BRF-Brasil Foods S.A.'s (BRFS) CEO Pedro De Andrade Faria on Q2 2016 Results - Earnings Call Transcript

| About: BRF-Brasil Foods (BRFS)

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

Q2 2016 Earnings Conference Call

July 29, 2016 9:30 AM ET

Executives

Pedro De Andrade Faria - Chief Executive Officer, Global

José Alexandre Carneiro Borges - Chief Financial and Investor Relations Officer

Analysts

Luca Cipiccia - Goldman Sachs

Lauren Torres - UBS

Alexander Robarts - Citigroup

Jeronimo de Guzman - Morgan Stanley

Antonio Barreto - Itaú BBA

Operator

Good morning, ladies and gentlemen, and welcome to BRF SA Conference Call to discuss Second Quarter 2016 Earnings. This conference call is being transmitted via webcast in our website www.brf-br.com/ir At this time all participant are in a listen only mode. And after the presentation, we’ll open up to question-and-answer session. Instructions will be given at that time. We would appreciate each participants make only one question. [Operator Instructions]

Forward looking-statements related to the company’s businesses, perspectives, projections, results and the company’s growth potential our provisions based on expectations of the management as to the future of the company. These expectations are highly dependent on market changes, economic conditions of the country and the sector and international markets, thus are subject to changes. As a reminder, this conference is being recorded. This conference will be presented by Mr. Pedro Faria, Chief Executive Officer; and Mr. Jose Alexandre Carneiro Borges, Chief Financial and Investor Relations Officer.

We now hand the call over to Mr. Pedro Faria who will begin the conference call. Mr. Pedro, you may begin.

Pedro De Andrade Faria

Good morning, ladies and gentlemen, and thanks for taking part in today’s conference. I am very pleased to say that our expansion strategy in global transformation are ongoing at posting and results are becoming more visible every day. As you may see in our results, our international operations are growing significantly, with volumes rising by 17% on an annual comparison.

On top of that we show remarkable resilience on the EBITDA margin that have remained at 13% even against the challenging and exceptional backdrop we have seen in the first-half of the year. This was the quarter we partially consolidated the acquisitions of Calchaqui and Campo Austral in Argentina, which combined brought more than R60 million in revenues for the Latin American market.

We also concluded in a very satisfactory way our 100-day [ph] plan to integrate GFS now known as BRF Thailand, in which we met the number of opportunities for synergies on the operating side, as well as on the commercial side. This should continue to help boost the profitability of our operation in Asia.

One good example is the new [branded line, the Zynga,] [ph] which is produced by BRF Thailand and will be launched in Middle East market in the coming months under this Sadia brand. We have also announced the setting up of Sadia Halal, a BRF subsidiary that should be based in the Middle East and will be established as one of the biggest Halal food companies in the world, with around $2 billion in net revenues.

We believe this is such an important step for the company, in order to expand and consolidate its position in the Muslim markets. The creation of an independent company in the region will allow us to give much greater focus and accelerate this expansion in a market, where the population grows twice the global average.

Regarding the sector outlook, the chicken cycle in the second quarter was even more difficult compared to the first. Basically, we see three variables that directly impact our results, and which are worth the commentary. The price of grains international poultry price in dollars and the exchange rate. What we saw in the second quarter is that, these three variable elements moved earning point in a synchronized way, creating a difficult and almost exceptional scenario for the sector.

In the quarter, corn prices have risen by more than 100% over the same period of 2015, increasing our cost metrics substantially. On the other hand, the production and supply of chicken continue to expand and squeeze prices in dollar terms, which combined with a currency appreciation of around 10% over the previous quarter, pushing up price in reais to even lower level.

However, when we look at some figures from the sector, we have the impression that the worst is clearly behind us. Market figures showed a slowdown in production of one-day chicks, which points to a reduction in future production.

Moreover, the entry of the second crop volumes has already made the positive contribution to the decrease in corn prices, as a result of greater availability of grains in the market between July and August. Even considering the current discussions of a potential crop shortfall, we should see healthier price in the coming quarters.

Finally, we have begun to see a recovery in international dollar prices in markets that are critically important for BRF, such as, the Middle East and Asia.

