BRF S.A. Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: BRF-Brasil Foods (BRFS)


Q1 2014 Earnings Call

April 30, 2014 9:30 am ET


Christiane Assis - Investor Relations Director

Claudio Eugenio Stiller Galeazzi - Global Chief Executive Officer and Member of Executive Board

Augusto Ribeiro - Chief Financial, Administration & Investor Relations Officer and Vice President of Finance & Investor Relations


Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Giovana Araujo - Itaú Corretora de Valores S.A., Research Division

Alexandre Fuentes van Amson - Crédit Suisse AG, Research Division


Good morning, and welcome to BRF S.A. First Quarter 2014 Conference Call. This conference call is being transmitted via webcast in our website, [Operator Instructions].

Forward-looking statements related to the company's businesses, prospectives, projections, results and the company's growth potential are provisions based on the expectations of the management as to the future of the company. These expectations are highly dependent on market change, economic conditions of the country and the sector and international market. Those are subject to changes. As a reminder, this conference is being recorded.

At this conference are Mr. Claudio Galeazzi, Chief Executive Officer, Global; Mr. Augusto Ribeiro Jr., Chief Financial and Investor Relations Officer; and Christiane Assis, Investor Relations Director. I would now like to turn the call over to the management.

Christiane Assis

Good morning, ladies and gentlemen. I would like to thank you for attending this conference call. It's very important for BRF that you follow our activities. During this moment of change inside our company, Investor Relations Department, we'd like to encourage you to follow our company even closer. The IR team is available for you. Thank you very much. I would now like to turn over our call to our global CEO, Mr. Claudio Galeazzi.

Claudio Eugenio Stiller Galeazzi

Good morning. We are very glad for being here and having the opportunity to speak a little bit about our first quarter results. I would like to review that in the last quarter, we explained in detail our strategy and the projects which we are implementing. And fortunately, we observe the positive signs of gains this first quarter, which indicates that the implementation of the different projects, reorganization and transformation of the company is having its positive effect. Some extent in the region, EBITDA of BRL 861 million with 7.1% growth over the first quarter of 2013, with an EBITDA margin of 11.7% against the first quarter '13 of 11.1%.

During the months of February, we implemented a very profound and deep change in all of our industrial area viewing and pursuing agility. We reviewed all functional scopes of the industrial sector. We've made redundant MPP [ph]. We also closed 5 regional offices, reducing from 5 to 3 levels from the President all the way down to the units. We implemented 300 million redundancies [ph] in this process. We have not as yet begun the industrial footprint, which we hope to begin within the next 60 to 90 days. It should be a process that takes at least 6 to 8 months. In our international market, under the leadership of David Falir [ph], we implemented and underwent also some profound changes in the structure and mainly in the strategy. We made a reduction of the 6 regional offices down to 4 regional offices. We reduced production to adequate offer to market demand. We obtained better prices, and we also redirected our experts to more profitable markets. There was a rationalization on logistics, renegotiations of freight charges. We reduced SKUs. We reestablished adequate levels of inventories. All these actions actually reduced significantly the historical volatility that we always faced seasonal and otherwise. And we are able to maintain higher prices, and we exported 535,000 metric tonnes generating revenues of BRL 3.1 billion and an operating profit margin of BRL 183 million as against BRL 35 million in the first quarter of 2013.

In our internal market, under the leadership of Sérgio Fonseca. We implemented a pilot project GTM, go-to-market. It was launched in January when the [indiscernible] was initialized our sales force was restructured and sales were realized [ph]. As initial result extremely positive, we've had an increase of approximately 25% of our client base in that region. Based on the results we obtained, we made a rollout initially in February of the GTM project in the state of São Paulo and we are now currently concluding the rest of Brazil as this implementation of the new GTM policy for the right region, which we call the right region, where we were not present other than the wholesalers of industry goods, with the lowered cost and expense reductions and we concentrated efforts in logistic efficiency. And we are also undergoing a 40% reduction in SKUs. The Food Service under the leadership of Ely Mizrahi, we had a growth of nearly 2% over and above the first quarter 2013. With the Marketing Area and Innovation, under the leadership of Sylvia Leão, we are launching many new products. We are investing heavily in publicity. We are integrating market intelligence. We are concentrated in brands, categories, and we are also undergoing a metric in research and development.

