Marfrig Alimentos' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.15.13 | About: Marfrig Global (MRRTY)

Marfrig Alimentos Adr (OTCPK:MRRTY) Q1 2013 Earnings Call May 14, 2013 10:30 AM ET


Sergio Rial – CEO

Ricardo Florence – CFO


Alan Alanis – JP Morgan

Wesley Brooks – Morgan Stanley

Alexandre Miguel – Itau BBA

Jose Jordan – Deutsche Bank

Josephine Shea – Hartford Investment Management

Alex Robarts – Citi

Aaron Holsberg – Santander

Christopher Vandergrist – Hartford Investment Management

Denis Parisien – Deutsche Bank


Good morning ladies and gentlemen. At this time we would like to welcome everyone to Marfrig Alimentos 2013 conference call to present and discuss its results for first quarter of 2013. The audio for this conference is being broadcast simultaneously to the internet in the website,

In that address, you can also find the slideshow presentation available for download. We inform that all participants will only be able to listen to the conference call during the company’s presentation.

(Operator Instructions)

Before proceeding, let me mention the forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward looking statements are based on the beliefs and assumptions of Marfrig’s management and on information currently available to the company.

Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future.

Investors should understand the general or economic conditions, industry conditions and other operating factors could also affect the future results of Marfrig and could cause results should differ materially from those expressed in such forward looking statement.

Now I will turn the conference over to Mr. Sergio Rial, CEO of Seara Foods, which is in a position process to the position of CEO of the Marfrig Group. Please Mr. Sergio, you may now begin the conference.

Sergio Rial

Okay. Thank you. Very good morning for those in the America and good afternoon for those in Europe. I’m here with Ricardo Florence, the Group CFO of Marfrig. We’re happy and pleased to share with you our first quarter results, and once again thank you for joining us.

We’ll start by sharing with you a couple of highlights before we go into the details of each division. A couple of things which I think are worth mentioning, one is certainly the first quarter, it is not what we would like to see from a performance point of view, but without a doubt, a significant improvement from fourth quarter and significant growth and better quarter than last year’s quarter in a number of dimension.

So we hope we’re going to be able to articulate to you tangible result and steps in improving Seara Brasil’s performance. As a matter of fact, we’re starting to share with the market five key KPIs showing a couple of important dimensions of Seara Brasil’s performance so that the market overall can follow the improvement of the company.

We have also come forward with a very clear and specific target for debt reduction. We are committing to reduce growth stat levels of the company up to R$2 billion to be completed and executed by December 31st, 2013.

We’ll share with you also very concrete measures that are underway to improve the operational performance of both Seara and Marfrig Beef in particular. Both divisions are performing and are in different stages, but they’re all seeking and chasing better returns and high efficiency levels.

So with that, we’re moving to slide 2 where we try to capture in four quadrants what we consider to be the highlights of the group in the first quarter. So on the revenue front, a remarkable growth of, as you can see there, from R$ 5 billion to R$6.4 billion, slightly ahead of many analyst estimates in that respect.

And fundamentally here, what you see is a significant growth better in company from Seara Brasil. Seara Brasil actually sold 55,000 tons additional in the first quarter, which basically equals 16% increase in the volume they transact. Part of that, it’s already the result of Brasil Foods integration.

On the international front, we have seen also very steady growth both Moy Park and Keystone. We’re going to talk about it later on. Gross profit, going the right direction, so we’re having the margin moving from 15.3 to 15.9 where Seara Foods here in Ceara, Brazil in particular plays a very important role in moving the needle even if it’s still early signals of improvement that they are at least happening.

EBITDA almost closed to R$500 million, 4.91, definitely higher than most estimates from the variety of analysts. And again here, the clear improvement that we see in the Seara Foods division.

Cost, they improve on the back of increased revenues. But we certainly have a task at hand to deal with the infrastructure of the group which hopefully we’re going to be able to articulate what we are doing as we speak so that we can bring to much lower levels relative to sales than we have today.

On page 3, we now move to very specific targets of what we are doing. So as mentioned, Seara Brasil has a very, very important growth on each revenue, 50% when compared to first quarter of ‘12.

The other thing, we have finally brought the capacity utilization of the plants that came from Brasil foods to 60% against 45% in the fourth quarter. This is not where we like to see it. We will see this continue to grow and probably in the second quarter, that’s another target that you’re going to see improved.

That has very significant implications for Seara’s performance, as such, but also the dilution of cost and to the generation of cash to the group overall. Important to mention, for those who do not necessarily remember, the transaction of Brasil foods actually represented almost 40% of the entire Seara Brasil site. So it was a very significant and material transaction.

Logistics, which was solely a derailer for us on the fourth quarter. It has come to 75%. We promised the market that we would work on it, that we’ll pay attention, that we will be focus operationally. And we are glad to inform the market that that work has taken place. The worst on logistics relative to the integration of Brasil foods is behind us.

We have committed to the market to bring logistics to an average level of 75 for the rest of the year. It’s 71% first quarter. We have already reached levels over 80% in the first weeks of May.

So things have improved considerably. Thanks to the good work of a number of employees and to the high quality leadership of the leader of both Seara Brasil and the logistic leaders that we have.

But that’s not enough. We are drafting the cost infrastructure of Seara Brasil. And by that, we will close four plants by June 13th. And those four plants are not plants that came from Brasil foods, actually this is a tangible example of synergies that will be emanating from the integration with Brasil foods.

So by having those advents of Brasil foods allows us to close or call challenged position plants would kill at about 300,000 birds which are clearly a subscale for a certain productivity that we are looking for.

One, it has already been closed. Three, we are certainly trying to sell if we can. And the number that you’re seeing here, R$23 million, it’s fundamentally just the working capital, the reduction of working capital on the back of the closure of these four plants.

It does not take into account any sale proceeds that could emanate, or any other accounting related impact that’s also from the four plants. Besides that, we are also reducing the infrastructure of the headquarters of Seara in the south of Brazil.

We are also closing up to four distribution centers still between now and July which should be yielding us at least R$20 million of less expenses. Again, it does not include potential sale of those assets, which is definitely real and we are negotiating as we speak.

We have good specific targets on working capital. And the 40 million that you’re seeing here in this slide on the working capital needs are, this target is fundamentally tied up to inventory nothing more than stocks.

And why is that? We have improved the level of planning, we have improved the alignment from production to sale inside of Ceara, Brazil that should allow us to reduce our inventory levels relative to the first quarter. We believe the 40 million is an absolutely doable target.

Last but not the least, a very important piece, we will from now on disclose 5 KPIs as mentioned of Ceara, Brazil so that the market will follow, and we’re going to talk more about them as we see the slide.