As we move to our Brazil operation, we continue to see demand shrinking. Nielsen figuresshow that the market for some important categories for BRF, such as, ready-to-eat meals and coca have fallen by 10% and 15%, respectively, compared to the beginning of the year.

At the same time, the pressure from costs during the quarter led us to make a new price increase of around 7% at the end of the month of May. Having done two successive price increases, we continue to see the competitive dynamic in the short-term, performing in line with the expectations. Competition is holding back on raising prices in order to gain market share.

As a result, BRF lost around two points in terms of market share compared with the beginning of the year, but continues to have a very solid leadership position with 57% total market share. We are following our strategy of improving the level of service for our clients through a number of initiatives to enhance the execution and improve process, such as, the new version of the go-to-market, which has provided a very satisfactory way of segment even further our client base.

The goal of these improvements in execution and price increases is clearly to recover the profitability of our domestic operations. Continuing Brazil, I’m very pleased with the results of our innovation program, which remains strong and focused on getting closer to the final consumer, bringing new attributes for our clients, for our consumers in our categories.

Besides the extreme success of our salamis versus meat line, which had its production expanded by around 30% in May. Market also proved to accept very well the launch of our new ready-to-eat meals line, resulting a gain of almost 4 percentage points in market share for that category. In the second-half of the year, we’ll launch new product lines focused on healthiness. Moreover, we will introduce a new category of ready-to-cook meals. This category was created in partnership with a famous Chef Jamie Oliver. The focus is to bring healthy products and move consumers closer to food, a campaign that Jamie has been pursuing worldwide.

In conclusion, we remain very confident in our financial position to navigate throughout this year of macroeconomic downturn in Brazil and cycle challenges. Without deviating from our long-term strategy continue with our short-term efforts to strengthen the initiatives to reduce costs and expenses through our zero-based budget program. And we have improved our commercial and at this clarification in our operations even further.

I will now hand over to Alex Borges, who will give you more financial details on second quarter results. Thank you very much.

José Alexandre Carneiro Borges

Thanks, Pedro. I’d like to highlight some important financial figures from our second quarter results. Our net revenues increased by 7.6% year-over-year to R8.5 billion. This result was due mainly to the strong growth in our international volumes with a highlight to Asia and Europe.

We had a gross profit of R1.9 billion, reaching a gross margin of 22.5%. This result was impacted by the challenges of this cycle, due to a strong increase in chicken supply, an increase in cost of grains, a lowered chicken price in dollar terms in a stronger real.

‘To give you an idea of the grains impact in our results, if we were to consider market price variation in the first-half of the year and multiply this value, but BRF’s monthly consumption volume, we would reach an increase of approximately R1.4 billion in cost year-over-year. This increase was R9.36 [ph] million in the second quarter alone. This should have been the impact on the gross profit from the grains alone, all other variables being constant.

However, we managed to offset part of this impact through a number of initiatives, such as, an improved feed conversion ratio, a better nutrition formulation of the animal feed, a better execution of the purchase of grains, hedging and other initiatives. The actual impact in our cost of the grains increase was around R1 billion on the first-half of 2016, and approximately R600 million in the second quarter alone.

In other words, we managed to offset the impact of the grains by around 30% so far this year. We also managed to control our operational expense as well. We continue to focus on our zero budget – at zero-based budget program in a number of our initiatives to offset the impact of this cycle.

If we were to exclude the recent acquisitions, our SG&A would have increased by 4.5% year-over-year, well below currency impact or the Brazilian inflation in the period. And despite of our efforts to offset the impacts of the cycle, both in terms of costs and SG&A, our EBITDA margin declined by 6.3 percentage points year-over-year and reached a 11.1% in the quarter, and the total EBITDA came to R944 million.

It’s worth to mention that, even though, we are in the worst moment of the cycle, we had a consolidated EBITDA margin of 13.2% in our international markets, which is over 10 percentage points higher, if compared with the worst quarters of previous cycles. And these profitability results were achieved with interesting growth in many of the regions. In the other hand, we recognized the challenges of the Brazilian market. On top of the big increase in cost and the shrink in demand, we witnessed a reduction in volumes and our operational deleverage. All these factors together increased even more the challenges for this region. We’re keeping our focus on recovering the profitability in the region, and we raised prices again by approximately 7% last May. Considering the current outlook for costs, new increases in prices may be necessary.

