BRF S.A. Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: BRF-Brasil Foods S.A. (BRFS)
by: SA Transcripts

BRF S.A. (NYSE:BRFS)

Q2 2013 Earnings Call

July 30, 2013 10:00 am ET

Executives

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

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

Analysts

Wesley R. Brooks - Morgan Stanley, Research Division

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

José J. Yordán - Deutsche Bank AG, Research Division

Alexander Robarts - Citigroup Inc, Research Division

Sambuddha Ray - JP Morgan Chase & Co, Research Division

Denis Parisien - Deutsche Bank AG, Research Division

Operator

Good morning, and welcome to BRF S.A. Second Quarter Year 2013 Conference Call. This conference call and the presentation are simultaneously transmitted via webcast in our website, www.brf-br.com/ir. [Operator Instructions] Forward-looking statements related to the company's business, prospectives, projections, results and the company's growth potential are provisioned based on expectations of the management as to the future of the company.

These expectations are highly dependent on market chain, economic conditions of the country and the sector and international markets, thus are subject to change. As a reminder, this conference is being recorded. At this conference are Mr. José Antonio Do Prado Fay, Chief Executive Officer; and Mr. Leopoldo Saboya, Chief Financial Administration and Investor Relations Officer. I would now like to turn the call over to the management.

José Antonio Do Prado Fay

Good morning to you all. Thanks for having us in this results presentation for the second quarter of 2013. I would like to begin saying that what we are showing is pretty much in line with our talks in the last 3 or 4 quarters' meetings. The main figures of the company is showing good figures, robust, positive financial position and good operational figures. Of those few, we believe that we can have better figures in the future, but considering the scenario and the global scenario and even the Brazilian scenario, we think that the company is showing very, very positive results. The main figures for this quarter, I would like to pinpoint the relief in cost, which we believe that would happen. Since October, September last year, we are feeling that the market, the grain price should have some relief during 2013 and not that much what it's really happening. We see corn mostly in Brazil detaches from Chicago prices and we have a strong and very big winter crop for corn, which makes the price, the corn price really to touch the minimums. And the soy still -- still shows volatility in the site complex, still shows volatility and still resists prices -- has a price resistance and this is completely related to the dollar. So it's one-on-one in dollar which means that we still are facing some kind of pressure in soybean meal, mostly.

The second point is the FX volatility during this quarter. We have a strong volatility of FX real/dollar. All in all, this is good for the company, but it puts some cost mostly for internal markets. But all in all, this increase, the devaluation of real, it's good for the company.

Another point is the start up of our innovation center. We just started up our innovation center near São Paulo, in São Paulo area in the city called Jundiaí, where we are concentrating all of our knowledge in R&D, which we do not have done it before because we have guys that spread around the country and we have many -- R&D centers. Now we've concentrated that in Jundiaí and we put there very more than one of the best in -- the world-class innovation center. This is crucial to keep on improving our strategy, developing our strategy, which is to focus on value-added consumer products and we are very, very keen about the possibilities that it's opened at this innovation center.

Another point is the bonds issuance. We have a very good results on our bond issuance and Leopoldo will get in details after, but I really believe that it was a very, very good operation of the company.

And another point, an important point that during this semester, we are finishing the commercial infrastructure that we need to consolidate to have more productivity on our sales force, which means that from now on, we can have all our progress, all our brands in our distribution centers. We can have the same front-end in our sales force for everybody. This was very, very important to keep on and it's one of the last steps in our merge processing.

So putting some figures in internal market, I would say that what we really want to figure out is that we are delivering a promise that we made in the second quarter, in the end of third quarter last year, when we finished the ruling of antitrust authorities that we will -- we had planned to recover volumes that we're losing in the market since we suspended and we sell some brands and some brands were out of the market. So we recovered that. We have a strong figures in growth when we looked for the same stores, let's say. So, same-store sales are very, very strong and this is due to a very good planning and excellence in executions that the company has during this time.

For external market, although the global scenario still is challenging, Europe is showing some improving and mostly, Middle East keep on having a good performance. I would say that we have the advantage of the FX of course, but the good management of volumes, price and cost made a very interesting recovery in this market.

For food service, we see some re-acceleration of the growth, mainly due to the consumers are making choices where to go regarding to the out-of-home consumption. And we see that still, we maintain our volume. We have let's say, a poor portfolio and we lose some mix from basic -- returning to the basic more, let's say, the food service area.

And the dairy products, we are posting very good results in dairy products. Part of this is due to structural measures that we did since September last year, where we right sized the [indiscernible] and due to the growth in cheese, we could put on place the strategy of the decreased UHT with milk, which has poor profitability, normally in Brazil. And so, this result is partially is due to structural measures and of course, partially is due to conjuncture of factors that are being positive, mostly due to the dry that happens in New Zealand, that makes all this factor more profitable during this semester, let's say so.