On slide 3, Moy Park. Net revenue grows 27.5. If we adjust this number for foreign exchange implications, this number is worth 15%. So it’s close to 15% growth, nevertheless still a very solid growth in terms of net revenue.

And the reasons are, one, consolidation of the poultry industry in Europe. I mean there are number of players that are either going out of business or actually being sold. So there are fewer players in Europe as speak.

Two, concerns around food safety and quality of products. Moy Park has established itself as the high quality product provider in the European market. And I think we are benefitting from the work of lots of hundreds of employees who have committed themselves to the best possible and the safest product to the marketplace.

I think third, particularly UK retailers are more and more favoring sourcing meat, sourcing food from UK or at least from the vicinity of what they know and control. I think the horse meat scandal that Europe has led recently has certainly brought the attention to consumers to where the meat is coming from, why, et cetera.

So the story behind the product has become a very important piece of the delivery model and value creation. And again, Moy Park is absolutely taking advantage of its position. Moy Park has also become our commercial engine as an organization to the rest of the group. By that I mean rather than having separate divisions and separate groups touching the same customer not necessarily aligned, Moy Park becomes the intelligence, the market intelligence platform so that the Marfrig Group can price its products with sometimes same customers a bit more intelligently than I think we have done.

Hopefully overtime, we’re going to be able to be more specific on what does this mean in terms of profit or margin enhancement as we continue on the following quarters.

On slide 4, Keystone. Solid revenue growth still also here, favorably impacted by foreign exchange but still very, very solid. I mean Keystone, particularly in Asia is growing very, very steady and with an incredible potential.

AI cases in China has not yet had a material impact on Keystone. I think we would see some. And the reason is I think we are, particularly in China, our operation is a lot more tied to McDonald’s which is more of hamburger and French fries house than KFC and other players on the chicken front.

Beef division, we have announced and as a matter of fact, we were the first and the only one right on the fourth quarter to say that beef margins will be under pressure in the first quarter. And for those who had been following the beef market in Brazil, that’s the fact. It has to happen.

And I think the reason for that margin compression comes on the back of just increased production overall. So, all players have increased their slaughter capacity. We have increased 24% in the first quarter, and so have the others also in the rest of Brazil.

The good news is that cattle levels have not really changed. I mean we have plenty of cattle, not to a point of bringing prices down, but to a point of keeping the market relatively stable. So I would not expect any significant changes in the marketplace.

As we’re doing with Seara dying to look at efficiencies and time to do stuff that I think the group hasn’t really done with the velocity that it’s required. We’re shutting down two plants in Argentina. With Brasil foods asset swap, we ended with five plants of which we’re shutting down too.

We will remain with three plants. By shutting down, we could also be construed as handover of the assets to a local player. That would be actually the desired outcome that we can simply transfer and protect jobs and protect the company’s relationships, particularly with cattle ranchers in that marketplace.

We have, as our third bullet point here, on page 4, restructuring of Rezende. Rezende is one of the largest finished leather product producers in the world. They are one of the best, as a matter of fact.

And their business is basically focused on two spaces. One, the car industry in Europe and the second one, the furniture industry overall. As far as the car industry in Europe is concerned, the model doesn’t work. It doesn’t work. It doesn’t work because, as we know, European car makers have been under pressure and they have demanded constantly changes the business model up to a point where payment terms have moved from 60 days to 120 days, and yet demanding six months of strategic inventory so that they would not run any disruption on the leather that it’s used in their cars.

Now, that’s for sure. That’s the map. It doesn’t close. We did try to change. But at this point in time, I think we have better use of the cattle to move on and redirect that business to the car industry in South America that has posted significant better growth better than those in Europe. And that’s what we’re going to do.

With that, we have already informed our customers in Europe that we’ll stop delivering leather which means that we will now be using the strategic inventory today at their disposal that would allow us to release at least $30 million of working capital in the operation in Uruguay. And again, this is an operation at Uruguay.

Besides that, we are also adjusting our Zenda [ph] infrastructure. We probably have more capital tied up and infrastructure than we would like. So we will reduce Zenda infrastructure in Brazil, in Argentina and Uruguay which should yield at least R$70 million right away in the second to third quarter, end of second quarter more towards the third quarter.

Still in the central spirit of touching agriculture, we will be shutting down our corporate headquarters in Sao Paolo. The company will move to the largest distribution center that we have in Anhanguera, which is very close to the City of Sao Paolo of about 20-minute drive, and that’s where we’re going to be.

Close to where the action is, close to logistics, close to the largest piece of infrastructure to the logistics of Marfrig. So, we’ll do that. Again, we reiterate that we will present to the marketplace our long-term strategic plan, as we mentioned, on the fourth quarter.

Moving to slide 5, we’re now looking at the consolidated financial highlights. I quoted a couple of points, important points to mention. Gross margin moving in the right direction, not as fast as we would like but definitely moving in the right direction.

The profit of 33.2 in first quarter 2012 was actually helped by 60 million in foreign exchange variation. That helped. So we feel 81 is not what we would like to see, but it certainly go in the right direction to get the company back to sustainable profitability.

EBITDA, as mentioned already, and our leverage ratio haven’t really changed. So it remained unchanged, which is not necessarily what we would like to see, particularly as we have mentioned a couple of times our commitment to deliver. We will talk more about that later on. But it hasn’t changed.

And here I would like to call your attention that particularly in the beef space, as margins are more under pressure, and not in Brazil but definitely in Argentina and Uruguay, and all Brazilian players are in those countries. We have seen and you will see an increase in debt levels of most beef companies in Brazil.

And I think we’re certainly not an exception, but we are not to be the ones singled out. So I think as beef companies displayed their numbers, even exceeded their leverage ratios, are definitely not anymore under three. We’ve moving above three in many cases, some may actually move above four.

So that does not in any way abate our commitment to deliver the company, but just to give you the structural change that has taken place in the first quarter.

Slide 6, our net debt has increased and primarily driven out of CapEx and interest. CapEx here, some of that is on purpose. We did expand capacity. In Europe, we did expand capacity to less degree in Asia and some of that in Brazil as well.

And I think the debt requirement, we have seen the slide before, no news is good news. But I think what’s important mentioning is that the average profile of our debt has now moved the duration to 3.6 years as opposed to 3.2.

Moving to slide 7, beef. We did announce that margins will be under pressure. Our gross margin moves from 21.4 to 18.6. Worth noting a couple of things, the remarkable performance of how tight the division in the business is managing its cost.