As far as the dairy business is concerned, we are presently analyzing the different alternatives, which may have, which does not exclude partial total sales of our dairy business. We do have already over 10 MDAs signed, and we have many of these companies go into the second phase searching for more details and information. We expect that this process will take anywhere between 60 to 120 days to be concluded.

We, on our capture of opportunities as stated previously, we are in line with the ramp, which we mentioned previously. And we have included these captures already in our budget. We are in line, and of course, the ramp increases from here on. And by the second semester, we should be obtaining these captures translated into results. We just finished the OBC program, this is the Zero Based Budget, which we should start implementing in May, June, which results of redefining the company's structured misreduction [ph] of expenses significantly help and a redesign of our process, through the Zero Based Budget program. We expect that the results will be obtained between -- after implementation between 12 and 18 months. We have not, and I would like to repeat, that as yet started the industrial footprint rethink, which will be starting possibly in June and should promote many, many changes in the industrial footprint, as you all know and recall, we have approximately 35% idle capacity. So the reviewing this footprint was extremely necessary and one of our objectives for the transformation and reorganization of the company.

I would like to emphasize that we had a very, very significant free cash flow of BRL 1.1 billion, due to much more efficient restructuring of our --

Unknown Executive

Working capital.

Claudio Eugenio Stiller Galeazzi

Working capital and optimization of our investments. We are also being very conservative financially and we also agreed with Activio [ph] mentioned previously that Brazil would probably avoid a crisis. We are renegotiating our revolver, anticipating the negotiation it was June 2015. We anticipated to present negotiations, increasing our revolver from BRL 500 million to BRL 800 million. We are negotiating the profile as a whole. The idea is to be very conservative and if the unprobable or probable crisis may occur, we'll be very well structured to face it. We have cash, we have different go-to-market. In other words, should that happen, we'll be in a very good condition to face any eventual and unprobable or improbable crisis.

Finally, BRF will continue investing in efficiency, quality, development, innovation, should the logistic and training, all viewing also the level of services to our clients where we believe we are still fragilized [ph].

I'd like to mention the fact that 1 quarter was not necessary establish a reversal of tendency. But all the indications, which we have points through very good results of the transformation being implemented. And I'd like to mention once again that we expect the low results of all the transformation implementations for the second quarter of this year. Thank you.

And I will transfer to Augusto Ribeiro, our CFO, that will expose all the numbers.

Augusto Ribeiro

Good morning, everyone. First quarter 2014 has marked the key implementation evidenced of key element of the company coupled with allowance of high impact x. Payment increasing the leadership of our brands in Brazil and replicate our performance and competitiveness in the international market. The net revenue of BRF amounted to BRL 7.3 billion in the first quarter of '14, with growth of 1.8% compared to the first quarter of '13 in the domestic and more challenging consumer environment and smaller volumes in the foreign market following our strategy to maximize profitability. The bid of sales volume in the period reached 1.3 million tonnes, 7.4% less than the same period last year, driven mainly by the external markets. Compared to the first quarter of 2013, cost of sales is 1.2%, with a volume decrease of 7.4% in the same period. The costs in labor in mid-collection suffered [ph] these slight increases compared to the first quarter of last year -- of the first quarter of '13, as well as increase in freight and packaging influenced by the valuation of the period. The feed has the same yield driven mainly by soy milk increase and like compared to the fourth quarter of 2013, feed cost increased leading by corn. Even with the cost increase, our gross profit amounted to BRL 1.9 billion, an 11.5% higher than the first quarter of 2013, which resulted from higher price in the period, leading to a gain of 2.3 percentage points in gross margin and increasing the same from 23.5% to 25.8% margin. In the first quarter of 2014, we had an increase of 9.9% in operating expenses, which compared to the fourth quarter of last year, totaling 16.5% of net operating revenue compared to 15.3% of last year. Selling expenses increased an 11%, primarily due to pre-expense in marketing and trade marketing due to alignment with the company's strategy to have a greater focus on the consumer and commercial part of the business. Just give you an idea about how we invested in marketing -- trade marketing approximately, BRL 80 million in this first quarter than the first quarter of last year.