In terms of our financial results, we had a net expenses of R504 million in the quarter. This amount included a R294 million in net interest, R85 million in adjustments to present value, R84 million in monetary correction and others, and R39 million in foreign exchange variation. It’s worth highlighting that we had an increase in net of interests in the quarter of approximately R34 million due to the increase of the net debt position in the period.

In order to provide more transparence to the market, we have revised our managerial cash flow session in our earnings release. Previously we presented a simplified free cash flow version with EBITDA, changes in working capital, and CapEx. Now, we are presenting the complete cash flow in a managerial format, and we would load in our Investor Relations site other reconciliation line by line from the accounting cash flow statement to this managerial version.

Our operating cash flow generation came to R908 million for the quarter, which allowed for the financing of R795 million in CapEx. There was also an impact for the payment of a R595 million in acquisitions in the quarter in the share buyback program of R360 million.

As a result, our net leverage for the quarter increased to R1.99 million. If we were to exclude acquisitions in the share buyback in this quarter, our net leverage would have come to 1.82 times net debt to EBITDA. The cash generation for the quarter already shows a significant improvement compared to the first quarter of 2016, and our EBITDA took cash conversion of – was close to 100%.

With this, we finish our initial comments. And I’d like to thank you all for a presence and we’re now ready to answer your questions. Thank you.

Question-and-Answer Session

Operator

Excuse me, ladies and gentlemen, we’ll now begin the question-and-answer session. Each participants may ask only one question. [Operator Instructions]. Our first question comes from Luca Cipiccia, Goldman Sachs.

Luca Cipiccia

Hi, good morning, Pedro, good morning, Alex, thanks for taking my question. I wanted to ask the follow-up on some of the discussion on the Portuguese color about Brazil. Just to keep up – to pick it up from that thread, more on the visibility on rebuilding profitability in the second-half, maybe if you can give us more context on what do you expect?

How long do you think it will take before going back to double-digit margin, even assuming a better environment for corn in light of the change in the mix and channel in branding products that you highlighted earlier, and as well as some of the year-over-year effects that may facilitate that process? Third quarter last year it was the [indiscernible] return, it was a sort of the adjustment in prices and all of that this year., I assume, you may have some additional costs for the Olympics, or some of these other items, but there’s a high seasonality as well in the second-half.

So maybe if you can just give us some visibility on the level of margins, or the level of improvement that we should expect considering maybe a better cost environment, but possibly as well and more sticky mix headwinds as we discussed – you discussed in the previous call from a channel and product perspective? And then if I may a little, I would have a – just a quick one on Sadia Halal, but just [to be the case,] [ph] this type of that?

Pedro De Andrade Faria

Thank you, Luca, and good morning. First of all, my apologies for making switch from the Portuguese to the English call. Thank you very much.

Luca Cipiccia

No, better for me.

Pedro De Andrade Faria

Okay. So when it comes to the domestic operation, Brazil operations, you were asking about double-digit EBIT margins, is that right?

Luca Cipiccia

Yes, I mean, just – as you look into the second-half and you’ve been commenting about rebuilding profitability sequentially, what do you think is realistic to expect in the current market context?

Pedro De Andrade Faria

Okay. So I’d start my answer to you by saying that, we mentioned it in the Portuguese call, we have had sequentially better months throughout the second quarter. So if I look just at the picture from June results, you already see us navigating a double-digit EBIT margins, okay? This is when we get the full benefit of the price implementation. We get the full benefit from a level of price relativity across all categories, and across all channels much more rationale.

So, I think, we’re building off of a gradual yet surely recovery of our Brazil operations. What makes me confident about that is a number of initiatives are starting to pay off. Our GTM was mentioned in a Portuguese call, in which we’re emphasizing a lot segmentation. We’re seeing the early results in the sub-channels we have segmented and improved our level of services.