Remember here, you also have Uruguay and Argentina, businesses that are not necessarily in a good cycle, and I think the division has really paid attention to their cost. And recent announcement of product closure of two plants in Argentina and the restructure of Rezende should enhance in all beef business to keep as high as possible their margin as the margin continues to be under pressure in Brazil.

So very solid revenue growth, very much helped by in opportunistic approach in capturing exports. I mean we did increase exports. Actually volume has increased 15.5% when compared to the first quarter of 2012. And our businesses have been able to increased average price around 6%, very much helped by opportunistic approach in some of the export market and also by the foreign exchange – we call it Riyal dollar exchange rate, helping the margin along the way.

Seara Foods highlights, page 8. It’s wonderful to see the gross margin now is close 15%, not where we would like to see. This is a margin that should be going the direction of 20. But it is good to see in a year sign with two significant challenge lives in 2012, a very significant spike and great drive and the integration of Brasil food assets.

It’s good to see the gross margin is going the right direction. But it’s not going to see that despite the very significant growth of operating revenue, which still have a very significant infrastructure cost. So whether it’s having expenses or G&A, this is work that we have to address in the four plants that we’re closing.

The reduction of headquarters of Seara and more work that will come along the way are just signals of our commitment to bring the cost levels to much more what we call acceptable.

We’ve also shown here the evolution of grain prices in Brazil, so this is outside of Brazil. First quarter 2013, still poses a corn that is 33% more expensive than the corn of first quarter 2012.

So first quarter ‘13 does not yet encompass the potential reduction of grain prices in the expected margin enhancement that should come third quarter and fourth quarter. But it’s important just to see – and part of that, I believe in 2013 the year is pretty much given from a grand price point of view. So I think we’re going to have a solid help by grain.

With this, I’m now going to a transition to the five KPIs of Seara Brasil that we’re sharing in the marketplace. Seara Brasil, and I think you’re going to see that on the release has two oversimplifying, two significant challenges. One is ensuring that the price, the way it position its product, it’s priced appropriately relative to the leader so that we can preserve as much margin as we can to sustain the infrastructure that we have.

And the second one is related to the cost dimension which includes from the way we source grain, the way we store grains, but also the number of plants, the way we go about raising chicken and a number of other items.

The first KPI is Nielsen. It is independently managed. It is something that is restricted to those companies that basically subscribe. And what it shows, it is basically the average prices for two months using a base of 100. So it’s the weighted average, as a matter of fact, weighted average of two months showing where the leader is and where Seara is.

So when you see Brasil foods, which basically encompasses all brands at 111, it means they are roughly 10 points above the weighted average. So, that’s where they are. And we are three points under it.

Now our challenge that we have been telling the market is to really work to narrow that gap. And with this KPI, you will be in a position to monitor that. Again, this is also not the only truth because Nielsen cannot capture entirely price points at smaller meat size retailers in Brazil.

But it does give a proper picture and direction where we’re going with our price positioning and how we’re positioning some of the brands. We’re helped towards the end of the year also by some of the brands that we acquired from Brasil foods, especially Rezende. So it is an important KPI for you to see that we are committed to narrow that gap today roughly at 14, 15 points.

The other two are meat byproduct. When you see processed and fresh, this gives you an idea, a very clear idea around profitability. And as we have fresh products here are the ones a lot more volatile than the ones in process in the blue.

Also the more processed capacity we have, the less exposed we are to export markets because then we have means and ways to channel chief raw material, whether it’s pork or chicken in to processed products and definitely enhance and obtain better margins in just exporting raw meat.

Sales mix by market, again, domestic and export, we’re putting the thermometer here or the needle at yellow to green. We would like to see 60% domestic and 40% export. We are 50-50, very much the lines of the leader in the space of Brasil foods.

Page 10, very important KPI, which is our exposure in our sales, so from the domestic market sales that we have, how much is that being directed to small and meat size retailers? This is directly linked to quality and profitability. So the margin expansion you see in Seara Brasil is partially explained by this – it is explained by better logistics, it is not yet explained by lower grain.

So you have not yet seen lower grains enhancing the margin of Seara Brasil. What you see here is pure operational performance in our hands to a large degree. So we have moved from 26.8 to 32.8, and that’s a very significant expansion relative to the year that we had in 2012. But it’s good to see that the first quarter, we were able to expand.

Logistics, we’re happy to show you that we paying attention to it. From 100 orders that we’ve got, 71 were delivered promptly what they asked at that time that they have asked. This has a directly impact to margin, to cash, to the performance of the business. So we are happy to see that we go in the right direction.

And the last KPI, the work starter. It is to start addressing SG&A and particularly the infrastructure we have mentioned before. So, we are not there at all. So a lot of work needs to still happen.

To summarize on page 11, we are also announcing at the same time that we will reduce growth step levels of the group up to R$2 billion until or by 31st of December. It could certainly be earlier. One question is, when will that happen. My inclination is definitely sooner rather than later.

So the commitment is, it will not go beyond this year. It should hopefully happen earlier. What would you do? It will be potentially a combination of transaction. It could be one transaction, it could be a combination of multiple transactions. Two concerns or two objectives that we have, whatever we do, the resulting entity needs to present significant earnings thrust to remain an attractive asset class for you as investors and in us.

For creditors and banks, the transaction has to be material enough so that our growth step level can really be brought to more manageable levels. We have mentioned during the follow-on that we would not adopt the equity market in 2013. That’s still are intention and we believe there are better ways to reduce debt amount looking at the equity market as such.

Seara transparency, we want you to price the turnaround. We want you to be in a position to really feel where we are. We are not yet in what I would call an infliction point. We are at the beginning of a very solid structure improvement in different dimension inside of the business.

I’m confident, but not yet to a point that we would say, "Here we go." I think I can say, "Here we go as far as the integration of Brasil food asset," and I can tell you, "Here we go as far as commitment of management to make it work."

For 2013, the variable compensation of the key executives of Marfrig Group in Brazil are solely aligned to cash flow generation, good cash flow generation. So people are focused in doing what is right, but at the same time enhancing the cash flow generation of the group.

Last but not the least, it’s our commitment to transparency and we definitely accompany that. That is focused on value generation and then we can, in the quarters to come, show you that consistency.

With that, I’ll stop so that we allow sufficient time for Q&A. Thank you very much.

Question-and-Answer Session


Excuse me, ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) Our first question comes from Alan Alanis with JP Morgan.

Alan Alanis – JP Morgan

Thank you. Hello everyone. I have a couple of questions. The first one is related to working capital.