Our investigative expenses decreased 1% compared to the first quarter of 2013, with the reduction in several lines. In the first quarter of the year, we presented a total of BRL 128.5 million in other operating expenses, higher than the BRL 68.3 million in the first quarter of last year. Within these numbers, there are no recorded events. For instance, we had a negative net impact in our result of BRL 24 million. From the negative side, we booked BRL 46 million as restructuring costs were BRL 5 million in claims due to a fire incident we had in one of our factories. Loading back, we are partially upset by asset sales, specifically farm [ph] and the lawsuit won by BRF, totaling a [indiscernible] impact of BRL 27 million. Therefore, we're ahead of those BRL 24 million at our nation before. As of this quarter, our nation that in our last call at the end of last year, but as of this quarter, we longer disclosed adjusted EBITDA. So the first quarter EBITDA reached BRL 860.8 million, 7.1% above the first quarter of 2013, which presents an EBITDA margin of 11.7% compared to 11.1% in that same period in the last -- on the first quarter of last year.

Now, if you exclude the nonrecurrent effect of BRL 24 million, our EBITDA margin would be 12%. The net profit was BRL 350 million compared with a net income of BRL 358 million achieved in the first quarter of 2013. Impacted mainly by the other operational results as I just mentioned to you, but also by our financial results. The latest -- the financial results increased from first quarter of last year due to interest payments over loans extended rate valuation on investment in subsidiaries abroad but also -- and also appreciation on cost of grains acquired based on price to set basis.

Now, if we -- as we move around profitability regarding our performance, we need some numbers from our business -- BRF businesses. So internal market, in the first quarter of 2014, revenues in domestic market reached BRL 3.2 billion, 3.6% greater than the first quarter of 2013 with volumes 2.7 lower mainly due to the other sale of line, which volume decreased 16.3% due to a sale of the Doux plant in May 2013. We will continue to have this portion on a competitive basis and during second quarter of 2014, if we consider the other sales from the consolidated results, the analysis better reflect the scenarios in domestic market with net sales of BRL 3 billion, 4.8% above the same period last year, an increase of 0.7% in volumes and an increase of 4.1% in average prices.

Operating income reached BRL 315 million in the internal market, 15.4% lower than the first quarter of 2013, registering an operating margin of 11% compared to 13.4% last year, a decrease of 2.4 percentage points when compared to the same quarter last year. Big difference in performance was largely due to noneconomic expenses related with structuring incurred in the period by increased expense on marketing trade following the company's strategy and also by difficult base of comparison in [indiscernible] of the domestic market in the first quarter last year, one of the greatest of the company for that period. So a little of bit the outcomes.

Moving forward, in the extended market, we are at achieved good results in the first quarter of 2014. During the period, the company exported 435,000 tonnes in revenue reached BRL 3.1 billion. The foreign market has been fitted from the valuation of the reality it developed, an average 18.5% compared to the first quarter of 2013, which raised the average price in real by 11.5%, compared to last year which ends up offsetting the volume decrease. Following our strategy again of withdrawing volumes from regions with low margins and contributed to keeping their revenue nearly flat on a year-on-year basis. The operating profit of the company had a significant improvement reaching BRL 183.8 million in the quarter compared to BRL 34.5 million recorded in the same period last year. Operating margins, therefore, also show an increase of 4.9 percentage points from 1.1 in the first quarter of last year to 6% in the last quarter -- in the first quarter of 2014. I'll give you some a little bit -- small messages regarding the performance in each one of our market up outside of Brazil. So we'll start for MENASA, Middle East, North Africa and Southeast Asia. The volume of investments in specific market was above expected, totaling 270,000 tonnes and revenue reached BRL 1.3 billion. In this period, the company took 2 big steps for consolidation in the region by acquiring 100% of the economic rights of our distributor in the Middle East, Federal Foods and announcing a binding offer of 40% of Al Khan Foods. Our currency within a month within the newly distributor [ph] of Federal Foods we gave our [ph] customers to wholesale food services. Those actions are in line with the plan of strengthening of our brand, distribution and portfolio expansion in the region. For the Far East [ph], in Japan, for instance, the first quarter 2014 was marked by a balance beginning to invite them in [ph] in good conditions for negotiations. In the Far East, the period of Chinese New Year recorded strong in there. And even with the outbreak of bird flu in China and South Korea, the company had great results in the region. Mix spot volume was 122,000 tonnes with revenues of approximately BRL 700 million. It is important to inform that China had simply announced the qualification of 5 quality production units in Brazil, one of them from BRF, which now accounts the 7 unit license to explore to that country. Eurasia. The Eurasian market is at a positive moment. Although exported grain are suspended and the region states serious political conflicts. Shortage of pork in Turkey, the latest for specifically for Europe. Offer for this year -- the shortage of those pork in Turkey also for this year has set good opportunities for BRF.