So now, I'll ask Leopoldo to put some details and then we return for Q&A. Thank you.

Leopoldo Viriato Saboya

Thank you, Fay. So moving forward here now, looking into more details, the results and performance of each business unit, let's now jump to Page 6, please. Here, we have the first half at a glance. So the contribution of margin for the mass market and also the export market, you can see a very balanced contribution from last year, so a good recovery from last year, poor performance, though. And very well balanced between the 2 main markets, Brazilian and export markets.

On next page, we can see that practically[ph], all this 2.8 bps of enhancement of our EBIT from 4.2% to 7%, while due to the enhancement of our gross margins, so it was a very well managed performance in pricing against cost after having a continuous increase in our cost basis as was explained by Fay.

Turning to Page 8. You will see that all this better performance was fully translated to the adjusted EBITDA and also to net income. So much better figures in both quarter basis or a half basis where we have this performance, putting the company fully back to our business as usual performance. In fact, there's even higher than the historical margin levels for the first half of the year.

Now on Page 9, we start a comparison that I think is pretty important for us to focus on, to understand in the short term. So comparing the Q2 with the Q1 '13 to see what were the changes and how we see that evolving looking to the full year of 2013. Here, you can see that we, against all odds, we could even increase the gross profit of the company by 1.4 basis points, but the adjusted EBITDA only grew by 0.3 basis points compared to last year, mainly due to more expenses in the second quarter that I will give more detail in a while.

On the net income effect, this drop from first to second is fully due to the FX effects on the net exposure and just reminding that this is a noncash effect, though.

Moving forward on the next page, on Page 10. We see this evolution of our adjusted EBITDA same as last year towards now. So our consolidated EBITDA for the first half was 12%, which is above our historical levels. In fact, the historical levels of the company, if you remember, for a full year was around 11.5%. This is the number that we always say premerger. So the first half of the year, which is the weakest half for a normal year, showed 12% and that as emphasized was pretty good performance. Of course, it's still below our potential and we're even facing this results, a lot of difficulties or volatility that is part of our business.

Moving to the next slide, in line with the top line of the company this is another factor to be emphasized, that we can see that on a quarter basis, we don't see any kind of effect of a potential revenue cliff that could have happened in our results if we did nothing regarding the effects of the execution. So we can see on a quarter basis, our top line growing in fact, and in a half basis, it was 11.8% higher revenues than last year.

On Slide 12, we have the breakdown of our net sales. And this, if we consolidated all the categories that we call process, you have the figure in the detail in our earnings releases. You can see that the amount -- the relative amount of processed food by revenue in -- year-to-date is almost the same we had last year. And remember that everything that we have to sell and to suspend was predominantly, not to say full, processed and branded, which emphasizes our capacity and our performance to fully recover this percentage loss in processed food now in this year 2013.

Regarding cost of goods sold in this quarter have been pretty much what we expected, there was some accommodation, some easing in the cost space. It was not a big reduction, partially offset by the FX impacting in the cost but it was positive, specifically for the international market, because it was exactly the opposite effect in Q1 where the pick up in the corn prices affected the international margins. I will give more details later on.

Just giving some more figures on what is going on in the market. For corn, when you compare to Q2 last year, it was in realized prices. Market price was only 2% lower but when we compare corn prices during Q2 compared to Q1 this year, it was 19% lower, showing the good perspective as by sales of the new crop and good perspectives for the second corn crops, the so-called safrinia [ph] in Brazil. That should have some impact on the FX going forward, but it's still positive.

On the other hand, soybean meal hasn't decreased that much because of the FX effect and because there's still some dots or some cautions regarding all the soybean complex performance. So in terms of soybean meal, we had a 4% lower prices against last year and 5% lower against Q1 this year. But here, the final message is that we have even cost, which is positive for us to keep on rebuilding our growth profit going forward.

On next slide, we give more details on SG&A, which I think is pretty important to understand this. In a reference basis, we see on Q2, a different trend from what we have been seeing for more than 4 quarters in a row, which was a continuous enhancement of our performance. What happened in this quarter specifically? So more than half of this change, so 80 bps is fully due to marketing and trading expenses, more trade rose[ph]. So it was on purpose that we expected our cost expenditures [ph] on this quarter because we had to. It was a quarter more challenging in terms of moving volumes and making our sales not to lose ground due to some slowdown of consumption in Brazil. And on top of that, we had another effect that was due to some other expenses that we could say that they were due to the half, but that was accounted in this specific quarter. So that's to say that we still keep a very tight control of this threshold, and we keep on having the perspective of the SG&A enhanced in a year basis, 2013 against 2012, which is the management's target for the year.

Moving forward onto the financial position, so I'm now on Slide 15. Our liquidity shows a very positive figure on Q2, which has total liquidity of BRL 3.8 billion, split into BRL 2.7 billion of cash and equivalents and BRL 1.1 billion as a revolving facility.