First of all, congratulations. I mean there’s an increased clarity in this presentation, and I should flag that, so very appreciated. My first question has to do with working capital. You’re diving for this R$40 million of improvement, we saw a deterioration still in the first quarter.

Could you give us a little bit more color, sir, how do you aim to turn around the trend of working capital and how do you aim to improve. That would be the first question. And the second question is pretty straightforward. I mean we’re still missing to see some color regarding organic currency, neutral trends. So any color that you can give us specifically in Moy Park?

But also more importantly in the Brazil operations in an organic rate in terms of volumes and prices, and so on, and EBITDA would be highly appreciated. Thank you.

Sergio Rial

Thanks, Alan.

Let’s refer to your question. So working capital, there’s a couple of dimensions, on page 6 of the release, we try to give the market what we call the operating cash flow, which basically that’s where it all starts. It is the operation generating abstracting from CapEx which still, to some degree, there is management digression and abstracting from interest expense, which in our case, the very important piece that is the operation generating cash.

And what you’re seeing for the first time the change from fourth quarter to first quarter 2013 is significant. So we pretty much came to what I’d call breakeven or close to breakeven. It’s worth 25 million but close to breakeven, which is a very significant shift from fourth quarter to first. That’s point number one.

This does not, in anyway, is helped by a different environment for grain prices. I expect grain prices to help Seara Brasil in particular around R$0.5 billion. And then you’re going to see more towards third quarter and fourth quarter.

Seara Brasil is working. And please do not construed as the guidance, but Seara Brasil is working towards all the cash flow generation is still in 2013. Now I believe at this point in time that if grain prices remain the way they are, corn prices in Brazil are under 35% from where they were in the past.

There’s a very good chance. Doing what we need to do, closing down plants that are basically in cash but generating profit, continue to reduce cost overall and increasing price, not increasing price but managing margin more than increasing price.

We should be on our way to a better result for 2013. But I don’t think that’s enough, so I don’t think that’s enough because I think we need to reduce the interest expense accounting. And that’s why I’m putting a target in the ground and saying, "We will reduce growth stat by at least 2 billion because that will have a significant impact on the expenses, on interest expenses for the group.

We’ve got to bring that and we’ve got to execute that. And we are working on that as we speak, so don’t think that as because I announce that we’re just quiet. We are working as we speak. We are not using any bank. We’re not doing anything; we’ve got to do it. It could be that this had a couple of transactions, one or two. Three, it could be one transaction.

But we will be protecting and observing the earnings of the remaining pieces parts of the group because that’s where we are committed to.

Alan Alanis – JP Morgan

Got it. Okay. Thank you.


Our next question comes from Wesley Brooks, Morgan Stanley.

Wesley Brooks – Morgan Stanley

Hey guys. So a couple of questions from me, also on Seara. Just to understand, obviously Seara improved through the first quarter with the full rate, with the utilization rate and with grains. Can you give us an idea of where margins where in, say, January versus where they ended the quarter?

Sergio Rial

Yes. So, you are absolutely right. I will just correct. I mean they haven’t really been helped yet by grains in the first quarter 2013. They will more towards third quarter than they were in the first quarter.

And the question of margin quarter ‘12 to quarter ‘13, Ricardo, would you like to comment?

Ricardo Florence

As Sergio was saying, the effect of the grain price starts to happen at the end of March. This means that the stock on March takes place not there but between 45 and 60 days. The full effect of the decrease of the grain prices is expected to take place in the third and in the fourth quarter.

A little bit in the sec, but really start to happen in the third and in the fourth quarter.

Wesley Brooks – Morgan Stanley

Again, but even excluding the grains then just for increasing the full rates and the utilization and presumably the quarter started at 4% or 5% EBITDA margin and finished above the 6% at your average for the quarter, right?

Ricardo Florence

Yes, there’s lot of different effects there. But I’d say that this is the ballpark.

Wesley Brooks – Morgan Stanley

Okay. And then just in terms of the utilization rates of those Brasil food assets, what level do you think you can get them to buy, say, Q3 or Q4 end of the year? Whatever your target is. And what is the incremental sales that that could add.

Sergio Rial

So we’re trying to target at least 70%. There’ll be a function of how the Brazilian economy is going to be performing also. We’re not seeing the similar expansion in terms of volume that we saw in 2012.

But we still remain pretty optimistic overall that Seara can continue to grow volume, especially as we penetrate more and more in the small to meat size retailer. That’s a very important piece for us to get our product and volume increased. So I would say around 70% at this point in time.

And then the second part is what is the additional margin and the additional revenue that will come with it. There’ll be a function also how much we’re going to be able to do that through different channels than the large retailers, the large supermarket chain.

So I’m not in a position to give you the numbers now. But we can certainly do some calculation and get back to you without any problem. As long as it doesn’t constitute guidance, but we can certainly go through the map.

Wesley Brooks – Morgan Stanley

Okay. Thanks. And then just one quick one just to make sure I understand. The R$2 billion of the debt reduction, that is including potential asset sales, right? Just adding up the numbers. You’ve got about R$250 million reduction from working capital and all these other things.

I mean to get to that level, presumably –

Ricardo Florence


Wesley Brooks – Morgan Stanley

Thank you very much and congrats.

Ricardo Florence

You’re welcome. Thank you.


Our next question comes from Alexandre Miguel with Itau BBA.

Alexandre Miguel – Itau BBA

Hi. Good afternoon. My first question is related to the beef business. You mentioned in your press release that is to expect the pressure margins for the beef business in the second quarter.

I just wanted to understand what do you mean by that if you expect some sequential improvement versus Q1, but maybe below last year levels or just to get a better clarity on this.

And my second question is related to Seara Brasil. How do you think you can continue closing the price gap versus the leader if you plan to continue raising prices for processed food products? And if you in Seara Brasil out of that KPIs that you showed, if you see continuing improvements in rates, maybe if you can share with us April levels if they continue at the same levels than March. That will be great.

Sergio Rial

Okay. So let’s go beef margin, so in fact we were one of the first to give the market a signal while the rest of the competition was relatively quiet. So we always had the pressure at the very healthy levels. So we believe this is the case. Cattle levels in Brazil are unchanged, meaning the cattle herd hasn’t really changed much.

So I don’t see pressure of cattle going down in terms of price, nor do I see a problem. So it’s relatively well-balanced. What has happened for those on the call is that the industry overall has increased its slaughter capacity. So a lot more capacity went into the marketplace while the export markets have been less compelling from the margin point of view than they think they were.

So I think we just had more capacity, balanced supply, export markets being less interesting. We have benefitted from our relative presence in the food services space, which is actually the origin of the controller, Marcos Molina who basically started the business in the food service space in Brazil.

