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BRF S.A. (NYSE:BRFS)

Q2 2014 Earnings Call

August 01, 2014 9:30 am ET

Executives

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, Vice President of Finance & Investor Relations and Member of Executive Board

Analysts

Diego T. Maia - HSBC, Research Division

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

Alexandre Fuentes van Amson - Crédit Suisse AG, Research Division

José J. Yordán - Deutsche Bank AG, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to BRF S.A. Conference Call to discuss the second quarter 2014 earnings. This conference call is being transmitted via webcast in our website, www.brf-br.com/ir. [Operator Instructions]

Forward-looking statements related to the company's businesses, perspectives, projections, results and the company's growth potential and provisions based on 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 change. 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 Mrs. Christiane Assis, Investor Relations Director.

I would now like to turn the call over to Mrs. Christiane Assis, who will open the conference call of the second quarter 2014.

Christiane Assis

Good morning, and welcome to BRF's Second Quarter Results Conference Call. We're glad to discuss with the market, another good set of results, showing management's focus on profitability and value maximization. Today, our host are Mr. Claudio Galeazzi, Global CEO; and Mr. Augusto Ribeiro, CFO.

I now turn over to Mr. Claudio for his opening remarks. And afterwards, we will continue with the results presentation. Thank you.

Claudio Eugenio Stiller Galeazzi

Thank you very much for your interest and hearing us out in this call and also for the opportunity to answer some questions which you may have.

I would like to start -- I'm here present with our CFO, Augusto, that will actually go into the details with -- there the numbers of the company I'll just mention some highlights and some of ongoing our activities.

BRF's performance in this second quarter indicates that management's strategy is on the right track, while focusing results and increasing value. We had a very strong cash generation in the tune of BRL 954 million, vis-a-vis last year same period, BRL 365 million, an increase of 25% over the second quarter '13. The first semester of '14, we had actually BRL 2.1 billion increase in our cash generation against same period last year of BRL 434 million. The increase is in this period of 381% of free cash flow [indiscernible]. This was achieved with a much more solid operational result, focusing in result, investment optimization and a consistent reduction of working capital that went from 57.4 days, 14% of the net low -- sorry, net revenue, blank, representing 14% -- 14.6% of the net revenue in June '13, to 36.4 days or 9.8% of the net revenue in June '14.

We will continue to address with active efforts in balancing accounts receivable and payable and, of course, adjusting our inventories. We expect to maintain these efforts despite of the fact that we are initiating at the present moment, a gradual build up in our seasonal inventory, looking forward to the end of the year. We also expect to take rational advantage of the decreasing grain prices, as we have storage capacity of [indiscernible] 3 to 4 months consumption. As the prices are decreasing, we will not take speculative move but we'll take certain position to maximize, of course, or to reduce as far as possible, our main cost, which is grains.

Our net debt fell within the last 3 months, 14% to 15% to BRL 5.1 billion of net debt. This represents 1.5x to EBITDA. We would like to repeat what we mentioned at last quarter that one quarter does not give an indication of trend, and definitely does not establish a trend. The second quarter of good results starts indicating that you'll have an establishment of trend. So we are very positive that in the next semester we will continue these indications and will be establishing, then definitely a trend.

Our net revenues added up to BRL 7.7 billion, a 2.2% over the second quarter, driven by higher revenues from processed food products, fresh poultry in domestic market, and higher revenues in the international market, in spite of the sales where there is BRL 1.3 billion lower in 12% during the same period last year. This decline in volume was due to several factors: our reduction in volumes for the export market; reduction in lower beef volume in line with our strategy of core business, concentrating core business; as well as a slower internal market demand.

EBITDA reached BRL 1.0 billion, 25% above the second quarter '13, bringing EBITDA up to 13% vis-à-vis 10.6% of the second quarter '13. The total for the first semester of 2014 was BRL 1.9 billion. The net profit was BRL 267 million, against BRL 208 million equivalent period last quarter, 28% above the second quarter '13. If we consider expenses of BRL 197 million due to our repurchasing of bonds in May, our profit will be close to BRL 500 million.