On the net debt, we finished the quarter with BRL 7.4 billion of net debt.

And here on the bottom of this chart, we must emphasize the very well or very timely, bond issuance totaled $750 million [ph] which the lowest coupons ever issued by a corporation in Brazil. And we did a liability management of the total $550 million including this $150 million of an exchange offer of our older bonds that we have.

On Slide 16, we can see that we could, not only enlarge our average terms, our duration to 5 years. As well, we reduced our coupons of both debt in reals and U.S. dollars. And having a more interesting, of say, funding structure being half of the funding source is the capital market, which should be the trend for an investment-grade company and a company that is becoming more and more global. When you see here, the debt maturity schedule is also very positive when we look to the business schedule. There is no big concentration in the short term, so pretty well distributed and very tranquil for the company to roll over in the coming years.

Now, explaining the financial leverage and here, I'll take some more minutes to explain how it happened during same to last year. So if you remember, at that time, when we achieved the peak of this leverage by Q3, we said that the company would entering in a de-leveraging program, and we did. We are delivering that since mid of last year in that consistent and continuous basis. Now, we are 2.22x EBITDA as our leverage. We had a pretty good cash from operations, with CFO concept. And net of CapEx generated in this quarter of approximately BRL 450 million that you don't see here as a debt reduction, a net debt reduction on a quarter basis, only because our MTM of the hedges due to the big FX changes and interest changes in the quarter basis. Just another reminder, that it goes to the net debt as a notification, but it's a noncash effect. So that's why we have to emphasize again, the de-leveraging the company despite the U.S. dollar appreciation. We should continue on this de-leveraging towards the end of the year.

Looking to the investment in the first half of the year. So we totaled in approximately BRL 1 billion and here, we made a little split. Not only looking to what was due to first and second quarter, and not only to the type of investment being grown to support efficiency, but making a more managerial breakdown of those investments to make it aligned to the guidance. So in terms of our biological assets, the so-called breeding stock, it was BRL 255 million in the semester, which is alongside with our guidance of BRL 500 million for the year. On another extreme, which is the CapEx excluding the leasing, which is the built to suit for sales that I'll comment on, we had BRL 524 million, which compares to our guidance of BRL 1.5 billion. So that's to say that we are running below the guidance and we should deliver a year below what we expected, and that's in line with what we've been commenting on former quarters with you.

Just to emphasize what we presented last quarter, the acquisition here BRL 107 million, it's the federal food position in Emirates so it's not a CapEx concept, but it is an investment as well, the leasing. For the leasing here, we have to account into our assets, but then we have an equal effect in long-term payables, which is 0 or neutral for ETA concepts, and also it is not cash of the company involved spent during those because they were real [indiscernible]. But this is just more detail for everyone to be in the same page that we are. Investing -- keep on investing in the growth, on the strategic items on further processing, not only Brazil, but abroad and not jeopardizing our future growth, but working below historical levels and below the guidance we gave last year.

And here, another one example of our rich investments on Page 19, is the so-called BRF innovation center. So this is our state-of-the-art complex here nearby Sao Paulo City, called Jundiaí City. It's going to be an enabler for BRF to become a more innovative company, to be ahead of the trends in the market for all the types of products we can test and develop here. We have even some facilities, they have this scale of real facilities. So they are not only a cute scene, it's a real facility that can replicate the environment of a plant. So it will, for sure, fast-forward our time-to-market regarding innovations.

So when we talk innovations on Page 20, we just gave 1 page, how we are seeing and how we are thinking in the background of what are the trends that we've started in the market, not specifically in Brazil, but this is all of those items. They are global trends meaning, at the end of the day, help and answer more concerns regarding convenience and sustainability and all those aspects. And when you link these trends with the launches we are making, they are fully matched. And you can see next page, on Page 21, just some extensions of the launches we are making. So the Greek yogurt, we launched it. And this is the drink of a one, which was the innovation that Batavo grasped the market, which is pretty good product, though, not to say all other products here, just example of this add, I would just give some emphasis here on the Sadia branding and display. In all the international market, it was standardized at the way we will use the packaging and the brand name with what can be used locally, what is the global display? So this is another step towards being more global, more standardized global-wide.

Now to finish the presentation and turning to the Q&A, I'll just give 1 slide of every business unit, just to give a little more color on what happened in each market. So starting with the domestic market, we have again, to emphasize, the great performance we had on the same-store sales concept. Here on the right of chart, 23, you can see that when you compare or when we make the adjustment in the first half of '12 with the same portfolio that remained in the company, we had grew in revenues of more than 32%. So this is incredible, how we recuperated, not only what we intended, but we went beyond that and of course, this creates an opportunity for the company going forward.