So I think we have formidable entry in restaurant chains and a number of other outlets in Brazil that has helped us to keep margins still in good place. So we also believe that by doing what we’re doing in Argentina and Uruguay should help to sustain the same level of margins or at least to sustain margins at very good level.

So don’t expect well that what we said on the fourth quarter our margins may look more like ‘11 than necessarily ‘12. But we will believe, again not guidance, but we still believe we’re going to have a solid performance in the beef space.

Seara Brasil, the fuel rate. I did mention. In the first two weeks of May, we actually reached levels above 80. So nothing to celebrate, but I feel very comfortable that the worst that we experienced in the fourth quarter. And then we so rightly disclosed with a lot of bank but we certainly wanted to disclose to get the market to explanation about where we were at the same time.

Well, we’re just giving you concrete evidence of improvement in that respect. And I think you have something else about Seara that I missed.

Alexandre Miguel – Itau BBA

No, no, just the price gap versus the leader, how are you trying to close it?

Sergio Rial

The overall starter would be to keep 10%. It’s going to be hard. I mean we’re dealing with formidable competitor in many, many dimensions. But they also aspire us to be better.

So 10% is something that we really would like to aspire. And again, we will be giving you this on a quarterly basis, so you’ll be the judge.

Alexandre Miguel – Itau BBA

Okay. Just a quick follow-up, Sergio, to clarify, you mentioned about reaching free cash flow is positive in Seara in 2015, by that you mean that you will reach in a certain quarter in the future or you’ll close the year with a positive cash flow generation in Seara Brasil in 2013?

Sergio Rial

It’s a good question. I think third and fourth quarter is when you start seeing potentially a significant reversal on the back of obviously significantly lower grant price, but more than 30%.

So I think we’re expecting on top of the operational work that is at hand. So I think it pay attention to third quarter and hopefully fourth quarter, which is the peak, we have to be much better prepared to lever the fourth quarter that we were in 2012 in the midst of the integration.

Alexandre Miguel – Itau BBA

Okay. Thank you.


Our next question comes from Jose Jordan, Deutsche Bank.

Jose Jordan – Deutsche Bank

Hi good afternoon everyone. I just want a clarification. On slide 9, you show the price evaluation for yourself and the market leader, et cetera, and it barely shows any increase in the August-September timeframe when as I understood it there have been significant price increases implemented by Brasil Foods and the insights as to why Nielsen doesn’t pick that up would be great.

And then the second question is this, would you give us an update on the Baskarne port [ph] terminal that had been mentioned for awhile as a potential asset sale? But obviously it’s been on hold. Is that off the table now or is it still a potential source of additional cash for deleveraging?

Sergio Rial

Excellent question. And I think it’s answered by we were right there in the midst of the integration of the assets. I think the company wasn’t necessarily in a good time. So this is the impact of the integration started actually in August and we sensed it and feel it more in the fourth quarter of 2012 while the leaders was definitely pushing our prices.

So all of these are all operational challenges as opposed to the marketplace which is reflected in the unchained price potential missed an opportunity, that’s what I would call. The Baskarne’s port terminal, yes, I mean we have a number of small non-strategic assets that maybe sold and are going to be sold. They are non-material from a capital structure point of view, but the answer is there were two potential buyers. There is still one buyer and it’s basically still tied up in negotiations on warrants and reps [ph] and a number of other things.

So it can still happen in the second quarter.

Jose Jordan – Deutsche Bank

That’s great, thanks a lot.

Sergio Rial

Thank you.


Our next question comes from Josephine Shea with Hartford Investment Management.

Josephine Shea – Hartford Investment Management

Thank you very much for the call. It’s very helpful to have the key indicators.

I have a question on the credit side. During this quarter, there was chatter that you broke one of your banking covenants, perhaps you can give some color on what actually happened. So have you refinanced any bank debt during the first quarter? Was there a need to ask the banks for any changes in any of your covenants on any of your bank debt? And do you foresee a need to seek any additional covenant release that would be helpful to give a final answer so the market will know what was going on during the quarter?

Sergio Rial

Excellent, thank you. I’ve been with the group slightly more than five months because I remember last year, during the same time, there were rumors around Marfrig not complying with the covenant in the second quarter of 2012. Then Martin-Brower’s transaction takes place which was the sale in divestiture of the distribution arm of Keystone and such a problem did not happen.

Then in the first quarter of 2013, on the back of relatively weak, not relative, weak fourth quarter and the fact that the Brazilian stock market also moves into a different rhythm, we are one of the most liquid stocks in the marketplace. And when you are one of the most liquid stocks in the marketplace and that you have clearly a leverage level that it’s not commensurated to where we would like to see, some speculators and market makers start selling our stock short which is capitalism in action.

There is nothing we can do except work, but unfortunately then towards the rumor primarily thrown in the marketplace by some of these players saying that we would have broken covenant in the first quarter. And the only thing and the right thing the company did was to refuse profusely such a statement.

That of course is very difficult unfortunately to see where it’s coming from because he was actually a field director. So he has no other intention than to harm the stock and benefit to short position.

As you could see, our leverage ratio has actually come down from first to first, ‘12 to ‘13. We have not broken any covenant with any bank.

And then the second part of the question is could that happen? Well we are in the second quarter. We have no visibility of that at this point in time. The visibility we have is we want to reduce the debt levels of this group. That’s what we are committed. Don’t expect it to happen in December. We’re working to see it happening earlier.

We are also taking a number of actions that you could see in terms of improving the cash flow, not necessarily the EBITDA, but the cash flow for the second quarter. And Seara Brasil and the rest of the businesses are working as hard as they can to ensure a fair second quarter.

So at this point in time I couldn’t give you any other remark but this because it’s not being direct at this point in time would be visible to us.

Josephine Shea – Hartford Investment Management

That’s great. I understand that every quarter bank debt rules over. That’s normal. That’s regular course of business.

Sergio Rial


Josephine Shea – Hartford Investment Management

So was there any bank that was rolled over? And second question then is in relation to this, do you have any financing needs or other debt that rolls over in the regular course of business over the coming quarters?

Sergio Rial

Well just, you know, what we have is really what I would call the more working capital type of transactions. They’re being rolled over as we speak. I think banks and creditors are reacting positively to our commitment to reduce debt levels with the specific numbers and targets.

Now, it’s up to execution. We just need to execute. We need to stop talking about leverage and definitely reduce it, so no concerns at this point in time. At this point in time we’re rolling over short-term debt.