The internal market had a challenging quarter due to the slowdown in economic growth. During this period, we focused our strategy in rationalizing our portfolio, we repositioned our brands and announced 18 new products aligned with demands of our clients and customers.

We concluded the GTM, the go-to-market rollout, an important phase in our [indiscernible] plant, with very encouraging results. We are convinced that we will capture significant volumes and gains during the second semester of this year, through the rollout of the GTM actions which we took.

We are also convinced that our GTM project mitigated the declining event. We're starting a second phase of our go-to-market, with the objective of training and better qualifying our sales force. Many of you will remember, that we integrated all our sales force and we didn't make our sales force redundant as we did implement significant reductions in other areas of the company, qualifying our sales force, increasing our sales and cross-selling as well as better servicing our clients.

During -- at the end of 2013, we announced a reduction of approximately 40% of SKUs to simplify process, reduce complexity, focusing in better product turnover and higher margins. We have already reduced 95% of these SKUs production in our plants. We have reduced the availability of these SKUs to 50% in the points of sales and, approximately, additional 3 months, we should conclude 100% month having these SKUs available.

In the external market, we increased gains by prioritizing the markets, choosing our markets by regions, reducing volumes to less profitable markets, and a simplifying process and reducing also in for the external market, the SKUs. We've implemented other actions such as adequate inventory planning, oriented towards the demand and higher prices. This helped a much better performance of our export, and Augusto will address the different issues in this export market.

For me, our strategy in the external market, specifically, in the Middle East, we have concluded the acquisition, where we formalized the acquisition of distributor -- food distributor, which is Federal Foods in the Emirates. We got final value of BRL 65 million. We objected to being to strengthen our brands and expand our portfolio -- product portfolio in the region. In the same line of thought, we will also made an acquisition of 40% of the working social capital -- working capital of AKF distributor of our own brands in Oman.

We will continue our strategy and expanding our distribution. We also concluded our Zero Based Budget program during this second quarter. And already during this quarter, we generated small gains expecting, however, larger benefits of the Zero Based Budget for the second semester of 2014.

Our isolation plan is absolutely in line with our expectation and we do expect a very -- a steeper capturing ramp of the benefits of our isolation plan, as of the second semester of '14 to up to 2016. We are pleased with both initiatives and it is important to emphasize that these actions resulted in lower expenses, cost of goods sold and in spite of inflation, labor salary negotiation cost were during this semester lower than last year's. Augusto will give also more details.

We are presently undergoing divestment of our Dairy division. We do have several international strategic players very much interested, and we should come to a definition in the very near future of the future of our Dairy business.

In the production area, we're concluding our studies of the industrial footprint. Another very, very relevant project within the extrapolation plant. The footprint towards a production rationalization, product line concentration, and actions increasing modernization and [indiscernible] to increase productivity. And definitely not increase capacity, as we do have some idle capacity.

We would like to reinstate our CapEx policy, prioritizing it in logistics, environmental projects, IT and plant optimization and modernization.

We have done our plan for envision for large acquisitions, unless a very interesting opportunity arises. We are open to smaller acquisitions and regions we considered a physical presence or a higher presence that we will increase our local production, brand and distribution.

Not concentrating only in this regions as a exporter of commodities. We are presently maintaining contexts, viewing potential joint ventures, partnerships and association in several regions of the world. Our presence, strong financial and cash position, our very low level of indebtedness and the exceptional funding availability have relatively low costs as we're investment grade, allows us to consider aggressive CapEx and M&A investments. However, we will proceed carefully and conservatively in analyzing opportunities that rise. We continue prioritizing in maximizing our abundant existing human production and commercial resources.

