BRF S.A. (NYSE:BRFS) Q3 2019 Earnings Conference Call November 8, 2019 8:00 AM ET
Company Participants
Lorival Luz – Global Chief Executive Officer
Carlos Moura – Vice President, Chief Financial and Investors Relation Officer
Sidney Manzaro – Vice President-Brazilian Market
Patricio Rohner – Vice President-International Market
Conference Call Participants
Isabella Simonato – Bank of America
Lucas Ferreira – JP Morgan
Luca Cipiccia – Goldman Sachs
Luciana Carvalho – Banco do Brasil
Leandro Fontanesi – Bradesco BBI
Antonio Barreto – Itaú BBA
Joao Soares – Citibank
Henrique Brustolin – BTG Pactual
Operator
Good morning, ladies and gentlemen, and welcome to BRF’s Third Quarter of 2019 Earnings Results Conference Call. We would like to inform that this conference call is being transmitted over the internet through www.brfbr.com/ri and the presentation is available on the webcast platform. At this time all participants are connected on listen-only mode and after the presentation we will start a Q&A session when instructions will be provided. We request all participants to ask only one question. [Operator Instructions]
Now, forward-looking statements within this conference call regarding the company's business outlook, projections and results and the company's growth potential are purely assumptions based on management's expectation regarding the company's future. These expectations are highly dependent on market changes, the overall economic performance of the country and the sector and international markets that are subject to change. Remember that this conference call is being recorded. This conference call will be presented by Mr. Lorival Luz, Global Chief Executive Officer; Mr. Carlos Moura, VP, Chief Financial and Investors Relation Officer; Mr. Sidney Manzaro, Vice President of the Brazilian Market; and Mr. Patricio Rohner, VP of the International Market.
Now, we would like to turn the floor over to Mr. Lorival Luz, who will begin the conference call. Mr. Lorival, please you may begin.
Lorival Luz
Well, first and foremost, good morning to everyone. Thank you for participating in our conference call and earnings conference recall. I would also like to inform you that in addition to the president, we have other people that will make presentations. All the other VPs are here with us and they will be available to answer your questions. Well, internationally, I would like to comment and going to Page number 4 that would be the first data of our company and I would like to talk about the net revenue of the company that is BRL8.5 billion and first and foremost during the second consecutive quarter we've had gross margins at the level of 25%. Now, this also demonstrates a trend of raising our margins and this is something that we have seen since the end of last year and we have seen this year and this has stabilized during the last two quarters.
I'm talking about the second and the third quarter and we're talking about a level of 25%. Now when we talk about the EBITDA, the adjusted EBITDA of the company is R$1.6 billion. This is a 19% margin, but we would like to highlight that we had throughout this quarter. As you saw in the release, we had a tax related event regarding the ICMS based on the PIS/COFINS. And this tax related events, we're talking about an adjustment EBITDA of R$1,142 million in EBITDA margin and that is adjusted of 13.5%. And I would like to strengthen that. The company during the second quarter of last year, they had EBITDA margin of around 7% and this went up to 10% during the first quarter. And now during the second quarter and third quarter we have had a 14% and now is specifically in this quarter with 13.5% of EBITDA margin that demonstrates the evolution of the actions that have been carried out in the company and the company's current level because we're increasing our EBITDA margin.
Now, moreover, during this quarter, just a strengthening this fact that regarding R$1,142 million during this quarter, we had an additional R$111 million in provisions. These provisions were carried out in the corporate segment. Here we include provisions of public civil actions, demobilizations, and also an adjustment of Lucas do RioVerde, and also regarding the housing program we have R$19 million. And we also have provisions of closing out labor lawsuits that represented 70 – 57. Within this R$1,142 million, we have R$168 million that correspond to provisions.
Now throughout the year, we totaled R$3.9 billion. We would like to remind you that like in the third and the second quarter, we also adjusted the PIS/COFINS base and even though we exclude – if we exclude this figure, we will total R$3 billion another very important factor that we would like to highlight. It would be the consistency of the profitability of the company throughout, this company of R$446 million and accumulated R$523 million. Now, we also had losses in the year of 2018. And what is very important is free cash generation of the company, a robust generation of R$1.4 billion during the third quarter, totaling R$3 billion in 2019.