We see on Slide 24, little more colors what happened in the quarter. So starting with the analysis on the growth on the last of the chart, I will concentrate on my analysis on these gray bars, the ones that compares what happened in Q3 with the Q1 this year. Here, you can see that it is displayed here that there's only 0.5% growth in volume. But in fact, what's happening is that the mix we could enhance because we sold more processed against Q1. But selling more processed means that mitigated the mix effect on the pricing, that we have to make some consent on pricing and some more marketing expenses that compressed the EBIT on a quarter basis. And then I move to the EBIT analysis that you definitely see a better result than last year, but a quite important margin compression of 6.1 bps compared to Q1. How that is -- how can we split this compression? A third of this compression, so approximately 200 bps or 2 percentage points, it was due to marketing and trading expenses. As I said before on a consolidated basis.

Another third of that was only due to the gross margin compression. So it was the cost that stayed flat because all the cost reduction in the short term affected positively the international market, but it was 0 effects for domestic market, roughly.

And the remaining third of this wise of this compression is other expenses due to the half and due to some other collateral effects of this need for the company to move volumes and not to lose ground in some categories that were not performing or not rolling the way we expected. So we had some more transitory expenses in this quarter that we don't expect to maintain in the coming quarters.

So in a nutshell, we saw in fact, the consumption that hasn't accelerated in this quarter, alongside with the whole Brazilian consumption. But when we look forward, we keep being cautious but with a very positive trend, especially when we understand what's happening during [indiscernible] and we see [indiscernible] of July and the perspective for August, they are better. So we can say as of today, that it seems that the more complicated month has gone, and now, we see a better trend for domestic markets going forward. Keep in mind, that we are still navigating in a more complex, in a more volatile environment domestically and internationally.

Export markets. Giving the highlights of that on Page 26, I'll make the same comparison of the gray bars, they compare Q3 with Q1. We see that we could grow volume in net sales, although we had a little compression in our prices. Even with the FX being positive. But that fact didn't jeopardize our results. It was, in fact, the other way around. This little compression in prices we had as expected. In fact, we said last quarter meeting that we saw some accommodation in prices, especially in the Middle Eastern market and in the Japanese market. But all this compression in prices, they were important for us to keep on moving volumes and they were more than offset by the cost reduction. That's the same thing that affected us in Q1 benefited us in this quarter in the export market in a cost basis. So that's why we could have such a great increase in our profitability, putting the Export division in a fully business as usual performance. And all the conditions of the market, at least now that gives us a good perspective for the coming quarters, although we keep the signs that we'll still see a lot of volatility in our front for sure.

I will skip the 3 next slides that they show the sales by market because with both Fay and I have mentioned the highlights of market by market.

I'll jump to the food service performance on Page 31. Here is basically the same reading of the domestic market. We had not that big difference in a reduced magnitude, compared with the domestic market for sure. We can see on the EBIT compressions that it was basically due to gross margin compression. But maintaining in a pretty good level, when we see the performance of the entire half, it was around 16% in terms of EBITDA. So for food services, it's a pretty good margin. We know and we recognize that this division can go further and the potentiality for this is beyond that, and we are working on this half to return. And bear in mind that the second half for both the domestic market and food service is still to come, which is the second half and precisely, the Q4 that presents pretty good perspective in the results for us.

But we have to say that what we felt in our bonds during this quarter was a market that grew in Brazil, but it's growing with less speed that used to grow in the last, let's say, 8 years at least. So food service was a market that the penetration of eating out of home was still very small in Brazil, grew a lot during these 8 years at least, and now it reduced in pace. It's not reducing the size of the market, it does reduce in pace. And now, we are seeing that trend and calibrating our strategy to better perform on a market like that.

So the last, but not the least is the dairy business. They represent a pretty good performance for the first half of the year. We are here absolutely delivering what we said we would do. That was, first of all, a rightsizing of the UHT division. That explains this dark blue bar here in volumes by 80.8%, down last year levels. It's because we made that. And that was crucial for us to have a better performance in cost and pricing in this market, especially in a year like this that we are having this increase on the milk that we are originating on every milk basis in Brazil. So even with this environment, we could boost our profitability in the UHT milk and also boost in the processed division, that food division. Not in the full potential, we are still not here benefiting from all the linkages there and the synergies with the BRF system that will start now. In fact, it happens to appear. But for sure, we understand that we made the turnaround regarding our positioning in terms of every category in the dairy division. And now, it opens a good perspective for this division going forward.

So guys, having said that, I'll turn to the operator to listen to your questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Wesley Brooks with Morgan Stanley.

Wesley R. Brooks - Morgan Stanley, Research Division

So first question, just trying to get a better feel. Obviously, in Q2, you had some benefit from lower grain prices and a weaker currency, and your export margins were really good. So can you give us some sort of quantification on where you think your export EBIT margins can get to in sort of Q3 and Q4 now with the weaker currency and even lower grain prices?