In volume terms, the region recorded 85.8 thousand tonnes exported, which resulted in a revenue of BRL 700 million, 4.8% greater than the same period last year.

Americas. During the period, their market sold volumes of 66.9 thousand tonnes and revenues of BRL 419 million. It is noteworthy that the -- that after most of uncertainties, the U.S. finally opened its market to Brazilian export of pork in that period. Initially, of course, the export volume is small [ph], but the endorsement of the country had great weight to the Brazilian pork industry.

Now, I will move forward to some of our financial figures. In terms of leverage, the company's net debt stood at BRL 6 billion by the end of the first quarter of 2014, an 11.7% yield that recorded at the year end at the end of 2013, resulting in a net debt to EBITDA of 1.88x.

Investments. The investment in the quarter amounted to BRL 335.8 million, 46.1% below last year -- 46.1% below last year. The main disimbursement with 2014 was target for investment to build the proxy planned in the Middle East in addition to investment in automation project, improvement of profits and support. All of those investments are in line with what we have been saying the last month in terms of strategy, both strategy and CapEx investments. In this amount BRL 120.1 million of investment in biologic assets are considered.

Now here I'm glad to make a parenthesis, in a statistic point, regarding this topic investments, it is important to mention that this reduction against the first quarter of 2013 is due to mainly investment saving only. For 2014, we sustained a guidance of BRL 1.5 billion of CapEx in line with what we did in 2013. Okay, so we might have this difference quarter-by-quarter, but throughout the year, we sustained a BRL 1.5 billion investment in CapEx. Regardless of our financial cycle, the company has also been working of duration [ph] of working capital resulting in the investment of the financial cycle of 58 days in March 2013 to 41.8 days in March 2014. This represents under a net operating revenue ratio, a reduction from 14.8% in March last year to 11% in March 2014.

And finally, we have our free cash flow, which has improved a lot. If you consider our improvement in EBITDA, our improvement of valuation of financial cycle and the last a better controlled CapEx. That in the first quarter of 2013 reached BRL 1.1 billion, not to mention [indiscernible] cloudy, but I just would like to mention one thing that with this BRL 1.5 billion, you could compare it with the BRL 1.5 billion that we generated throughout the full year of 2013. So 2014 will be a strong year of cash generation at BRF. And so far we are on the right track.

So now, I'll give you -- let's move forward to the Q&A. Thank you.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Mr. Tim Tiberio with Miller Tabak.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

I wanted to start off with the MP 627 legislation that we've been reading about, I believe that was approved by the Senate and I did read some comments earlier in the quarter around potentially that impacting your international expansion ambitions, can you just give us an update of, one, your take on how is this going to impact potentially your international growth, whether there is any workarounds or amendments that you can push with Congress in Brazil. I guess any additional color that you can provide would be very helpful, particularly for international industries outside of Brazil.

Claudio Eugenio Stiller Galeazzi

Thanks, Tim, for your question. Yes, the 627 MP will, of course, impact our performance in the countries, which where our volumes have very reduced taxation, because we will have to pay the complement of reaching 34%. We are working together with Congressmen and class entities with the objective of actually having a special clause put into the MP or under a new MP, which is being elaborated by government, which is the 634, where we will have as food industry exemption. Of course, for instance, an example, in the Middle East where taxation is below 10% somewhere and we're between 5% and 6% in the Emirates where it seems like we are building a client. With the 6% to 7% prepay of such we will have less competitiveness within that specific market. Anyway it's still premature to say what will happen in the near future. We are following it very closely together with members of the government, with the Ministry of Finance. And we hope to have a specific clause included in [indiscernible] specifically addressing the food companies of Brazil, which are expanding outwards. Those food companies that eventually have a presence in the United States will definitely not be affected because the taxation there is similar to what we have here, which would imply that the measure in itself would not affect them. Of those that are not present in, let's say, countries that have less taxation, we will most definitely be affected by having less competitiveness. As I would like to repeat, it's still premature, because the negotiations, the conversations between the different companies that have this worry together with us, we are jointly working with government officials trying to minimize the impact specifically in the food processing companies or the food exporters that do have processing in other countries.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Okay. I realize it's premature as you stated. In the case of theoretically if the exemption does not go through, when you look at your growing free cash flow what you've been talking about on call, would you be more inclined to shift some of your growth capital -- CapEx away from areas like the Middle East to regions you were talking about. U.S. having a comparable tax rate, but it has become more attractive or is this the situation where maybe with the increased free cash flow in that scenario that cash in terms of shareholders would become the greater priority.