We would also like to remind you that within this R$3 billion, we include the investment plan that was announced last year and it was executed in the beginning of this quarter. But this strengthens our commitment of financial discipline with operational cash generation that is very robust and everything is being used in order to reduce our debt and to deleverage the company. This is one of our priorities. Now on the following page, Page number 5, our cash flow position that is very solid and robust of R$7.7 billion, our net debt reduction R$13.8 billion and an average maturity of 4.4 years.
And now our financial situation is better than what it was last year. And now regarding our leverage, we had a guidance of 3.15 at the end of this year and we have updated to 2.75 by the end of this year. And we are reporting currently 2.90 at the end of this quarter. And here we’re considering the effect of the IFRS16 and this would be 3.21 times. But what I would like to highlight here is the trajectory one – exactly one year ago during the third quarter of 2018, we reported an EBITDA of 6.74 and now we are at a level of 3 and we are pursuing to drop this leverage to around 2. As we mentioned in our strategic planning last year, this was during the BRF Day last year.
So we are going toward our priorities and within 2.75 we still have three months till the end of the year and the exchange rate is volatile. And as we have 57% of our debt and foreign currency, we may see volatility regarding this. And this kind of affects our balance sheet, but not the operations. This is why this leverage is of 2.75 now. Now, speaking about events, possibilities and opportunities that we have ahead of us and the prospects for 2020, throughout this quarter and very recently we have three plants for the Chinese market here that are licensed here. We have Lucas do Rio Verde that is for pork and poultry and they were licensed by the end of September. So we still do not see any effects in the results of the third quarter, but with a possibility or a great potential to explore 40% of our volume – and 40% of export in porks and 20% in poetry.
And during this last week, we also licensed our plant of Santa Catarina of Campos Novos to export offals for China as well. And with a potential of at least 5,000 tons a year of these products that demonstrates a great opportunity. The company has worked together with the Ministry of Agriculture has worked together with the Chinese market in order to license these plants in order to supply this market. And we have observed this throughout these months and this has generated a greater volume potential and a greater opportunity for BRF. And on Page number 6, during the last week we signed an MOU with SAGIA in Saudi Arabia with an investment of around $120 million in order to build up plant to supply the Saudi market, but this can also be an export hub for the region.
Therefore, this is a plan that will have an installed capacity of 50,000 tons a year that will produce industrialized product breaded and marinated products, hamburgers that are the objective of the company to grow more and more in the products of greater added value and also trying to reduce the result volatility and greater stabilization of margins and results. Saudi Arabia as all you are aware is a market that is a priority market like all the Halal market for BRF. We have been present in this market for over 40 years. We have a leading process. We have a very strong brand. We already have an excellent distribution in this region, mainly in Saudi Arabia. And we want to participate more and more of this moment and the 2030 view of this country.
I would also like to highlight and to clarify that there are no negotiations or no counterparts with SAGIA or with the Saudi government. What we do have is a strategic plan of BRF according, it has been mentioned beforehand of investing and to continue growing until maintain our leading position in this market. Therefore, there is no type of counterparty as there is no obligation that in terms of raw material that the raw material for this plant should come from the loco market. Where we are, we are committed with the final quality of product and all the raw material that is necessary that will be used in this plant should meet all the quality requirements that we assure the quality of our commitment that is our product, that this is our greatest commitment. If we have good quality raw material, that is locally competitive, we will buy locally. If not, we will have to balance this with the import of the products that we have. And with these products we can reassure the quality of the products that come from Brazil. So this is part of our alignment on our strategic alignment.
Now going to our next page, we will talk about our view in terms of grains that something that strongly impacts our cost that is the cost of protein. And this is the message that I would like to convey. Now, unlike last year where we had a very strong spike in terms of cost of soybean and corn what we can see here, yes there is a volatile situation because of trade wars, because of delays of the crops in the U.S. But this is an intrinsic volatility within a certain level. And this is something that we have observed in 2019. We have seen greater stability in this level. And with this volatility there can be a slight increase for the beginning of 2020. The company is dealing with this not as a financial position but yes as an absolutely, relative input and we do not use this as a financial instrument in order to add grace to the company.