We’re also seeing our stock outs and [indiscernible]as we call it coming down. We have a relationship program [indiscernible], which is also bringing the anticipated results, and we’re starting to see yet when you look at the quarter picture. We’re starting to see stabilization in market share loss and in some categories notably, we are gaining market share again. We are gaining market share in ready-to-eat meals, which is a strategically relevant category, and we see even on the process categories, in general, the high frequency ratings we get from new, essentially all stabilization of that market share trend.

So I’m confident that we’ll see that. It’s a big challenge, because there’s a number of variables, which we don’t control. We’re hoping, of course, for much better price environment for our inputs. We almost know that there’s a communicating way between chicken prices outside of Brazil and chicken price in Brazil.

So you should expect enough to our category in Brazil to have a quite a positive price trend in the next few months now. And I also expect that some of the innovation program that we bring are also helping to fight back the erosion in the mix, which I think was the main concern we have for the second quarter. So I expect the third quarter to be sequentially better than the first and the second, and I expect to have a nice fourth quarter with a very well-executed campaign around activities. So we can start the year of 2017 on a much higher and stronger note.

José Alexandre Carneiro Borges

Luca, if I may, I just want to add that, you saw that the key drag on our results for Brazil in the second quarter was gross profit, right? We saw the line of about 3.5 percentage points quarter-over-quarter, so this is really hurting us. One hand is COGS, as we mentioned, the cycle grains and everything else. But in other hand it’s a little bit of a loss of operational leverage because of having lower volumes, right. Its better we’re seeing – a sequentially improvement on the results. And that should come particularly from gross margins.

We are looking to return or get back – continue to be in its statuary of recovering, the gross margins and getting back to levels that we had historically in this market and we’re going to do that not only benefiting from the cycle that’s improving, but with full impact from a price increase, improving the mix of channels and products that really hurt us in the second quarter.

But also increasing volumes, which should help us to improve operational leverage, reducing our capacity costs related to this loss of volume. So we are very confident that we’re going to gradually continue to improve the business to recover to profitability in this region.

Luca Cipiccia

Okay, very clear. Can I ask quickly about Sadia Halal, a quick one?

José Alexandre Carneiro Borges

Well, go ahead.

Luca Cipiccia

My question was about two things. One if you could clarify what is going to go in there? I mean should we think about the Middle East operation is just more of a platform for different kind of segmentation, doesn’t mean you’re going to separate that or separate your division in a different way going forward that’s the first part.

And secondly, maybe if you can talk around – the main rationale for doing this and then the operational flexibility more consistency in strategy across the Sadia brand in the Muslim markets. But how much – that is a driver? How much is a better relations and maybe platform in this markets?

How much could it be the idea of crystallizing some value, there were reports about potentially an IPO? How – I don’t know if you can comment about that, but maybe give us some context of why you’re doing this between crystallizing international value, operational flexibility, and domestic relationship that would be useful?

Pedro De Andrade Faria

Thank you Luca, I think the reasons why Sadia Halal, I think you are quite right to point a number of reasons; why but I’d say that the overwhelming reason why is to accelerate growth. We truly believe we have a winning formula there. We truly believe we have the best brand in that market.

And we also have execution capabilities, which I think are second to none. So this entity will be born is already one of the top, it’s not the largest Halal food companies in world and accelerate growth means extending the business model that we successfully employ in the GCC, in the six countries in the Gulf to other regions, Egypt, Jordan, two markets, which are deeply investigating as well as some odd opportunities in Southeast Asia and other bigger markets.

So we think that the reason for I mean depend on management company is also again in the lines of our philosophic thinking of empowering people giving them freedom to run the businesses. We have a platform I think you have the benefit of visit, which I think is quite substantial good banks in terms of talent.

So I think unlike some of the comments, which may induce people to believe that we are trying to unlock value or monetize any assets. We’re truly thinking in terms of how we accelerate. In that sense, I think Sadia Halal bring something, which is quite unique in that world, because when we think about the perimeter of this entity, we are probably starting from farm to table and the farm starts in probably the best production herb globally, which is different from other Halal Food Companies, which don’t benefit from a Brazil production platform, which has perfected chicken production according to Halal standards in the last thirty to forty years.