Leopoldo Viriato Saboya

Wesley, it's Leopoldo speaking. Thank you for your question. Of course, in terms of quantification, we won't give precise figures, because we don't guidance on margins for our entire units. But we can, of course, discuss the conditions for us to grow or to not to grow margins in a quarter basis. So first of all, what we have to take into account is that in this quarter, we have the full benefit of the cost compression, because the dollar hasn't affected the cost of our products. We were kind of consuming corn and soybeans bought on the more -- on our older FX, if you understand. Now on Q3, we don't have a cost pressure, but we don't have the benefit of the FX anymore. It's going to be the other way around. We will consume inventories made with more devaluated real, which means that in terms of corn, we lose this tailwind. And in terms of our other dynamics, in terms of pricing, of course, we have to balance very neatly how we keep a pricing dollar terms accordingly each market performance not to lose volumes, right? So I particularly don't see a big space for margin expansion. We -- because the margin we're having are great for international divisions. So our big challenge is to maintain the type of margins we've achieved during this quarter. I think that's the indication.

José Antonio Do Prado Fay

And adding on to Leopoldo's answer, I would say that when we look for the production scenario, what called my attention mostly is that we don't see that there is potentially an imbalancing regarding to the equation of supply-demand for the short term, since Brazil is not growing its allocation and new assets recovery in its internal market. So the global -- globally speaking, the supply-demand equation pretty much is stable, which is good for the business.

Wesley R. Brooks - Morgan Stanley, Research Division

Okay, and so the sort of the smaller Brazilian producers that a lot of them cut back production significantly in the second half of last year when they were losing money, are you not seeing them ramp up production at the moment?

Leopoldo Viriato Saboya

It's very hard to say because they have some means to increase production. But all in all, let's say we expect that they increase somewhere in the second half. But until now, according to our readings in the general markets, the allocation is not growing in Brazil for this month and next month.

Wesley R. Brooks - Morgan Stanley, Research Division

Okay, fantastic. And then just lastly, so putting that into the context of the sort of-- the normal commodity chicken cycle. I mean, do you have a view on when the cycle is going peak this time around? Is it like Q4 of this year or maybe because of the Brazilian cost advantage plus the FX, maybe conceptually, this cycle could be more profitable and longer than previous cycles for Brazilian chicken producers?

José Antonio Do Prado Fay

Well, it's a pretty good question but pretty tough to answer. But I'll give you how I particularly see that going forward. And after the big crisis that we had in 2008 and all the clutter [ph] effects towards 2009, we have -- we didn't see the market so big investment in new or fresh capacity globally. And Brazilian state [ph] has big players, big exporters in the chicken business, right? It appears that, which means that the potential capacity for this -- for the production in the world is not, let's say, tremendous. Even if everybody puts all the other plants to work to capacity. But of course, we have a risk. As always, we will have that the production [indiscernible] in short term reacted positively to some incentives. Real evaluating [ph] in Brazil or more profitability in the industry in the United States. So although we can see that we may see some, let's say, some good perspectives or incentives for Brazilian [indiscernible] to grow capacity, I don't see a big risk of damaging or jeopardizing completely the scenario that we see. So your call that the this could last a little longer, of course, we need to wait a little bit to confirm that. But this is a possibility, or assumption that, that could -- I mean, the arrivals in the market may lead to that, although it's early to confirm, if you understand what I'm saying. And you still have to consider that probably the grain, the cost will relief for the 2014 since the U.S. should have a good crop for this year, which means that working capital to recover capacity will be less than it used to be in the last 2 years, let's say. So there is many, many variables to analyze. But all in all, in the middle term, let's say, it's -- our view is positive.

Operator

Our next question comes from Mr. Luca Cipiccia with Goldman Sachs.

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

I -- a follow-up just on the previous call on -- actually, innovation. I was just wondering if you could give us some visibility on how should we think about new launches, product innovation, as well as white spaces maybe going forward. Clearly, you had a set of urgency to try to recoup volumes DCS [ph] so as we move forward into the second half, after the -- to see the impact will diminish as we look into 2014, if you could share some visibility on how should we think of that, as well as what is your interest in expanding maybe into categories where you're not today. And what would be, in your view, the most attractive spaces to look at?

Leopoldo Viriato Saboya

Look, the point is that during this time that we were following the rules that we have from anti-trust authorities, a lot of energy of our R&D guys were took by to rebalanced our portfolio between Sadia and Perdigão brand in domestic markets and then to repositioning our categories to face that in that ruling. So -- and even though we delivered many new products, and part of our strategy of volume recover was based on innovation, new products mostly in frozen ready-to-eat categories, what we maintain our focus. Now we have a better infrastructure to R&D, and we do not have to rebalance our portfolio and so and so. We will improve and accelerate our programs in portfolio renovation and bring some innovation to Brazilian consumers. This is the strategy that we lined -- we planned at the -- during the merge process, and we are on track on that regarding to this startup of this innovation center. For new categories that the company are not in, I would say that this is not our first step in innovation. We have a lot to do in the categories where we are already in.

