last year, and I would like to remind you that last year we were in another module where we were also using food service as a channel to drain products. We are not doing that this year. We are being able to keep this portfolio more intact in terms of a strategy. That's why we have this price performance, as well as a profitability bringing food back to a platform, a stage where we had before. That's what we wanted, and we had said that in the past. We want food operating in our historical levels since the merging.

And finally, dairy. Probably here you can see where our strategy really comes up, and I had told you in the past before, wait a little bit because this is going to be good. I believe we have to focus on good results because we are in a ramp-up of leverages to bring the business into a sound results and then consistent results. But in the first quarter, we can see it. The drop in volume has to do with UHT that we compressed and therefore, we can bring better prices to our portfolio. In the category, we also see a better improvement in the dry division and in the chilled products division. And with that, our EBITDA margin goes to 4.4 and EBITDA is around 6, 6-something. And for dairy, this is an interesting margin. And we now have the intercrop for milk. We've seen that the sourcing of prices for milk have increased, which is good when we have the right market. But on the way back, it's a challenge to keep profitability. But anyway, we are very happy with these figures, and they really express our strategy and our ability to implement our plans.

So I hope I sticked to my time, and I have just here one last slide. But now I'll turn the floor to Fay.

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.

Question-and-Answer Session


[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.


Isabella from Merrill Lynch.

Isabella Simonato - BofA Merrill Lynch, Research Division

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 - Goldman Sachs Group Inc., Research Division

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 - Banco BTG Pactual S.A., Research Division

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

Alexander Robarts - Citigroup Inc, Research Division

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: The acquisition of distribution structures, some in our area, some are not; and also something else that is essential, something that is going to increase our presence in processed foods, which is processing out of Brazil. We have a factory in Abu Dhabi. There was a major problem acquiring license, but now everything is okay. So by the end of this year and the beginning of the next year, that plant will be operating and others will come, would do the same thing in that direction. In terms of synergy, so far, our main synergy source comes from supply. And that was already our project. We have established a supply process that is very effective bringing good results to the company, and the synergy is spread by this CPV and expenses. That's why sometimes it's difficult to identify. Because of that, we have that system that we used from 2009 and on. I had meetings -- one-on-one meetings and -- where people ask me, where are these BRL 1.5 billion? So that's why we have established those 12 months of 2009 and from then on, we started measuring. And our main source, as I said, is supply. Now we need to work jointly with our front end that is, we can now, from the second half of the year, to operate our distribution capacities, all of them together. But we still need some adjustments in the system. But I'm sure that from now on, this is going to bring a lot of value to the company. That is the possibility of being able to work jointly with our full portfolio of brands and customers because we still have a small overlap between customers from Sadia, Batavo, Perdigão and Qualy. And now we'll be able to work with the market on that after the second half of the year on.

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.


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

Fernando Ferreira - BofA Merrill Lynch, Research Division

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.


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

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