We’re also talking about our distribution model in the Middle East. We’re talking about the Kizad factory in Abu Dhabi and of course expansion projects into Halal markets Egypt, Malaysia, Turkey, Jordan. So this is really a way to ignite faster growth into the – what I think is one of the best hidden values in the BRF story, which is our Halal food footprint.

José Alexandre Carneiro Borges

Pedro, if you allow me just to complement, Luca, if you think about this rate, we would be in this region from 60s to 70s on export platform. And the movement we made in the last few years and we accelerate in the last few years to become more of a local player, with local distribution, the branding, commercial execution and so forth that that you saw there.

And that we still have a lot of room to grow to improve our product needs to increase penetration to increase, to increase the offering and so forth, supported with a plant in Abu Dhabi and so forth this is higher movement of becoming more of a local player has really taken off the results of this region.

If you think of where we were, some five years ago in terms of EBITDA of this region, we were south of a $100 million per year in terms of our EBITDA in the region. To be exactly the number was close to $80 million. If you look back in 2012 and that wasn’t a particularly and that was actually a good year at that time.

If you think what we did last year, which was close to $450 million in EBITDA, this is multiplying the business by more than four just by the fact that they would put a lot of emphasis, focus, execution, of the team they’re really looking and building this platform.

So what Pedro is saying affiliate growth is how we think the next step to become even more of a local player to really capture the local opportunities over this more independently managed and more focus at team there to really accelerate what we think it’s going to be not only the GCC, but up on Halal strategy.

We see a lot of opportunities for growth in the regions. We have mentioned that over-and-over in our discussions and have this is a separate entity dedicated fully integrated we are in the firm believe that we can really ignite as Pedro was saying and then further accelerate growth and profitability of this business. This is the main reason behind it. You have mentioned a lot of other potential benefits, but this is what’s really driving us to pursue this opportunity.

Luca Cipiccia

That’s very clear. It makes a lot of sense. The fact that they could be a public company would it help any how or it just a consideration that comes after?

José Alexandre Carneiro Borges

As we have answer to CVMs considerations and questions and stuff, this is one of the alternatives that we are analyzing and we may consider to the extent that that helps us to further accelerated growth. This is something that we are considering as well.

Luca Cipiccia

Okay. Thank you very much. Thank you.

Operator

The next question comes from Lauren Torres, UBS.

Lauren Torres

Yes, hi good morning everyone. My question or a follow-up I guess on your domestic business. You seem quite positive about some of the industry conditions turning in the second-half of the year. But you’ve put some good pricing already in place, so just curious about plans for the second-half, do you need or would like to take more pricing?

I guess you mentioned that your competition has been somewhat irrational. With that said, if things get I guess more irrational second-half, would that change your pricing plans, and I guess in conjunction with that question, as you think about mix value-added products I guess are not doing as well in light of consumer? But how do you feel about that going forward? Is the incremental investments are going behind value-added brands, or if the consumer rate remain somewhat soft, the allocation from they shift? That’s my question. Thanks.

Pedro De Andrade Faria

Thank you, Lauren, and this is Pedro. I really believe unfortunately new wave of that concluded this is in due course, the movement in our input costs such as grains have been really beyond anyone’s expectations. But as you pointed out in the Portuguese call these movements. They will be less intense more granular and more focused in some categories that we feel find room for price increase to take place.

As we move into the second-half of the year, it’s a busy part of the year for us. It’s seasonally the stronger period of the year. We have activities coming around the corner. So I’m truly hoping and I think I have reason to believe that competition that have maintained a big level of rationality as we move into this part of the year is to continue to behave rationally.

We are all being subject to the same level of increases in our input costs. And I think we finished the first-half in a relativity, which I think brings back some level of equilibrium to the market. So I am hoping for sequentially a better second-half of the year, it will be a gradual improvement. But I expect this to take place as the Brazilian economy also starts to recover and consumer sentiment improves somewhat.