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

Okay. And if I look into the third and to the fourth quarter, how should we think about the differential that you're currently showing when you present your growth rate adjusted for the capacity that you transferred? So how -- this type of growth rate, as we move forward, when do you think are going to normalize, really?

José Antonio Do Prado Fay

They tend to normalize, Luca, especially because we start to compare it to a more comparable basis of last year, Q3 and Q4. So we don't -- we -- as I've said, the bulk of our initiatives and launches, in order to offset partially or in full the effects of the TCD implementation is done. So we don't have flow of that going forward.

Operator

Our your next question comes from Mr. José Yordán with Deutsche Bank.

José J. Yordán - Deutsche Bank AG, Research Division

I just have one question. Thanks a lot for disclosing the comparable growth, excluding the TCD. It's a helpful thing that we hadn't seen before. And so now that you did, I'm curious as to what the growth rates on the same basis were for the fourth quarter of last year and the first quarter of this year, which were the first 2 quarters of -- after the divestiture for the first full quarters. So that's just my question. What if you can give some sort of -- if you can tell us what the number was for the those 2 quarters to put them in perspective. What happened in the second quarter of this year?

José Antonio Do Prado Fay

Thank you for your question. I'm just taking here the figure. We do have, and we have disclosed that during the Q1. On Q1, only taking Q1 in a same-store sales for domestic market is the same 32.4%, that if we get it for the half, it was 38.3%. For Q4, probably I don't have it here. I know I do. Yes, for -- I do have for the second half '12, compared to second half of '11, in the same-store sales for domestic market. So the growth of that time was 50% growth. And then all these materials they were available on the earnings releases in both fourth quarter earnings and first quarter this year earnings.

José J. Yordán - Deutsche Bank AG, Research Division

Okay, great. That's useful. And so I guess, I mean it has been -- it had been slowing down somewhat. And as a result, I assume that we should continue to expect the slightly higher marketing expense rate for at least for the rest of this year.

José Antonio Do Prado Fay

Yes, I would say that's what we are expending in marketing. It's pretty much the normal that the company should expend. And the first quarter, we were less active in trading, in marketing and even in above the line. So we expected to keep our marketing investment for the rest of the year.

Operator

Our next question comes from Mr. Alex Robarts with Citibank.

Alexander Robarts - Citigroup Inc, Research Division

I want to go back to the export market. Clearly, that was the big positive surprise for us. And I think going beyond the macro factors of grain and currency into kind of the factors that are really about the marketplace, I had kind of 3 parts to the question. I mean, in March, you kind of unveiled for us this reorganization of the international business, 17 country launches of Sadia brand and all these kind of factors. And so I guess, kind of starting with Europe, I mean this is a key market. Interestingly, when you strip out the volume and the currency issues, it seems like you got about 4%, 5% higher dollar price in your exports in that market. And just wondering if you could kind of comment about that. Is that perhaps more because of mix and you have more processed out there in Europe or just general demand recovery? The second thing is that the Americas now has come as a region, right? More important in terms of sales than Europe. And obviously, a lot of that is Argentina. Can you tell us about how the Quickfood kind of restructuring and transition is going? That would be the second part. And the final part is when we think about the goal, right, of having the direct distribution getting to about 30% of your international business and how are you moving toward that? Are we still kind of on track to get to that level by the end of next year?

Leopoldo Viriato Saboya

Thank you, Alex. I would try to remember all the questions that you did in one question. So let's begin by Quickfoods in Argentina. Really in Argentina, we are now deliver -- we are execution -- we are executing a very, very strong merging process. Since we have Quickfoods, we have Avex, we have Danica and even Sadia Commercial business there. So there is a strong restructure there. The scenario is really a challenging scenario since we have price control. And in the other hand, we have inflation about 20%, 25%. But even in this scenario, we can see -- personally, I'm very keen about the future of Argentina because even in this so, so strong and challenging scenario, what we are having in Argentina, we are having, let's say, breakeven process. We are not making money there, but we are not losing big money there. So we are almost in the breakeven. When we see some cost-- production costs, mainly in the chicken production, we see that we have figures, that we are improving the figures of the yields and so on. And we still have some figures that are the same figures that we are in Brazil. Of course, when we go to exports from Argentina, we've 5.5 pesos per dollar, it destroy a lot of results. And then we are focused on domestic market pretty much than export. But in the future, I believe that Argentina could be a good export base for our business, talking about Quickfoods. Regarding to the results in external market, we do not increase processed foods export, but we grab some margin in distribution. So since we acquired the Federal Foods and we are improving Al Wafi, which is our distribution in Saudi Arabia that are in -- that are having more share in our sales, will go in the total, which means that when we go directly to the shelf, directly to the consumers, we can have better margins. And this is important figure for Middle East mainly. The same we have in Europe, not with the same intensity. But in Europe, we see some improving in the results in Europe since the turkey markets are getting better and we are having better prices since production in Europe seems to decrease mostly in turkey, which gave us some price advantage regarding to the [indiscernible]. This can explain some points in our margin. I would say that Europe and our distribution in Middle East should take -- we have to take into account that.