When we observe protein’s prices, we see that there is a higher volatility, especially in swines. And I will talk about that in the next slide. But in a much higher level in relation to 2018 and beginning of this year, therefore, there is a certain level of volatility and instability in the protein's price but in a much healthier level than the one we had last year. And that can be seen in the company's results showing an improvement in our margins, especially gross margins. Therefore, our scenario as to costs to proteins that is much more positive than what we had during the first half of this year and especially during last year. And we forecast that this will be kept throughout the next the quarters and that will even increase positively.
And why is that? Especially if we consider our next Slide Number 8 there is still a ASF impact of the African swine fever on the left. So we see relevant information where we have information from the Chinese Agriculture Ministry is stating a reduction of swine matrix in amounting 45% to 50%. China is responsible to 50% of the worldwide production amounting 115 tons to 120 tons. That represents a very significant and relevant impact.
And the main curve let me highlight those breeders. Such a drop is constant. What is that? They are still slaughtering the females. The more they will slaughter the female animals, the longer it will be the recovery time and the crop reposition. And more we will delay the fact of effect of protein shortage, because there is a continuous as lottery and their offer is still at the local market. And even if we anticipate that the curve on the right conveys that local impact as to prices.
That yellow curve of the breeders they will stabilize and once a day reestablish the crop. There will be a shortage of products for consumption. Here we have the piglets and so hard and live hog getting to a higher impact offer demand when will that happen? We thought that could happen during the second quarter, third quarter, but it's still that will take place just once the African swine fever is controlled and hold. So every month or every quarter this scenario or this data gets closer. And due to the number of 50% reduction, there is a likelihood to see that happening during the first half of 2020. And that will be increased leading to a higher volatility and significant impact in regarding to prices.
Next slide please, let me just emphasize that later on we will address future perspectives. Our BRF Day, which will be that carried out the next Tuesday, November 12, in San Paolo and November 14, BRF Day in New York. So you are all invited to participate at BRF Day.
And with that now I'd like to introduce our CFO, Mr. Carlos Moura, who has just joined the company. And now thanks to Carlos Maura, we have a complete VP team. He now has joined the other Vice Presidents, who have been working together for one year. So this team has been together for one year. And Carlos just came to reinforce and close this team.
Now you have the floor. Thank you.
Carlos Moura
Thank you, Lorival. And good morning to all of you. It's a great honor. I'm very glad to be part of this team under Lorival’s, liability we have a very united team, thanks to solid and sustainable results. And we have positive future perspectives. Figures will be commented by Sidney and Patricio, so I will address our net revenue, which has increased at 8% in comparison to the same time last year that was due to the cost of a stable food product in comparison to last year, a gross profit of 28.4%, $2 billion. This is stronger development of our gross profit. Gives us an adjusted EBITDA and margin of 178% that represents a very important leap. And now we have $172 million in the comparable base. Once that we are highlighting the effect of $467 million, excluding ICMS in the calculation base as to surge here. Considering the harvest of this revenue as a consequence of SAGIA's as revenue, we have a positive effect of our financial results of $1,500 million, which collaborated for the second half of the year.
We have emphasizing our expenditures matrix management to where we reached our organized set of actions to keep our expenditures under control.
Slides Number 12 now, we see improvement in operational performance going from 17% to 18% last year, progress into 28% reaching a new level in the next two semester. In comparison to the past nine months, our absolute gross margin grows 10.3% year after year.
Adjusted EBITDA also tells us that we started from a level of 7% or 8%, moved into 10% and now we are around 14%, as Lorival just mentioned. Once we are comparing that to the exclusion of PIS/COFINS over the ICMS calculation base, same appeared last year. And this year the leap or the growth is off almost to 97% year-after-year.
Next Slide 13, wanted to highlight on three quarter. We had a growth of our net profile going down from R$16.32 billion to R$13.8 billion in the third quarter of 2019. Such a drop vector of these R$2 million off the net profit takes place due to operating cash flow. In our investment cash flow, there is a CapEx flow chart which is very structured by the company and the company is keeping its pace off investment capital, especially in biological assets in relation to our market efficiency industry 4.0 which is a new industry where we see new actions in our industrial complexes, IT support. We have to mention the implementation of the integrated business planning, which will allow an optimization of our integrated planning process.