In our estimates, we believe that the second semester should be more difficult for retail, which will affect industry -- food industry. We observed that the construction industry, which is a large employer, is suffering decline in demand of new construction. As well as the automotive industry, which is suffering a decline in its sales, [indiscernible] in which we will definitely increase -- or decrease, sorry, the available income or disposal income of consumers, aggregated by the rate of -- by the increase in unemployment and, of course, in scenario of inflation and indebtedness of the consumer.

We would like to make also, that we have implemented in the past 6 months, intensively in the last quarter, a profound cultural change. This change is a rethinking of the company model, we're investing significantly in developing our internal talent, bringing the new talents into the company, and we are definitely targeting our company as the meritocracy based company looking -- focused in results.

I would like to thank very much all of our collaborators, which has dedicated their time, their efforts in going after hard work.

Thank you, very much. And I would like to pass to Augusto that he will detail [indiscernible].

Augusto Ribeiro

Good morning, to everyone. Good afternoon to some of you. I would start with some operational figures and then move into financial ones. So let's start it with the overall company.

Net revenues come to BRL 7.7 billion in this quarter, 2.2% higher than in the second quarter of last year, due to the increased sales of the process products and [indiscernible] of poultry in the domestic market in line with our strategy. And then our comparison shows that the revenues in the quarter are driven by domestic market, where we were able to pass through price adjustments, given the higher input costs, mainly grains, [indiscernible] and new collection. As well as a better mix that offset an ongoing weak market on scenario.

Revenue from the domestic market increased by 7% over the second quarter of last year, then grew 3% compared with the first quarter of 2014. The recovering international market was 7.3% higher than in the first quarter of 2014, on a quarterly comparison. While our NOI comparison, shows that net revenues fell slightly by 2.2%, this is in line with our strategy of reducing our volumes from regions with lower margins a move that continues to be effective.

By the way, even with a current -- despite of the current devaluation of the real, it was this adjustment in the operating month curve that allowed us to increase prices in dollar terms for the last 2 quarters consecutively. Despite the cost pressure felt in the second quarter of 2014, mainly for grains, soybean, we were able -- our gross amounted to BRL 2 billion in the second quarter of 2014, 80.9 -- 8.9% above second quarter 2013. The gross margin rose by 1.7 percentage point from 24.9% in the second quarter of the year to 26.6% in the second quarter of 2014. A quarterly comparison shows that the gross margin increased by 0.8 percentage points against first quarter 2014.

There was a reduction of 1% in operating expenses in the second quarter of this year compared with the same period of last year. With a higher gross profit and lower expenses achieved in this quarter, we have continued with our strategy of applying back into our operation, part of the savings generated at marketing -- insight marketing investments. All in the second quarter 2014, we invested more than BRL 50 million compared to the same period of last year.

As I mentioned in the 2 -- in the last quarter call, we always gave a disclosure regarding the nonrecurring events, if there is any. In this case, in the second quarter 2014, we had approximately BRL 58 million, all related to redundancies. The majority of that happened in the international, or non-international operations.

So EBITDA came to BRL 1 billion, 25.1% higher than the second quarter 2013. This translated in a margin EBITDA of 13% compared with 10.6% last year. At quarterly comparison shows that we increased 16.5% our EBITDA compared with the results in the first quarter of this year, with an increase of 1.3 percentage points in the margin. If we exclude nonrecurring event that I mentioned to you, that those BRL 58 million, the net recurring event, our EBITDA into -- in the second quarter of 2014 would be around 13.5%.

Net income in the period was BRL 267 million with a net margin of 3.5%, an increase of 0.7 percentage point against the second quarter of last year. These occurred despite the payment made in the relations to bond buyback operations. Again, if we exclude the nonrecurring event, we will have approximately BRL 0.5 billion as net income in the second quarter of 2014.