We have a number of payments in the first quarter, the bencher related, we’ve paid out a number of the benchers, R$200 plus, so that’s being paid, a very expensive debt as a matter of fact. So that’s being paid now. But no concerns at this point in time with any global or third quarter and fourth quarter to CCR [ph] generating cash, so we will go beyond that.

This needs to happen, but along the lines, we also need to do something with the portfolio to reduce down debt.

Josephine Shea – Hartford Investment Management

That’s great. And my last question and I’ll go back in queue. On the logistic side and sale side could you perhaps give a little bit of color? The last time you said that some new sales people that came with the acquisition of BRF Foods were slow in the uptake of the new products.

It’s understandable, but perhaps you can give an update on where we are today on the sale side of the organization and perhaps a little bit on the logistic side whether you’ve seen some notable improvements on logistics and distribution? Thank you very much.

Sergio Rial

Thank you. Now, I mean, a part of your answer is definitely in the price index. So when you see, if you look November-December ‘12 we were at 94.2 relative to 94.8 and then we move up to 97 in the first quarter. That’s work. That’s helping sales force positioning our product a lot better than they were in the past under seen by better resistance or delivering consistency which you see that also in the fill rate ratio.

So if you see January, February on slide 10, you clearly see the improvement from February to March given our average. So this is the way that we think it’s better to give you data, tangible data for you to judge that.

The teams that were higher 600 people, of course they are now – they’ve been here now six months, Brasil Foods assets are now with us for nine months. So nothing like time to make us better, right?

So overall, things are going in the right direction, but it’s a lot of work, I mean we are in the early days, but we are optimistic so far.

Josephine Shea – Hartford Investment Management

And the logistics?

Sergio Rial

Well logistics, I mean there’s nothing more I can give you besides the fill rate which you see there on slide 10 and the other thing that I did share is that we’re going to be reducing the cost of logistics by closing down four, at least four distribution centers. So those are two tangible measures without impacting anyway our delivery process.

Josephine Shea – Hartford Investment Management

Perfect. Thank you very much and good luck for the rest of the turnaround.

Sergio Rial

Thank you.


Our next question comes from Alex Robarts with Citi.

Alex Robarts – Citi

Thanks. Hi, everybody. I’ve got two questions and I guess the first one is perhaps a nice follow on with what you’ve just been talking about. It essentially focuses on the distribution and point of sale in Seara. I mean it seems to me as we look out in this turnaround process in the second quarter besides grains, margin benefit is going to come from, it sounds like, further penetration into the small and mid-size retailers.

And as you look out, I mean, you’re 32.8% right now of your sales in this small and medium size, how is that process going as far as your penetration? How is your portfolio been accepted in these mostly newly acquired right points of sale from Brasil Foods?

Are you kind of getting to the maximum penetration? I guess, at some point you talked about reaching 55,000 points of sale going to 80 points of sale? If you can give us a sense then of how you’re going in terms of the penetration rate, how has been the receptivity, right, of your portfolio and to the extent that you’re happy or there’s still further room to kind of adjust between third party and direct distribution. That would be kind of the first question.

Sergio Rial

Okay. So on slide 10 I mean clearly we are trying to share with you the level of penetration that I think we have been able to accomplish in the first quarter. And why is that happening? It’s happening for two reasons.

First retailer is smaller, mid size, they need a second brand. They need a second option. They need a second company that can actually provide them products. I mean Brasil Foods I guess, they probably have the penetration in market share in excess of 60%. So here your interest [ph] is small and mid-size retailer having a second choice that it’s well accepted by customers, I mean, it’s pretty important.

And the Seara brand, it’s probably the only other brand with national scope and reach that can actually create the design and the demand by a number of players in the market to buy our products always on the assumption that we are not compromising the quality.

So that’s why we think it’s so important to share with you this KPI so which is directly linked to the profitability and margin expansion of the business.

The second part of your question is we have as we get Brasil Foods assets and a number of distribution centers I think we got eight, we are now rationalizing. We need to get a leaner infrastructure for the logistic footprint of the company so that we can still deliver consistently, but definitely with a lower cost.

So the cost I mentioned of Seara Brasil hasn’t yet been addressed. This is the beginning. And again, the art and the science will be doing it without ever interrupting of the consistency of what we do and what we deliver.

The third piece in terms of acceptance also it’s related to innovation. So we as a company, we have to ensure that we continue to innovate but not necessarily by creating news to the world, not at all but just by bringing products that are good. They could be original cuisine. We just launched a number of ready-made meals in Brazil with a very good acceptance. There’s one for those who are Brazilian that knows it, it’s called [inaudible] which is potato puree with mean’s [ph] beef. And that is having a phenomenal progress in terms of sales.

So adjusting product mix, making sure that we are innovating appropriately and definitely also enhancing the capacity utilization of the plants to have this capacity to do so. When we are closing for plants, what we are actually doing is transferring equipment, process equipment to bigger plants so that our bigger plants can actually have better efficiency levels.

Alex Robarts – Citi

Okay. So basically you see further to penetrate beyond the 33% level, right, of your total sales? Is that fair?

Sergio Rial


Alex Robarts – Citi

Okay. And in terms of just, sorry, the split right now, you’re happy with where you are vis-à-vis third party and direct distribution where we see more of a shift toward a direct distribution.

Sergio Rial

That’s a tough question. I don’t have an optimal mix, but I think it varies because it really varies from market. It’s also varies from the third party. I think Brazil has not yet created – we have a number of very, very good third-party distributors and logistics companies.

And for us, it’s in the early days. We got to fix our case. We got to have much better platform before we even contemplate insource and outsource. So we still have work to do in our house so even bringing the right design for our logistics so that we can start thinking about what’s next, okay?

Alex Robarts – Citi

Now, fair enough, okay, okay. Second question and last one just intrigued about this new commercial model, right, that you’re rolling out in Moy Park and as I think about it, I guess there are three elements to the question.

First is timing. In other words, is this a strategic thing as you see [inaudible] and viand and do and these folks really struggling, is this part of the motivation for why now because it would seem to me that you’re doing a lot of other stuff back in Brazil, so to engaged in this? So the first part is the timing question.

The second is there a margin rationale behind this new commercial model or is it kind of a top-line volume? In other words, do you see this enhancing at the end of the commercial model execution kind of a margin benefit to Seara? And then the third one is I mean just a tag along here, is it safe then to assume that any asset sales that are contemplated would not then be within the Moy Park domain if you’re spending this time doing a new model?

Sergio Rial

That’s a good question. Let me try to simplify. It’s relatively simple. So here we have one of the largest European food companies selling over $2 billion and we actually have different businesses of Marfrig Group searching the same customer.