And cash flow from investments due to our debts and also the currency exchange that we face at that same period taking our check in currency to R$4.16. And now our financial cycle as well has been highly optimized in all of its components, clients, suppliers, inventories. I mean the company has been managing the company in a very coherent way, especially working in revising processes and in sustain all practices throughout following months.
Slide 14 next, I'd like to highlight and detail leverage and debt profile. On the chart on the left, we have a financial leverage. I already addressed it here before. But let me highlight that with the IFRS16 we will have a leverage of 321, the profile of our gross that on the right charter of R$21.5 billion, amounted 58% addressing international currency and 22% in – 42%, sorry, in BRLs.
The net debt below, we can see a clear evolution of two components. We went from 3.2 to 4.2 years and our cash profile associated to debt maturity – average maturity, we had a stronger demand in for 2013. The repurchase of bonds with due time between 2020 and 2024, and also a domestic market and that’s of R$1,000,600 and the previous motorization of lines amount to R$700 million in the domestic market. All of that allowed us to reduce our debts associated to an average now extension time to national and international currencies.
With that, I’d like now to give the floor to Sidney who will address Brazil market. Thank you.
Sidney Manzaro
Thank you, Carlos. It’s wonderful to have you with us here today. And here I am to talk about the Brazil segment, good morning. Let me share with you our positive results in the Brazil segment in aligned to the strategic planning that’s exactly what we have been talking about in our past meetings. Our net revenue up to 6.3% gross margin reach in a level closer to the idea of 24.6% reflecting to a significant growth adjusted EBITDA of R$541 million with 12.3% margin.
There is also a continued to focus on leverages that will support us in the future. Our continuous growth trial to our new pipeline and new projects, which will build up our future results, as well as our – getting back into our investments brands recognized in the top of mind awards such as the Sadia’s campaign, Qualy and Deline, all of them awarded and recognized by the market. Thanks to the awards that we got.
Now Slide 17, results they become a more evident and clear once we see a consistent growth of margins and there is a rise in profitability in the past three terms with a level of 24.6%. Adjusted year-to-date we see our significant growth from 19.9% last year moving to 23.3% this year. That reflects a constant growth and a recovery of our bottom line at the – in the Brazil market amounted 12.3% in the last period.
And now Page 18 and here is where I would like to elaborate a little bit more in the explanation. We can see that in volume we still see a drop vis-à-vis last year, this is a reflection of our profitability policy and because we are adapting our chain to the new reality of the inventories, therefore pressure for liquidation has ended. Now when we see for example this market, we can also observe that the growth or the drop is driven by in natura products where we concentrate our great efforts to regulate our chain see – when we see processed products, we can see that there is light drop vis-à-vis last year of 1.1% and when we analyze the past period and we compare it to the last quarter, we grew almost 10%.
This has generated never growing revenue of 6% when we compare it to the last period that was 7%. And therefore, our margin is growing in a consistent fashion. And also this is reflected on our EBITDA. Now this also impacts our market share. Our market share presents a drop of 1.3% and it is also important to understand what has happened here. This is different between categories that we work with because it’s reflected in a different way.
So there are categories where the past effect of liquidation had a greater impact, and this suffers more. Now the segments where there were no major impacts, we suffer less. So we can clearly see that within the Cold segments we grow 0.6% vis-à-vis the last year, Cold Cuts here is where we have a market share of 50%, Other segments that we also follow in a positive way would be Margarines and reaching a level on a significant level when we compare it to our history would be 54.2% and this is a growth of 1.3 percentage points and where we have the greatest impact regarding the balanced policy of the chain and the recovery of our margins, because of the transfer of price.
We have a negative impact specialty when we’ve talk about Cold Cuts where we drop 2.7%, where we regulated our inventory and now in – with more consistent margins, we are already recovering our growth and the same thing with frozen product and frozen products where the impact the self service operation is impacting our prices. But I believe we already have the retail driving Colds and Margarines.
Now when we see this scenario, we are highly optimistic. We are also consistent regarding our strategy and we will continue having more gains, because of the better execution and operational efficiency. We will work a lot with innovation, improving our in our services, investing in our brands, so that we can have – so we can provide our consumers the desired brands.
I will give the floor to Patrício, so he can talk about the positive results in the international market.