Now let's start to go briefly through the market. So let's start with domestic market. Without the initiatives, revenue from the domestic market came to BRL 3.3 billion in the second quarter 2014, 7% higher than the second quarter of last year. Average price is increased by 13% due to better portfolio and passing through of costs. Here, it is important to like to mention you -- as specific point, as was the case in previous quarter, during the second quarter of 2014, we've felt impacts from the other sales line, which has significant variations in price and volumes. This difference was due to [indiscernible] sold to the Doux plant sold in May 2013, a nonrecurring event. If you exclude the other sales line from the analysis, the figures on the quarter give us a better idea of the real scenario of the domestic market, with net operating revenues of BRL 3 billion. This was 6.4% higher than the same period of the previous year and an increase of price -- an average price of 10%, 9.9%. The operating results EBIT came into BRL 384 million, 70.4% higher than in the second quarter of last year, registering an EBIT margin of 11.6% compared with -- to the 7.3% of the same quarter last year, and an increase of 4.3 percentage points. If you compare -- so that is it again a 4.3 percentage points against last year.

Now, talking to -- regarding to our international market, It achieved the important results from the annual comparison in the second quarter 2014. Although still faces some challenges during the period such as pressure from grain cost and lower supply of beef and hogs at the [indiscernible] level. The net revenue from the division declined lightly by 2.2% on an annual comparison and was 7.3% higher than in the first quarter of 2014. The operating margin EBIT came to 7.8% in this quarter, compared with 6.4% in the second quarter of 2013 and 6% in the first quarter of 2014, this shows that we are in the right track regarding our strategy to decrease the volatility within our international business.

Now I'm going through market-by-market, in the external market, just give you some main figures. Middle East, Africa. The sales volume that [indiscernible] amount to 269,000 tonnes, in line with the previous quarter and revenues came to BRL 1.4 billion, 4.1% higher than the first quarter of 2014. The Far East, we have sold 123,000 tonnes in the Asian market in the second quarter of this year, and revenues up BRL 727 million, an increase of 4% over the previous quarter. Japan was the main market in the region, following the trend of the first quarter of this year, with continued reducing the local inventories and the possibility of raising prices.

In Asian market, it is also worth noting that BRF ended its joint venture with the Chinese company Dah Chong Hong both in April. Both companies still maintaining a [indiscernible] commercial partnership focusing on the market in Hong Kong and Macau.

Europe and Eurasia, the short bit of pork meat for Eurasia gave the company good opportunity of higher volume sold in higher prices. Europe registered an increase in sales of BRL 30 million. Sales in the region came to 87,000 tonnes and net operating revenues amount to BRL 800 million, a rise of 14.2% over the previous quarter.

Americas, there was a big increase in sales in the Americas regions, the second quarter of this year. Volumes grew to 77,000 tonnes and net operating revenues to BRL 466 million. Both were higher than the previous quarter.

Now I will go through some financial stats, most of them already mentioned by Claudio, but I just would like to pinpoint some specific topics, if you allow me. Furthermore, in terms of financial effect, net financial expense came to BRL 393 million in the quarter. It was something like 52% higher than the second quarter of 2013. The main issue here -- this happened mainly due to the repurchase of bonds with a face value of $450 million in May, with a subsequent issue of a 10-year bond of $750 million with a coupon of 4.75%. By the way, that operation was one of the benchmarks for the region, not only for Brazil but also for Latin American companies.

This transaction extended the duration our of -- and just another point, if we exclude these nonrecurring event, this premium paid -- given the liability management, that we gave in the second quarter, our net financial expense would be 25% -- 30% smaller, lower than those of the second quarter 2013. These transactions extended the duration of our debt denominating foreign currency from 6.4 to 7.2 years, while our average cost in dollars was reduced from 5.5% to 5% per annum. With these [indiscernible] management, the annual savings will be approximately BRL 11 million, as less financial expense.