So Seara Brasil would sell raw poultry to Tesco. Moy Park would sell processed and fresh poultry to Tesco. Keystone Asia would sell poultry out of [inaudible] to Tesco and if that wouldn’t be enough, Brasil Beef would also sell beef to Tesco.

So it’s a wonderful thing to have the portfolio we have, but it’s not a good thing when we are so fragmented as we approach the marketplace. So think of Moy Park being our go-to-market commercial engine so that we can actually extract better market intelligence how to position the portfolio of the group.

It is not about having all persons selling everything, it’s about having in one infrastructure more intelligence how we price and how we sell it and also how we deliver the logistics of all these different things as they were approaching your PM mark we’re not even coordinating. So that’s a very tangible synergy that I expect to see happening with Moy Park.

Now, then the second part of the question, "Fine, Sergio, so what, what is the market expansion for a Moy Park?" Give us a couple of quarters because we are just starting investing. We are managing and measuring how are we going to be able to expand margin which could actually be in Seara Brasil as opposed to Moy Park, but how does better alignment of the go-to-market in Europe will help the group overall?

We will come back more towards the third quarter and fourth quarter.

Alex Robarts – Citi

Thank you.


Our next question comes from Aaron Holsberg with Santander.

Aaron Holsberg – Santander

Good morning and congratulations. A few questions, I see a lot of progress, but looking at your short-term debt, we were expecting short-term debt to go down a bit following the equity issuance, the bond issuance and the stretch out of Keystone. But it looks like it’s stated about the same level and so is cash.

Are you looking to decrease your short-term debt beyond this level and what’s your strategy to do so?

Sergio Rial

I’ll give it to Ricardo

Ricardo Florence

Yes, hi, Aaron. I will say that in the long term, 20% of the total debt is a more reasonable level to work with. I wouldn’t see this in the short term. What we have done is basically part of the operations we have done in ATCs, and ATEs and pre-payments of export, all of them related to trade parts thus a profit of operations, usually they mature between six months up to a year.

But you can see that together with this, we didn’t move in order to lengthen the propriety of the debt that you could see that’s increased in 0.4 years. As through mention in one of the previous questions, we have not had any problem with the renegotiation or the business base as part of our strategy of what we have done exactly in order to keep under control the average interest that we have in on our debt because you know that this type of operations, they have an interest rates that’s lower than the longer term operations.

The foundation is far from our strategy.

Aaron Holsberg – Santander

It is a trade of. Would you be looking at least to have short term that’s lower than cash position?

Sergio Rial

I’m not so sure. You see the short-term debt that you see is primarily really working capital. It fluctuates to a large degree with the working capital needs of the business. What we would like to see really is just lower debt whether it’s short term or long term and that’s why we are committing to the 2 billion hopefully one day we are going to be able to come and say "We did it", as opposed to saying, "We will do it."

So we are comfortable with the will, but at least we are being very specific about how much and by when.

Aaron Holsberg – Santander

Okay. And the other thing is I just want to make sure I understood the answer to a question asked earlier. Following the S&P downgrade, many people were wondering if there’s anything in any of your contracts or other debt which could be triggered by a downgrade or by an additional downgrade.

This just came up because we saw it in Mexico there were a couple of issuers were – many different contracts were triggered and unexpected things happened.

Sergio Rial

That’s a wonderful question. So the answer is absolutely no. In fact whatsoever, we are disappointed but we understand. We’re also at least encouraged in the S&P release they say if not only we come with a target of debt reduction but we actually execute it, then we will review our rate.

So I think we got to where unfortunately we got but the straight answer is no impact whatsoever at this point in time.

Aaron Holsberg – Santander

Excellent. Thank you so much.

Sergio Rial

Thank you.


Our next question comes from Christopher Vandergrist with Hartford Investment Management.

Christopher Vandergrist – Hartford Investment Management

Hello. I want to say congratulations for the strong quarter. I guess I had one question that I asked in the last call related to a couple of taxes. You guys had mentioned that you had maybe a committee looking at addressing that. So it looks like it’s a use of cash this quarter that was almost 300 million BRL.

I’m just wondering what are your [inaudible] reverse going forward, let me stop from that, thank you.

Sergio Rial

I think we certainly haven’t been I wouldn’t call it very stewed in how we monetize some of the best credits that I think businesses in Brazil generate not only related to us. I think what we have seen with the Brazil assets walk is that we have stopped adding more to the pile, but we haven’t really come with a plan and an aggressive plan how we’re going to be monetizing it.

This is working progress for the third quarter, so that’s one of the areas that we want to spend a lot more time and being very realistic about what we can and cannot do to the marketplace. There is value in that that we will be working. So that’s one of the areas of focus for us and particularly in the third quarter onwards.

Your question in relation to the cash position and it’s clearly the first quarter it’s an improvement, but it’s not sufficient. It’s not sufficient. I wish we’re doing everything we can with the velocity that we can to ensure that the market gets reassured that we do what we need to do.

We have the creditors helping us and backing us. We have absolutely no concern at this point in time particularly the four critical banks supporting group and they’re still supporting and they’re seeing it, they’re seeing the work that we are doing.

But it’s still going to take more than a couple of quarters. And hopefully I think with a rightly so for fourth quarter, we decided to be as transparent as we could possibly by probably in the worst quarter of the company for a long, long time and transparency short term brings a cost. And hopefully by sharing more and more, the market will be able to price us better.

But answering your question is on the operational level as we call it, the operational cash flow we certainly came to a breakeven situation. So that’s prior to CapEx which has some discretionary levels and prior to interest expense.

So we are working hard to increase that number on the operational cash flow as hard as we can so much so that the entire compensation of the key executives in Brazil is aligned to cash flow generation. And of course, we have to be sure that these people are not going to just be taking measures for short-term’s sake.

But that’s one clear goal that alignment is there. If we are able to reduce debt between second and third quarter we’ll be able to reduce interest expense account and that starts with the process of improving some of the capital structure but also the cash flow position of the company.

We are announcing what we’re going to do. Now, it’s upon us to execute on the debt reduction. At least we are giving in this quarter some signals that operationally some signals we are improving.

Christopher Vandergrist – Hartford Investment Management

And then on I guess one-time items, the other operating expenses, I didn’t see the explanation of that in the note, could you comment on that?

Sergio Rial

Fair. I’ll give it to Ricardo.

Ricardo Florence

Yes. In the other operation expenses and revenues, what we have there, it was a higher amount of provisions on the legal issues that indeed in the quarter we considered the most part of them be non-recurrent and this is why we included them in other revenues and expenses.