Patricio Rohner
Thank you very much, Sidney. Good morning. Now let’s see the international market. We are on Page 20. Here we can see an increase in volume practically at the same level of last year, but a slight drop vis-à-vis the last quarter, especially because of Turkey that ended their exports to Iraq and this impacted a volume that represented more or less 30% of our export. This is an important volume.
Nonetheless, it was managed by other markets. Now when we go to the revenue, our revenue was 4.8% lower than the last period. When we see the gross profit, it was almost 8%. When we see the EBITDA, it was only 2% less. And I would like to explain this effect in the upcoming slides.
So when we analyze things per geography. Halal is very important. It has been 59% and non-Halal represents 41%. And if we analyze per protein 79% would be poultry, 8% swine and 13% would be other products, especially in this industrialized products. When we analyze this category per product, here we have poultry whole 37% and most of them have the Bambet [ph] and the Sadia brand. The poultry parts represent 41%. Swine represent 9%. And FBP 12%, that are the main focus of our moment that would be for whole poultry, then we’d go poultry parts, industrialized swine and FPP.
Here we have a picture of the Halal. Here you can see the important percentage of processes. Years ago when we have 4%, now we have 14%. And poultries have 86% and I believe that poultry parts have been cannibalized. And this has been cannibalized when we compare it to a whole poultry. When we see the net revenue, this is what was mostly impacted. Here you can see a drop of 11.6% vis-à-vis the last period and what happened with the EBITDA.
Well, it dropped, but not so much because of the control of the expenses and the good management of the prices of the volume per channels. And this is something that we have done in the Gulf. In order to improve the situation that presented in Turkey, we would like to remind you that Turkey represents 30% of the total volume that is sent to Iraq and Iraq was closed, almost totally only the Northern part of Iraq was open. That was highly saturated because of the exports of the Turkish producers.
So this exerted pressure on the Turkish market to sell products that are not ideal for the Turkish market. These are smaller poultries and that were frozen. And they have – and this was to sell poultry that buys fresh products. So this has impacted a lot. So Turkey is the main Halal market. And nonetheless Saudi Arabia, together with the Gulf country specially the Emirates had better prices in order to maintain an EBITDA of 17.9% totally aligned with the former period. The only thing that this generated a little bit less cash because of the volume.
Now when we go to the international markets, the volume at the end was better, especially when we compare with the mix of elusion process products are growing. When we see swines here we have 18% in comparison to 70% poultry 70% the revenue grew 5%. But as the other international markets represent 40% of the total, they weren’t able to generate all the volume and the revenue that Halal had lost because of Turkish – Turkey. When we see the EBITDA, we can see an expressive improvement in the total period from 20% to 23% of EBITDA that was the growth of 20%. So when we compare year-on-year, the sales price was 32% higher, they were higher ship volumes, this was 5% and the new plans haven’t been opened yet and there is a 23% margin that has been the best margin in the past years within all of these market groups.
So I would like to give the floor once again to Lorival.
Lorival Luz
So thank you very much, Patrício. Just to bring this presentation to an end and before we start our Q&A session, I would like to stay that the strategy outlined by the company has presented very positive results. Our company now is in the new level, when we see the margins, when we see its cash generation always reminding you of our commitment. This is a commitment with the profitability and sustainable and continuous growth always with our eyes on the long-term and the trajectory of the company. We are operating in a very efficient fashion with our inventories at very low levels, something that allows us to have a proper management of our exports, of our sales in the local market. Always with the objective of adequate in ourselves that the long-term and now the recovery and the results are appearing as it was planned.
And as I can see, things are happening in an accelerated fashion faster than what we had last year. Though, we’ve seen the net result of the cash or the leveraging of the company, our cash generation is a result of all of this. And our prospects are very strong, because of all the structural effort that has been carried out and the impact that we will have with the new licenses within the last corridor that will generate new results as of the upcoming quarters.
Now our leverage guidance – deleveraging guidance, perhaps maybe affected by certain volatility in the exchange. What is important, is the trajectory of the company’s management that it is to take the company to 1.52 times and to recover the growth, not only in the foreign market, but in the local market with innovation, the launching of products, and also the expansion of our plants. This is just a summary and a conclusion of the first part of our presentation.