The company net debt continued to decrease and reached BRL 5.1 billion. This is 14.6% lower than that registered only 3 months ago by the end of March 2014, which give us a leverage of 1.5x, which again demonstrates this administration's constant search for value and capital synergies.

I would not go through the investments detailed, as Claudio did give you some -- a good result. Anyway, we are -- what I would like to say that, we are in the half of the year. We're starting to -- as we start the second semester, we are right on target regarding our guidance of that BRL 1.5 billion that expect to use as CapEx in 2014. And those [indiscernible] are related to the profits plan in Middle East as well as automation and improve in profits and support our the improvements in our levels of service.

Regarding financial cycle, the company has been consistently working to optimize its working capital, which led to an improvement in the financial cycle, which fell from 57.4 days in June 2013, by that time representing 14.6% of net operating revenues, to 36.4 days in June 2014, which is 9.8% of net operating revenues. The largest gain in this quarter occurred in accounts payable, accounts receivable -- in the accounts payable -- in accounts receivable, respectively.

Just I would like to make specific point here. Although, the active management of accounts payable and receivable, inventories is expected to continue throughout 2014 and to the year to come is something that we are paying a lot of attention. It is important to highlight here that we might have -- not a decrease, but a slight impact in our financial cycle improvement base. Why is that? Because in the second semester, as a user, just we like to remind you about that, that we tend to increase our stock level for the seasonal products that we sell in November and December. So we started to build up these stocks in July and moving forward, month by month by month until the end of the year. As well as we might increase our position of grains, physical position, because if that would happen only if the price, the market price is regarding grains are aligned of they happen aligned with our strategy. So those are 2 increase in stock that would go against our optimization working capital. But align everything okay with our strategy in the way that we conduct our kind of business, I mean the seasonal products.

With operational results improvement, favorable working capital management in CapEx optimization, the free cash flow generation amounted to BRL 954 million in the second quarter of this year, compared with BRL 365 million that we generated in the second quarter of last year. If you took, what we generated, in this semester alone, it's more than we generated in the throughout the entire year of 2013.

And finally, I would like to share with you, actually to remind you, that you are all aware of that already. We receive the positive outlook from S&P in this quarter, showing that we are in the right track in our strategy and the way that we are applying it.

So I'll open now for Q&A. Thank you, very much.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Diego Maia with HSBC.

Diego T. Maia - HSBC, Research Division

Just curious, I'm trying to gauge your sentiment regarding the second half of the year, as you, one hand, you have a more favorable cost scenario with falling grain commodities, which could help, especially your export business, which is more commodity. But on the other hand, you have more difficult scenario in the domestic market with decelerating consumer, higher inflation and maybe lower growth. So just trying to see what are your views are as for as the outlook for the second half? And if you are maybe more optimistic, or more bearish versus what you were before into this quarter?

Augusto Ribeiro

Definitely the grains will play an important part -- as you know, it is important part of our COGS. If that -- everything showing currently that we get some -- we might get some price benefit or -- from the grains in the second quarter, so that would be good for the all the players that use that as a raw material for their animals. Regarding the scenario, one thing that is important that I would like to stress here, is that we are denote expression "walk the talk", as we've been talking regarding our strategy of a lower top line growth for the company in 2014, and all the strategy...

[Audio Gap]

We have good results in the external market, given the strategy of decreasing the volume for certain regions. In general markets, we merged the sales force. We started to increase our operation within the mom's and pop's stores. So when you look -- when you take all that we did in the second, in the first half of -- first semester of this year, and you look at the second semester of 2014, we expected to be able to keep the good momentum of the company. So but again, 2014, there's is going to be a growth year in terms of top line, what we in see trends in volume.