When it comes to the mix, this is really the big priority we have. The consumers are making choices. Consumers are looking for value for money opportunities, but we continue to roll our innovation program in what I think is a very satisfactory way. We have the big hit with Salamitos snack version. Snack is a very interesting high group category because it brings both high value-added for us. But also in terms of out of pocket and in terms of indulgence, I think is a category that brings a lot in this moment of the Brazilian economy.

We took a challenge to read nice growth in ready meals and we’re very happy to see. Now let Zynga used to be the big item and now it represents less than half of what we do meaning that all the categories inside that bucket are actually presenting very remarkable growth.

We got four percentage points in market share in that category and I think that the more I’d say basic items in our portfolio. This should be able to recuperate in terms of brands preference consumers who have migrated from Sadia to Perdigao. Some of them will now hopefully migrate back to Sadia, which gives us extra percentage points in profit.

In terms of channel, I think as consumers become less constrained in the budget, I think they give a rise to opportunities for convenience choice for brain choices. So I think this will be a gradual recovery I don’t expect one single thing to really like this. But I think we’re just moving to a more positive tone here because we already see the early signs of our execution paying off and a better economic environment overall.

Lauren Torres

Okay, good to hear. Thank you.

Operator

The next question comes from Alex Robarts, Citigroup.

Alexander Robarts

Hi, everybody and thanks for taking my question. I wanted to go back to the Halal project and the Middle East. I mean it’s pretty clear that your stated strategy is to accelerate growth with the Halal project overall. And I guess in Dubai, when we were at the offsite recently kind of the markets that seem to be very attractive and nearby as you said, also today in your remarks Egypt and Jordan – and Egypt particularly is my question this is a market with 80 million people versus 50 million living in the Gulf, it’s a significant market and as I think about you throughout history or at few years it’s been a dicey market for you.

I think at some point if I understand it was in 2040 did you want Egypt and it seems to me and these product to export more directly from Brazil as you say in the press release. Can you tell us a little bit about the kind of the growth potential in the Middle East vis-à-vis Egypt is the acquisition currency of a separately listed Halal entity necessary to expand there, and could it be some without a potential IPO.

And so maybe if you could just speak to the potential of Egypt in the medium-term and how might you think the Middle East a bit if you can expand effectively in that rather size of the market. Thank you.

Pedro De Andrade Faria

Thank you, Alex. For sure, Egypt, Jordan, Turkey, Malaysia Southeast Asia eventually in a second round, even Indonesia in other very important and large Halal markets are in our radar screen of potential place for accelerate growth and continue to go there. And as we grow in this expansion, to some extent, some of these markets represent a greater operational challenge given their scenarios, macro economics, political, and so forth.

And that’s why reinforces our view that we really need to be become more locals and be perceived more as of a local player than just what it used to be historically and export platform out of Brazil. Historically, we have entering the countries who very strong match importers as we’re moving along and growing. We are on the view that we need to strengthen our local position and relations with a lot of these markets.

We are analyzing if how could an IPO help us in other alternatives and so all could help us accelerate growth perhaps having local partners joining forces with us. How can that would help us to accelerate what they show acquisition opportunities. So that’s it’s part of our study as we think as you were mentioning Egypt for instance and what is the best approach not to be completely exposed to what is a challenging environment. We acknowledge that the whole region it’s challenging.

But it has offers great opportunities business and growth opportunities for us. If you think about – it can range from capital structure discussions, access to funding, really partner up with the local players, really being getting closer to them, really being perceived more of a local entity rather than just a foreigner being there that really opens room for us to continue to strengthen our people talent pool.

And a number of other factors operational, strategically and so forth. So we really think that you were there right you saw how much we have advanced in GCC in some of the market, some of the markets that we have build a very, very solid leadership in branding in market share, in price positioning.

I think we got and we have build a very strong and winning model that we’re looking for ways how to better replicate that in a faster way in term to market and so forth to the – to some of these other markets that I mentioned, and very excited about it and really working hard in this project, how to really continue to accelerate growth in the region at very profitable and attractive results.

Alexander Robarts

Okay. Thank you.

Operator

The next question comes from Jeronimo de Guzman, Morgan Stanley.