With no further ado, we will open to our Q&A session.
Question-and-Answer Session
Operator
Ladies and gentlemen, we will initiate our Q&A session. [Operator Instructions] Our first question comes from Isabella Simonato, Bank of America.
Isabella Simonato
Good morning to everyone. Good morning, Lorival. I have two questions, local questions. Well, one would be, when we see process products, what draws our attention here would be the improvement of sequential volume, where we compare the second and the third quarter. Although, the average prize was maintained and the price of the poultry was lower. If you can give us an idea of how you see the dynamics, especially in these segments. Do you believe, how would you consumer responding to the price?
And my second question would be connected to the local poultry production. We see the data that has been accelerated. So how do you see supply and demand, mainly, because of this uncertainty of when the foreign market is going to accelerate in a more consistent fashion? So I don’t know, if you can elaborate and tell us what do you see on the side of production?
Lorival Luz
Well, thank you very much, Isabella. I’m going to briefly answer your second question and then I will give the floor to Sidney. Once again, here what we can observe here would be a context in general way and the prospect. Now, when you’ve talk about housing, especially for 2020. Now the data exists and you can see it, but yes, there will be a need for more proteins. We have already seen shipments towards China, chicken breasts, something – well, this market really did and buy a lot of chicken breasts. So this demonstrates that there is a greater demand and so what we are observing and, yes, this is a new opportunity as you can see the chicken breasts market was mainly for Europe. So the effect of the protein need is making China and other countries to import these products. So I do see this increase.
I believe that the production and the results will be seen throughout 2020. And I believe here that during this period, we will have a demand for these type of products. So yes, as I already said, perhaps there will be some type of price volatility. We’ve recently saw natura, but this is short-term volatility with a high trend. And as I said, we did our homework and we can properly manage these facts to see, when is the best moment to sell. Because we have a low inventory, now the long-term trajectory, perhaps during a certain month we will have an impact in volume. But what we see is that there is a positive perspective in the mid-term and this is where the company wants to find its profitability. I will give the floor to Sidney now.
Sidney Manzaro
Good morning and thank you for your question. Yes, so in natura or to poultry, as you have asked. Differently from our markets forecasts, third quarter showed in the poultry market in Brazil, a decrease in prices differently from what the market forecast agencies had said. And that is to a vulnerable market considering that export flow, not being quite regulated as to some new actions that are taking place as systematically. And as this is a pulverize the market with more players. There is a certain change oscillation in prices being responsible for a poultry prices during the third quarter lower than what we were expecting in terms of higher prices. The idea was to keep our prices and this is the reason why we had the drop in the volume as that was a situation. And thanks to a higher export flow prices or the recovery they would get back to normal.
And this is exactly what is happening lately. With the pressure off some other prize as a swine, bovine and now the recovery of a poultry prices are going back to the traditional levels, end market level prices. So there was a poultry price drop in the Brazilian market. In a certain specific time and that is no longer the problem. That will be a recover. And it will go back to the previous level in few months. So we had the summer price problems, we suffered a little bit, but that does not to change our future demand scenario. Thank you.
Operator
Our next question is from Lucas Ferreira, JP Morgan.
Lucas Ferreira
About process meat food, there was a price repositioning the beginning of the year, the swine exports they are now much more consistent in terms of volume and prizes in comparison to poultry. Do you see room for a new prices spike? If so – if yes, in which categories and if not because consumers are not still able to absorb it to capture such an increase. And other question to Patricio, what would be a scenario once a China reopens to the United States. And then it imports poultry again from the United States. What sort of challenge or did that represented to you and what sort of opportunities would that represented to other markets? Maybe China would absorb a higher volume. So these are my two questions. Thank you.
Lorival Luz
Hello, Lucas. How are you? Thank you for your question. As to in natura markets, I guess, I had answered in the previous questions. We see room to market to price recovery and that should grow. We are really sticking to our yield strategy. So we might have compatible prices to our policies.
So now let’s talk about the process products. I guess, that the price level, I mean, the rebalance – the price of rebalance that we did the back in the beginning of the year. That was concluded back then and now what we are measuring is the fellowship of our competitors, which is slowly is getting closer to our levels. We still have a fellowship gap in relation to the competition, but we hold to our policy and considering the competitors price increase. We have increase in volume of our products and the Brazilian markets. We see possibility offer new actions according to the markets behavior. We had certain stability in the previous season allowing stable costs.