Top line growth in volume, specifically volume, of course. What we're seeing that second quarter, given the perspective of Brazil, we're still will be heavily paying a lot of attention within our internal projects, our capabilities to deliver them. We after the merge, now the name of the game is productivity. We're going to pay a lot of attention on the sales force productivity. So we believe we will be able to get value outside of that in the short term, I mean, still in 2014. But again, economy is not booming. And that would be great if you had a tailwind, the economy would be growing, that would be great. But we believe we have all the tools to deliver growth aligned with our expectation. 2015, something different. By then, we should be able to higher the -- we would be able to -- we went through -- we have went through the major projects of that we're now implementing. And then we might get back with the growth more aligned with our historic base.

Operator

Our next question comes from Tim Tiberio with Miller Tabak.

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

I'm just wondering if you may be able to quantify the magnitude of feed cost reductions that you are expecting maybe second half over first half and then for the full year over 2013. Just so we can get a sense of the magnitude of what you're projecting.

Augusto Ribeiro

Well, thanks for the question, but unfortunately, we might -- we cannot give you a number on that because it will depend a lot what will happen in the market. Everything that we're saying based on common information and given the production in Brazil, given the crops, the harvest of the crops in Brazil, even what is forecasted and happen in U.S., even Argentina, we expect that, that decrease in costs and prices going prices. But I cannot give you a precise percentage of decrease of that based on our assumption.

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

Okay. Probably, I guess, I can build up my own private forecast. And it doesn't sound like you are aggressively hedging. So kind of...

Augusto Ribeiro

No. We do have -- our hedge let me make it clear. We sees it -- we buy stock. We have the -- by the way we are the only one in the industry in Brazil that has the capability to hold stock...

Claudio Eugenio Stiller Galeazzi

Inventory.

Augusto Ribeiro

Inventory for more than 3 months. So what might happen the second semester, given the price that we might find that, we might decide to increase our physical stocks, that's the hedge we do, buy more grains.

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

Okay. That's very helpful. And then back to your export markets, you're seeing one of your competitors within Brazil, expanding their capacity in the poultry segment via acquisitions, I'm just trying to get a sense outside of the proactive steps that you're taking to rationalize unprofitable or less profitable opportunities in the export channel. Are you also just seeing more competition in these channels in a couple of years ago? And does that concern you at all that you may see more competition going forward in the export channel? And maybe that could potentially trim some of the growth expectations that we've seen in the past?

Claudio Eugenio Stiller Galeazzi

We find that the repurchases of the acquisitions of production is not an increase in production or the purchase of the existing capacity. As we mentioned, we have idle capacity to what we're concentrating our efforts is increasing productivity, rationalizing our productions, unifying production lines. In other words, we're looking at the costs of increase in supplying the finished products. I think, that we will try to rationalize our production, our facilities, maximizing, as I mentioned, productivity.

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

Okay. I guess, I was addressing, directly, obviously, JBS purchasing Tyson's business in Brazil, and some of their prior acquisitions. It seems like they're expanding their presence in the poultry segment. And I was just trying to get a sense of whether you think that may disrupt the dynamics that you seen in the export channel versus the past? Or do you think since they're just buying existing capacity that, in fact, it could actually create more discipline, because pricing never really had much, I guess, operational scale, as they would put it, there to begin with. So having that, these assets within larger operator, maybe that actually -- is it positive?

Augusto Ribeiro

Actually, I will not comment on their strategy. That is better if you ask them, I think that would make more sense, but going into your direction of the market balance, which seems there is no building up of new production capability since there is no more chicken up there, actually just the consolidation of the volumes that's already there. That someone blamed, I would go with direction of more discipline in the market. That would be my call. But anyway, that's a different strategy, different company. As Claudio mentioned, we want to increase what we have within our house. We are very big. We have a lot of -- lot not of a [indiscernible] very good growth to the develop in terms of asset utilization. So we had space to grow in terms of what volume based on that.

Operator

[Operator Instructions] Our next question comes from Alexandre Amson, Crédit Suisse.