This is the most part of what we had there.

Christopher Vandergrist – Hartford Investment Management

So should we add then basically that 68 BRL to the headline EBITDA number to get recurring EBITDA of like 560? Is that how we should view the company?

Ricardo Florence

Yes. If you consider it an adjusted EBITDA, yes, those would be the case.

Christopher Vandergrist – Hartford Investment Management

Okay. We shouldn’t expect those at all moving forward?

Ricardo Florence


Christopher Vandergrist – Hartford Investment Management

Great. Thank you.

Ricardo Florence

You’re welcome.


Our next question comes from Denis Parisien with Deutsche Bank.

Denis Parisien – Deutsche Bank

Hi, all. Thanks very much for taking so many questions and being so patient and congratulations on the results you attained. I’m wondering about the cost of restructuring that we might see this year typically shutting down plants and distribution centers entail some redundancy cost and what not and provisions.

You mentioned that there may also be some extraordinary gains from selling such assets in Argentina and in Brazil. Can you tell us anything about the net or any estimates of what the upfront costs are and what the ultimate gains might be?

And then my second question would be apart from the R$2 billion target for gross debt rather, the company has done a valiant job of selling assets here and there over the past couple of years without attaining a whole lot of deleveraging. Do you have a leverage target for the end of the year that we could attach to the R$2 billion gross leverage reduction target? How will we feel comfortable that the reduction and gross debt by selling assets won’t give us a reais-per-reais reduction in EBTIDA and no deleveraging at the end of the day?

I appreciate it if you could address those two issues, thank you.

Sergio Rial

Okay, very good questions. For the first part of the question, the reason why we haven’t been very explicit around what the potential impact [inaudible] could not be from an accounting point of view is that in the case of the plants, we’re actually in discussions to sell them.

So until we know where we stand, it’s difficult to really give you a fair number about the potential impact. And I’m now referring to the four plants in Brazil.

In the case of Argentina, the Argentina that you are seeing there in terms of potential, that’s where you’re taking into account our loss related to – because here, it’s either closure where people being unfortunately dismissed or pending out the plant to a local operator with all of these liabilities, with its labor or other liability which is our preferred root and there are players interested.

In the case of Zenda, in Uruguay, there’s a plant in South Africa that are potential buyers. So everything that we are doing, we will close. I mean the decision to close, but properly is to sell so that we do not take the accounting impact here or there in which will be different depending on the asset.

I’ll be in a better position to give you a full picture as towards the end of the second quarter. That will be my preferred route.

In terms of debt reduction, for our R$2 billion debt reduction, gross reduction, you can take into account what point of EBITDA or leverage reduction. So what is our ultimate goal? Probably more around 3.5 and why hasn’t that helped in terms of divestitures help the group? Because I don’t think we were definitely done with concrete signals of the improvements of Seara Brasil.

So Seara Brasil has sold the debt reduction as such it is not the [inaudible]. It has to be debt reduction coupled with clear and tangible operational performance. One relying only on the operational performance, we’re going too slow. Relying only on sales, we’re fooling ourselves. So it is the combination of both that could actually help the group long term.

Denis Parisien – Deutsche Bank

I couldn’t agree more on that last point. And the operational improvements I think, as you pointed out consistently throughout this call and the last one, I think focusing on working capital management which is obviously the key here, can you give us any guidance for the full year working capital figure?

This is the number that is basically been hampering free cash flow generation at Marfrig forever and it’s continued to accumulate in the last 12 months. And it’s obviously where you’re very focused on now, can you give us any guidance on that figure? I understand it maybe a little bit early. Perhaps you prefer to do that in the next quarter as well.

But I think in terms of providing analysts and investors with metrics that we can follow to increase your transparency and improve our understanding of how you’re going to arrive at getting to free cash flow some guidance on the working capital numbers would be much appreciated.

Sergio Rial

Absolutely. And I think what I can tell you now so that we do not necessarily postpone the question, I believe at this point in time with what we know, in Seara Brasil in particular, we will have around R$0.5 billion less of working capital needs for the remainder of the year despite being a significant bigger company particularly with the integration of the Brasil Foods asset.

The same phenomena it does not take place to international front because Moy Park is a lot more relying on wheat and Keystone although relying on corn, they are very much 100% hedged. So they start the year pretty much without taking any price risk at all.

So fluctuation does not really matter to a large degree on working capital unless it will increase volume and capacity.

In the case of Seara, it’s different. We are hedged philosophically, but in Brazil, we don’t have the same sort of debt of futures market, so you’re hedged from volume. You’re not necessarily hedged as much as you would like on price. And we are deliberately being a bit more exposed on price on the back of this significant crop expansion in Brazil.

So in summary, for Seara Brasil there should be a benefit around R$0.5 billion for the current year.

Denis Parisien – Deutsche Bank

And I can take that from the beginning year number or from the end of the first quarter number and deduct the R$0.5 billion from the working capital?

Sergio Rial

Yes. I would say taking it from second quarter onwards because the back of lower granted [inaudible] is not at all sales in the first quarter. This will be starting to get being perceived through margin expansion in the second quarter and more noticeably in the third quarter.

Denis Parisien – Deutsche Bank

So I’m taking it that you have roughly three to five months, three to four and a half months of grain inventory I guess to work through?

Sergio Rial

Correct, correct.

Denis Parisien – Deutsche Bank

Excellent. Thank you. Thank you very much, I appreciate it.

Sergio Rial



This concludes today’s question-and-answer session. I would like to invite Mr. Sergio Rial to proceed with his closing statement. Please go ahead, sir.

Sergio Rial

Well, first of all again, thank you for those supporting the company for a long, long time. Thank you for trusting us. Thank you for believing in what we are trying to do. Help us to be better. Give us your feedback on how we could improve. We just heard certainly on the cash flow, it’s an area that we need to continue to improve.

There’s a lot of work ahead of us. What inspire us is the true potential of the group, but we also know that that potential will not be fulfilled with a significant improvement in performance and a significant reduction in this debt.

So we are committed to that, Marcos Molina and I. We’re completely in sync in making that happen so which is sometimes in family-controlled companies, the desire to get it done tends to be challenged. It’s not the case here. So we are very, very much committed to talk to the Board of Directors, through Marcos being the Chairman of that Board, to myself and the rest of the key executives of the company, that’s what we want to do.

So we’ll continue to work quarter-over-quarter, it’s only 90 days. There’s a lot of work. We know what we need to do and again it’s never too much to say thank you for the support, okay? So thank you very much.


That does conclude our Marfrig conference call. Thank you very much for your participation and have a good day.

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