Now looking ahead, we see – we foresee a new perspective, a different scenario which will be related to higher costs due to inflation. Going back into normal price of policies, what we did in the beginning of the year, was just a correction of what was spending and due to – this is stabilized chain. We had squeezed the margins, but thanks to new regulated the process. We will go back into a market dynamic, where we have competitors, where we have a grain pressures and external market demand. And with that analysis in mind, we may reach the conclusion if it will be necessary to have a new price increases, but so far what we have in terms of prices is within our politics – our policies. I mean, and that's exactly what we did and what we said in the beginning of the year this is the line that we'll follow and we'll keep with this normal prices and costs policies.
Lucas Ferreira
Hello Lucas. What ought to happen if China opens fowl trade to the United States?
Lorival Luz
Well, I don't see that as a main problem, that will depend on how much of that, on how that will be done, if that will be done gradually or not. And the United States just import, exports everything throughout the brokers in Africa, in some Eastern countries and other countries in the Russia or around.
If China opens, there will be a volume reallocation. They do not have a too much wings and/or breasts. And China has a higher demand for this food, than what we are able to export to. I don't see that as a long run problem. All the countries that would help our strategy to sell the mix, where we sell different parts of the animal and sometimes we find it difficult to sell like legs, when we have, Japan acts as an example to illustrate is the Canadian one that Canada was closer to China and they ended up at dealing with Japan, that increased their frozen food inventory impact in poultry exports and legs and wings exports to have open and stable markets. It important to allow us to better prepare ourselves for market volatility, those markets which open and close or that is an obstacle.
But swine as they are suffering – they suffered a little bit in the beginning of November but now prices are more stable, poultry protein or they have lower prices but there is market for everything. I don't see that has any problem. Thank you.
Operator
Our next question is from Luca Cipiccia from Goldman Sachs.
Luca Cipiccia
Hello, good morning. I also would like to go back and talk about Brazil market. Lorival, you had the two quarters with a gross margin of 25% much healthier than what we had in the past two years. Despite that, it's interesting to say that the Brazil margin and international markets margins, they were above in the first quarter in terms of Brazil profitability. Letting aside short-run volatility, there was a premium for gross profitability margin due to the Brazilian mixed market share distribution et cetera, et cetera. And I have the feeling that still Brazil markets is below of what it could be high-20% of gross margin, which I believe it should be much more achievable in that scenario where we have a health international markets with their go-to demand.
I'd like to hear from you if you still have that perception that domestic profitability margin could keep growing. That would be a spike, maybe not on a short-run, but maybe on a mid-run. And if there is that financial urgency by international markets which cannot be not considered, at what extent will the company focus to innovation into the domestic market, with a focus in a product mix or at least talk about to some of those issues that were not to taken as being a priority as part of the financial debates that we had in the past one year and a half.
Lorival Luz
Thank you, Luca for your comments. First of all, about the Brazil, within a context of general margin, yes, there is room for improvements. Let's not forget though that history – historically speaking, and if we'd go back in the past of the processed product mix and In Natura they would reach 80% to 85% of processed products and 20% to 25% In Natura. Today we have 30% of In Natura with lower margins and 70% of processed products. That may improve from two different perspectives.
First 2020, if we see a economic growth, revenue increase, that will take more to the processed product sides allowing better margins and that may also improve under a second perspective once international demands when China, we are embarking poultry to China with the reasonable prices, I mean the higher the demand – the higher the external demands, the greater will be the local In Natura price. Having said that, yes there is a chance for Brazil market improvements always and let's not just limit such an improvement to external prices but to everything that has been done in Brazil and we'll talk a little bit more about that next BRF Day on Tuesday about commercial improvements, distribution, customer service efficiency and operational costs, efficiencies. These are all frameworks that once we add to market movement, allows us to feel more confident to reach a new level with a positive perspective about that.
And now going into your second question that allows us to feel more confident to feel that there is a robust investment in business. We had invested more in the Saudi Arabia and we also have to invest more in other markets like the Brazilian markets that is a priority. We are deploying more resources and investments throughout different initiatives, searching, – always searching to go back to what we had in the past to be pioneers in releasing new products, new categories of products and to have a relevant position in the market always after greater margins and products participations for processed products and a better balance for our outcomes.