Jeronimo de Guzman

Hi, good morning I wanted to go back just what you mention your expected recovery and trying particularly in volumes in Brazil going forward in the second-half. I wanted to ask the more specifically if you’re already seeing any improvement in the trend in July so far, now that the price increases are from May potentially have been absorbed?

And then also kind of related to this volume question, you mentioned that the competitive environment has remained rationale. So I just wanted to understand what is driving which means I guess they’re solid in pricing. So I’m just wondering what is driving the share loss as it’s just – do you see it just as a timing issue or you’re just the price leader and recover that share or has there been something else that’s been driving the losses?

And then also it’s related to the volume question and the fact that you mentioned that the cash and carry format has been increasing, if do you have any specific strategies related to this format to continue growing or to be to have little more profitable going forward?

Pedro De Andrade Faria

Thank you, Jeronimo. This is Pedro. So in terms of volume trends we’ve pointed out that we’d seen even a pretty weak trend for the second quarter. The months were sets gradually and sequentially better, okay. As we finish the second quarter, we have reason to believe that we continue to see this gradual improvement in volume trends, July being better than June, August, which is a good month, because of calendar days be even better.

So I think that the overall trend is there. We don’t know how steep that recovery will be, but I have reason to believe that with most of the price realignment have been done with a lot of the equilibrium and relativity among channels among categories and more competitors, I think the market is a much more favorable stance. I think the reason for rationality is quite straightforward. If we the big leaders we’ve probably be the strongest balance sheet, we are suffering a lot of our smaller competitors and regional players. They are also taking the pain if not more pain than we are.

So that I think is bringing a level of rationality, which should even be perceived as we see the trends in production in Brazilian placements and so on and so forth. When we think about market share, I really like to believe there is more of a timing issue as you said. We have taken the burden of being the leaders in the categories in pushing them to a minimum level of profitability and this also brings a lot of trends around.

How do the channels and the trade accepts those movements, there’s some more prices the channels that we’ll fight hard not to lose that whatever price or reference. So I think a lot of that is said and done, we come to this end of the semester. With strong relationships with the trade, which have understood the necessity of those price increases.

They’ve seen also the competitors moving. So we’re seeing emerging trends of civilization in market share. I have pointed out to market share gains in some of the strategically relevant categories like ready-to-eat meals. We’ve seen stabilization across the entire range of process foods. So I’m more positive on market share trends starting to reverse or even week over.

I think you have a second question or I pretty much covered the entire question? Cash and carry, yes. So cash and carry, you are right. We have a team – a dedicated team now implementing a full blown strategy with cash and carry that involves different level of service more merchandise and more promotion that involves a careful metal door – methodological study of the format.

And as an opportunity cash and carry is indexed to brought in into our portfolio. It evolves understanding the perfect mix and the perfect portfolio. We are relaunching same items. We have discontinued, because they have a strong acceptance in that trade. We are bringing new SKUs. We are playing a lot with the spec side spec price, which is very relevant.

So I think we are already reaping the benefits of that initiative this channel for us is one in, which in the quarter. We have grown, compared to last year. So I think the trend is positive. We’ll continue to try and perform our very best in this channel, which I think is here to stay it is indeed what’s feeling growth of most of the big chains. It is indeed very interesting format for consumers, nearly half of the consumers there are actually end consumers are not transformers, so there’s interesting segmentation possibilities. I think we’re pleased with the initiatives we have for the format.

Jeronimo de Guzman

Great, thank you.

Operator

Our next question comes from Antonio Barreto Itaú BBA.

Antonio Barreto

Hi, everyone. Good morning. Thank you for taking my question. My first question is a follow-up to the commentary that was made in the Portuguese call that you’re able to buy grains at 14% discount through June and June was already lower than May. I just wanted to make sure I understood it correctly. First, is it 100% and through the end of the year also lead them through the end of the year that you bought, and if at that same price, there was a 14% discount review and you bought at the fiscal inventories or contracts until the end of the year?

Pedro De Andrade Faria

Antonio, thank you very much for the question. The number that I was giving was the purchase that we made in June versus May that was 5% lower on average. And that was a mix of buy on the spot contracts that we have bought and there is impacts of hedging contracts in other instruments.