Claudio Eugenio Stiller Galeazzi

I will repeat that it's still premature, but I can assure you at this stage, we have no intention of changing our strategy in these countries. Of course, we must still think what will be the impact if we wish to expand in building other or acquiring other industries in other region. But for the time being, as far as the Middle East is concerned, specifically the Emirates, we will not be changing our present strategy. Of course, you have to reconsider if the impact if we grow significantly in the future in different countries that have the benefit of lower taxation, we might have to consider, of course, the domicile. In other words, rethinking the corporate structure to take into consideration the impacts that the 627 may impose on companies like ourselves.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Just one last question if I may. You mentioned that the rationalization of the global potential footprints really is not approved yet, but that would start as early as June. I think investors are extremely encouraged by the efforts in BRF 17, but on just kind of very technical question as far as the approval process within Brazil, obviously, GDP growth has been lagging in the prior years. Is there anything from a government approval milestone that you will have to achieve when you're looking at some of this idle capacity or can you feel confident that you have complete flexibility to take the measures that your financial and strategic teams propose over the next 12 to 18 months?

Claudio Eugenio Stiller Galeazzi

Tim, the decision does not involve government participation. In other words, we are restricted to BRF establishing policy. Of course, BRF is a conscientious company. We'll be thinking of the social consequences, the regional consequences because we are very relevant in certain cities around the area of Brazil. But it has no government necessity to acquire the agreements of that. Of course, there will be always government pressure basically based on the social questions involved. But I think we've had the experience in the past with this industrial footprint in other companies. And it's a question of how you will address the problem and what is the speed with which you address this project.


[Operator Instructions] Our next question comes from Ms. Giovanna Araujo with Itaú BBA.

Giovana Araujo - Itaú Corretora de Valores S.A., Research Division

My question is about working capital. You guys deliver a substantial improvement in working capital in the first quarter, particularly, in the payables line. And I would like to know, if you see those further improvements going forward and how sustainable are current levels?

Augusto Ribeiro

We have seen continued improvement, of course, we have to say, the improvement from that one tends to be a little bit careful than the part we did in the past, but still there are a lot of rooms -- lot of rooms yet to improve growth. For instance, we have been driven in terms of inventories that we've given off our strategy regarding recording our quality service, delivery to get in a better relationship with some key clients. We did not get too much pressure in terms of internal projects for eventual reduction yet. So there are room for these growth to actually be tackled by BRF. And so they're active room but probably with the rate of increase, the rate of improvement should decline from now on when compared for roughly during the present [ph].


Our next question comes from Mr. Alexandre Amson with Crédit Suisse.

Alexandre Fuentes van Amson - Crédit Suisse AG, Research Division

Just a question concerning the short-term outlook. The company during your presentation of the first quarter results, you mentioned that the strong cash generation in this quarter should help the company to face difficult times ahead, at least this is my interpretation of your words, so I just wanted to understand if you could provide more of a detailed information or more clarity in the sense of, if there was any change concerning the outlook that the company had a few years or a few months ago for the short term, or if this is -- anything that you could provide in this sense concerning the evolution of the market, competition and growth and ability to pass through the cost increase to pricing and so on.

Claudio Eugenio Stiller Galeazzi

In principle, we are not changing our outlook for the future. We had market wise, we had participation. What we did mention is that we are just taking precautions should anything do occur, which is unlikely, I believe, but should it occur, we will be in a very good position to face any crisis that should arrive. Of course, we have a reduction in the industrial growth in Brazil. We still have very close to full employment. But if you have, let's say, a slowdown as for industrial production in Brazil, you might have an increase in unemployment, which definitely would affect the market as a whole. We are very much attentive to any of changes, but presently as I mentioned we have no intention of changing our expectations for this year or for next year in our planning.


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

Claudio Eugenio Stiller Galeazzi

I would like to thank, everybody, for listening to us. I thank the questions which were placed. I don't know how successful we were in explaining our CapEx, our strategy. And I would like to place that -- reinforce what Chris said, that she is always available for any questions in the meetings. And I would like to say -- state that both Augusto and myself will always be here to receive your questions, your worries and your expectations. So please feel free to contact us at any time. We will definitely arrange to reach with you. Thank you very much for everything, and have a good day.

Augusto Ribeiro

Thank you.


This concludes our BRF S.A. conference call. Thank you very much for your participation, and have a good day.

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