Leopoldo Viriato Saboya

Just adding on what Fay said, Alex, and now taking one of your points, I think there was -- the main factors that made this a better performance in this [indiscernible], how we should think in going forward, if we can think on further positive impact on the FX or not. First of all, we need to understand this quarter performance, even in -- when we compare to last year performance or with the Q1, the 2 most relevant contribution of factors for this better performance was FX and cost relief. The cost relief, looking to the very short term, it was fully because we had a price decreasing still not affected by the FX itself. So why they were so important in this quarter? Because the FX that we had in the half of the quarter, so by mid-May until end of June, only positively affected the top line, but not affected the part of the cost because we were long in corn and were consuming corn bought -- corns are being bought at the former FX. How can we look now -- [indiscernible] or look into the next quarter? The FX will continue to be positive, but the costs won't bring the same contribution that it posed in this quarter. So that's to say that -- and then that's one of our strategic esthetics in the market. That's -- Of course, when the margin they boost in so short a period of time, we, as a leader, we have to control it to manage that in order not to over, let's say, intensify or incentivate [ph] -- over-incentivate [ph] the entire market to increase production or to migrate production from Brazil or from their domestic markets toward exports. So that's why we need to control this profitability on the next quarter in order not to make a huge profitability in one quarter and then spoil the results on the quarters onwards. So that's the mind of the company. And those are, again, the main drivers for the results in a quarter basis, in a year basis, and that should be a little different when we look forward.

Operator

Our next question comes from Mr. Sambuddha Ray with JPMorgan.

Sambuddha Ray - JP Morgan Chase & Co, Research Division

I'm representing Alan Alanis and team. The question that we have today is regarding the cash flows. So you improved your working capital materially this quarter. So if you could share with us your expectations regarding the trends in working capital for the remainder of this year. And on that line, I mean, if you could also share what level of operating cash flow that you plan to achieve by -- or to generate by the end of this year and the target level of net debt to EBITDA, please. Those would be my questions for today.

José Antonio Do Prado Fay

Thank you for your question. In terms of where we are in our working capital recovery or performance, we -- as you can see in the figures, we are much better than last year levels. Still in a historical basis, it is positive. When we look now onwards by the -- until the end of the year, we have to consider 2 main facts. First of all, we are in the moment where we build more inventories of corn precisely because we are in the crop -- in the harvest time for the winter crop. And we build this inventory by -- as a carryover for next year. So first of all, this is a fact to be considered. And as well, we have all the build on stocks for the seasonal products like the Chester and the turkey for Christmastime. But those, although they put a -- as an investment in working capital, they are not that big in order to represent the big cash consumption, right? They are -- they will be according to our expectations. But all of the accounts being payables, receivables, we keep on working, and we are pretty much on track from our plans of enhancing every account that contributed to the working capital of the company. And they just keep on a positive trend towards the end of the year, even 2014. Your second point regarding all the cash generation, of course, we don't have this guidance. We don't give guidance on cash generation. But we keep a positive trend on that, and as long as we keep on generating good CFOs [ph] and with a very disciplined or very well-balanced CapEx program for the remainder of the year. Another thing that you're asking is regarding our target for leverage is our target or our, let's say, optimal leverage is around 2x, which we -- precisely we are there. 2.2 is around 2x. But we target for the year to go below 2x, something in -- from 1.5 to 2x is achievable, of course, depending on market conditions and a lot of other things, including FX that, in some cases, it poses a pickup and doesn't have to do with cash generation or other aspects. So we have this target to finish the year below 2x. Of course, it's hard to be precise how below it's going to be, but we are pretty confident that we will reach this threshold, okay?

Sambuddha Ray - JP Morgan Chase & Co, Research Division

Got you. Just to follow up on that quickly, if you achieve the 1.5x to 2x below the optimal level, do think there is a possibility of increasing your dividend payout targets going forward?

José Antonio Do Prado Fay

To be honest with you, those -- this issue is a -- more to do with the Board of Directors decision, what to do with the excess of cash and liquidity. But of course, it's a no secret for everyone that it only has important ambition in terms of international growth. So at the end of the day, we are preparing ground for the company to accelerate its growth in both domestic and -- but more emphasis to the international market. So the trend is for the company to maintain this. We don't have a problem of maintaining for a couple of quarters below the optimal, because it's not a problem at all. It is a problem when you don't know what to you do with your excess of cash, but it's not our case so far, when it happens of course.

Operator

Our next question comes from Ms. Chelsea Consco [ph] with TIAA[ph].

Unknown Analyst

I was just wondering if you could please repeat what you had said about the reasons for your reduction in CapEx for this year. There was just a lot of background noise at the time when you were discussing it, and I was unable to hear. And also, can you discuss any potential international expansion plans or what your thoughts are there?