Alexandre Fuentes van Amson - Crédit Suisse AG, Research Division

But my question was regarding the potential impact in terms of taxes, income taxes for subsidiaries abroad. Because of the provisional manager that was approved a couple of months ago, correct me if I'm wrong. And I haven't heard anything new about these over the -- since then. So I just would like to check whether you had any updates concerning this matter?

Augusto Ribeiro

The updates that you -- not only us, but the entire industry are still discussing that the government, some change in the current law. We strongly believe that is not for our competitive for Brazilian exporters, or Brazilian that wants to become international. The -- something that -- it's based on an ambition to raise more money from the government side, that doesn't make sense when you think of longer term. We need to actually to foster the internalization of Brazilian companies. So we are still on that front yet, trying to come up with the different possibilities. When they are short-term, there is no impact for BRF that we'd like to make it clear. Our current business, the way that is structured, will not be impacted for that law. However, in the future, as the plant for example in Abu Dhabi and other region starts to grow, even if we make some investments in regions with lower tax rate in Brazil, that would start to -- might impact our results. So the short term for 2014, even for 2015, I would say that impact is not big for BRF. But again, we're still working with the government, trying in other companies, not only BRF, but all the Brazilian exporter that -- from that matter. So come up with the different solutions that could merge all the interests involved.

Operator

Our next question comes from José Yordán with Deutsche Bank.

José J. Yordán - Deutsche Bank AG, Research Division

Just have a good follow-up to the hedging question. You mentioned that right now you are just doing with physical inventories, but is it just a matter of company policy? Or why not use futures to hedge grain cost when -- like when there is a extraordinary circumstances like what you have today?

Augusto Ribeiro

There are policy regarding grains related to physical lines. So we buy physical stocks. We had some deals regarding the what -- not extra hedges regarding that some -- to find some price, future prices within a certain level, that is within our policy -- our treasury policy that we should approve by our internal committee -- with committee that we have in the company. And so there is the lot of rules within the company that gives us step-by-step what we are supposed to do. But the majority of the heads that we have is not 100% related to physical inventory holding, physical inventory and taking position, physically speaking, of grains.

José J. Yordán - Deutsche Bank AG, Research Division

Are you saying that it is possible to do, if you take it to the committee, et cetera to extend the 4 months? I know you, something you might...

Augusto Ribeiro

Sorry, could you repeat, please?

José J. Yordán - Deutsche Bank AG, Research Division

I guess what I was hearing, I think, you seemed to be saying that if you bring it to a committee et cetera, that it is within the policy of the company to allow hedging with derivatives. And therefore, you could extend the period of hedge beyond the 4 months that you can do physically. Is that the right way to look at it?

Augusto Ribeiro

No. We do physically hedge in off grains only.

Operator

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

Augusto Ribeiro

Sorry guys. I really would like to apologize, but I'm running late. I have to get some airplane after a week of meetings in Hong Kong. Jet lag, it's been a tough and busy week. A lot of things going on and just like to apologize. And thank you, for your time. I'm going to the airport. Now for, Claudio. Thank you very much.

Claudio Eugenio Stiller Galeazzi

I would like to speak but unfortunately, Augusto will not be able to extend the present call. But I would like to place all our investors relation plus Augusto, and myself, the whole team, will be always available for further explanations, answering the questions and the doubts you have. I think we have established a practically an open house practice where we do appreciate investors coming to talk with us, either by phones, directly or in person, in Brazil, or when our team and myself are traveling outside of Brazil. So please, free -- feel free to contact us through Chris Assis, that we will always be meeting and giving the necessary attention and comfort to your questions and doubts.

I would like to thank everybody for their presence in this call for the questions asked. And once again, placing our team available for any further information you would like. I would like to thank Augusto, Chris, Abilio that participated in the Portuguese version of our call. And thank you very much for your presence in this call. Thank you.

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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Source: BRF S.A.'s (BRFS) CEO Claudio Eugenio Stiller Galeazzi on Q2 2014 Results - Earnings Call Transcript
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