When I mentioned about July about 14% to 15% lower it’s in the same basis. As you look forward through the remainder of the year. We have not bought 100% of our needs for grains and I’m here specific more specifically on corn. We have brought a significant amount of our needs and that is the physical contract with producers mainly okay.

The curve of the prices going forward, July own, it’s pretty much following the curve that you see on the on the markets. If you’re going to BMS, then you see one of the trading that basis versus the Chicago prices and so forth. Then you see the curve and that’s the curve obviously each one of our geographies has its own dynamics some of them more impacted by the second harvest, which are finalizing the next month or so.

But what we’re seeing in terms of the dynamics is what you see on the screen in terms of the curve going forward there. What I was saying was that the [indiscernible] the second harvest was lower than expected, and we’re still seeing more exports from Brazil than expected. I think we will most likely, as an industry – the whole industry, we will need to import some corn in the second-half.

And the import of corn could also help to ease the pressure or the potential shortage of the grain because of excess exports that we are seeing. So we have seen the prices come down just about this 20% that I mentioned. We are seeing, but we’re still seeing the dynamics under pressure. But even this under pressure give us very much the comfort that average cost levels that we’re going to realize in the second-half of the year are going to be more competitive to what we have seen in the first-half of 2016.

On this side new, for instance, we’ve seen an increase on the prices in the more recent months. That is one of the grains imports that we have, be able to manage our means more effectively. We didn’t got in a very tight position, so we are more comfortable in that regard. But that’s – the combination of these two is what’s giving us the comfort of those two types, but it’s going to be a much better than this impact that we showed in our results in the first-half of 2016.

Antonio Barreto

Okay.

Pedro De Andrade Faria

Happy Antonio to follow-up individually to go into more details, if you want. But this is, obviously, it’s an area that, we’re putting a lot of emphasis, a lot of focus. And I think for the results, which we just disclosed, we have achieved significant results. If you think about competitors that do not – not been able to be as effective as we were. We are talking here of about 3.5 or 4 percentage points of lower margins, or better margins that we gained because of our active management managing of purchasing the execution hedging protections of grain. So I think this has been a source of competitive advantage for us, and we expect that to continue to be the case going forward.

Antonio Barreto

Okay, thank you for that. That was very clear. And my second and last question is about your – the line that you reported as well the revenues. I could see in the financial reports that you guys had a gain on combination of business of R58 million on your 80.5 [ph] subsidiary there in the Middle East. And I just would like to know if this is a recurring gain. and if it’s recurring or not recurring, if it was allocated proportionally among the business segments?

Pedro De Andrade Faria

Yes. So I can take this. This had to do with consolidation of our Oman operations, okay? So this was in the Middle East, as we move from the 40% to a 100% stake. This was the adjustments in the gains that we actually have built over the years, and then we realize as we step up this on this quarter.

So it is – it is the – we call, it’s – [I saw their] [ph] operational, but it’s operational gain, it’s not recurring. We’re not going to have those going forward. And that was because of their more operation, so therefore, impacting the Middle East results.

Antonio Barreto

Okay, very clear. Thank you.

Operator

This concludes today’s question-and-answer session. I would like to pass the floor again to Mr. Pedro Faria.

Pedro De Andrade Faria

Well, I’d like to wrap up this conference by thanking you very much for participating. As we finish the first-half of 2016, is no secret. We have had one of the most challenging periods in the company, having very adverse effects coming from variables we cannot very much control.

But I just like to state that I’m overall very satisfied to see that the company is still running very strong, is still very much looking forward to its long-term strategy, seeing the benefit of a number of investments we have made in the last few years paying off, showing a lot more resilience in our international business. And also in a more positive way looking forward to a gradual Brazilian economy recovery, and of course, a number of our initiatives starting to pay off.

I really believe, this should be a year of first-half, second-half total different dynamics. There’s still a lot of uncertainty around variables like corn prices, FX trend, so on and so forth. But I think we’re very, very confident on our ability to enjoy tough times, as it was the case of the second quarter, and of course, be compensated by our efforts once markets become more favorable in terms of trends. Thank you very much for attending this call, and I look forward to seeing you in the next conference 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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