José Antonio Do Prado Fay

Thank you for your question, Chelsea. The first question regarding the reasons for the reduction in CapEx, it's important to qualify that it was not -- we are not reducing the CapEx program. What has happened is that we did last year a pretty massive or important CapEx program based on a fully recover of our capacity of both units that were sold and suspended, so we had to anticipate much of that over last year. And for this year, we had intention to spend in CapEx BRL 1.5 billion. And as we see the trend according to the figures, we can say that we tend to deliver below that, something in between BRL 1 billion to BRL 1.3 billion. Probably this is most likely, it's not a -- we are not cutting CapEx, but we are making adjustment in the timing they are happening. For instance, there is one example, which is the Abu Dhabi plant. As we had to -- we had some difficulties with licenses, we ended up postponing the bulk of the CapEx program. So the cash investment was, let's say, rolled over to 2014. So the things -- we are not changing our vision or our growth ambitions but only, let's say, investing -- accelerate [ph] what is needed and what is in our front that we see that demand for us to invest. Your second question regarding to expansion, international expansion, I would say that we keep on active on M&A market as we are in the last times. Mostly of our focus was on the -- increase our distribution as we acquired Federal Foods, and this is a kind of business that we keep on looking for. And [indiscernible] very aware about the opportunities that can give, but we do not have a specific targets at the moment.

Operator

Our next question comes from Mr. Denis Parisien with Deutsche Bank.

Denis Parisien - Deutsche Bank AG, Research Division

I was wondering if you could give us a little bit more color on the other factors that you said caused a part of the reduction in the gross margin. You said that there was some -- 1/3 was due to the marketing and trading, 1/3 due to the COGS effect, and then you referred to another third coming from some transitory other expenses related to moving product around to make up for the weak demand. Can you give us more color that? And how does that -- how do those costs remain temporary if the weak demand remains in place? Can you just give -- talk about that aspect and how -- give us a little bit more comfort on that being temporary by discussing more in detail, please.

José Antonio Do Prado Fay

Very good question, Denis. Just for us to be on the same page, what I said that third, third and third compression was not in the gross margin but on EBIT margin, right? Just for us...

Denis Parisien - Deutsche Bank AG, Research Division

Yes, that's right.

José Antonio Do Prado Fay

So yes, 1/3 of that was marketing expenses, another third was the compression in gross margin and then another was split in several other expenses. I'll give some expenses on these other expenses that they are transitory, for instance. There is the effect of our -- the deal that we made with Do [ph]. And afterwards, we had to sell to JVS [ph] because of CADE ruling. So this presented an accounting losses of BRL 30 million. That, of course, is a corporate losses, but it's split by all the business units. So this was incremental compared to Q1. Other -- and this is transitory, of course. On other expenses, they are related to the quarter to the operation, domestic operation itself, and they work -- they happen like as we had a mismatch between production pace and a sales pace, we had little problems with some specific inventories that we have to fast-forward our sales. And those presented losses during this quarter. So I'm just giving examples what happened. They are -- all these, they are little. But when we add all together, and including our other expenses that we can consider that they are due to the half, but they ended up being accounted in this quarter. They represent something that we don't expect to be, let's say, expected to be seen in the coming quarters, in the domestic market. So part of that, as I said, are these other aspects of the EBIT compression. They were due to some company's issues or corporate issues, or they were due to the domestic market operation that we had more losses during this quarter, specifically due to the products -- slow-mover products like I said. And basically, it's that. There is no other aspects that affected our margins other than those.

Denis Parisien - Deutsche Bank AG, Research Division

So these slow-moving products, rather than piling them up as working capital inventory, you discounted them to move them through and you wrote that off as an expense, the difference between on the markdown? I'm just trying to visualize how it runs through the P&L.

José Antonio Do Prado Fay

Okay, good, good. No, if it's a pure discount, it goes on gross margin, because it's a discount on prices. But when you have some products that you cannot sell or because they are very short in life and, of course, this is a loss [ph] and then you -- the way you account is in SG&A and not in the revenue.

Denis Parisien - Deutsche Bank AG, Research Division

Okay. So these were products that you had to throw out, then. And so, when it's in pure write-off, then you take it out of SG&A?

José Antonio Do Prado Fay

Yes, perfect.

Operator

This concludes today's question-and-answer session. I would like to pass the floor to Mr. Fay for his final statements.

José Antonio Do Prado Fay

Okay, gentlemen, thank you for being with us. As my last words in this call, I would like to say that the planning, execution and delivering that BRF are showing make us very positive regarding to the near future but, of course, cautious as we are every time regarding to the challenging environment that company is involved in and the high volatilities of our business that we used to have in place. Thank you very much. Until the next time, bye-bye.

Operator

That does conclude our BRF S.A. conference call. Thank you very much for your participation. Have a good day.

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