Luca Cipiccia
Very good. So I have a quick question too, along those lines, could you elaborate or clarify your brand strategy between Sadia and Perdigão. It's been a while that we saw that exchange. What can you tell us, what can you share and how do you see that brands advantage extends that part of a, there's a new setting or a structure, it's quite a weird that we do not talk about those, the two main brands and it's different segments.
Sidney Manzaro
Okay. Luca, this is what we have done. We want to improve our brands in a nutshell in BRF, We can explain this in details, but well in a nutshell, the brand territory Sadia, for example, is the brand that presents more quality, more practicality and driving more and more because it's a innovative brand.
Now the other is Perdigão, has a very important role because they, it has an important flavor. We work with indulgence and we also work with special moments and occasions, where people are sitting at the table and we have people at the table that are connected to this brand.
Of course, Qualy, Qualy that is the brand that we're working within our spread markets. So, I believe that these two territories are our focus. And if you analyze our campaigns, you will see this present. And we also work a lot with the attributes of Sadia, like real pizza, lasagna without preservatives. And it is a brand that talks to this consumer and this is a consumer that wants superior quality in his foods, wants innovation and practicality. And on the other side, you see this in our campaigns, you have a campaign, the barbecue campaign, you can see people eating at the table, eating a bean casserole.
So we work with two brands very close, but now they are faded into clear territories and I believe that the value proposal of the consumer is different for each one of these moments.
Operator
Our next question comes from Luciana Carvalho, Banco do Brasil.
Luciana Carvalho
Okay. Good morning to everyone and thank you for taking my question. My question is regarding the Halal market, we've seen that the volumes have dropped and there have been lower prices and we have seen the effort of the companies to control costs and expenses that allowed you to sustain your margin. I would like to know how much more can you do in this aspect, perhaps we can see that this low double-digit, this new level of margin for the region or can we expect a progress in the short and midterm?
Lorival Luz
Okay. Good morning. Thank you very much. When we analyze the Halal margins, Halal is presented in two major regions, Turkey, that represents 40% of the total amount and the Gulf region where we have Saudi Arabia and this represents 60%. The problem here with very specific in Turkey, because of exports. All the Turkish market exports 30% of the production that goes toward Iraq.
Now Iraq that was closed and this is the country that consumes a lot Baghdad, and Basra only Kurdistan was opened and this is in the Northern region and this is why we had to sell the volume because we have our product schedule. We schedule the six months in advance when we – so we have to sell gray part of this volume to Turkey. And this impacted a lot the prices. The Turkish market was giving us the best result of the Halal product. And at the end of the line it represented the lowest result in the quarter.
But when you see the Gulf region that is pressured by consumer, there is an increase of costs, light fuels were at a high price level. We are above our budget and we are able to, we believe that the volumes – we are placing our volumes with no problems. There are certain markets like Egypt and Yemen that delay prices from – delay payments from one month to the other, but the impact was merely in the Turkish exports.
And this is where – but to sell this volume within Turkey impacts. And now if you see the total EBITDA regarding the percentage, I believe we're at the same level. This is more or less 17%. This is a high level. The only thing that there is pressure here because once again China is not taking these volumes. Africa still presents problems of currencies in some markets like for example Angola that is undergoing certain changes in their import format. And I believe that because of all of this we have to place greater volumes. All the industry has to place more volumes in the Middle East.
But in reality, I am very reassured that the prices that we have today now the cost of distribution, the mix of products and the allocation per channels, well, I believe that all of this is very positive and I see the same situation for the next year and I believe that it will even improve because there are producers that are going from grillers to heavier poultry and we have new markets that are opening.
Luciana Carvalho
Just a second question in the region if you could elaborate regarding your expectation for Saudi Arabia, do you believe that there will be in Greece an increase after the government visited this country perhaps they will open their country or do you believe that your growth in the region will be because of the new partnerships as you announced with Sadia? Well, Saudi Arabia has a clear target. They want their local production to be 60% well, last year when they closed many companies of Brazil, they only, they almost reached 60% during a couple of months and this year it's 50%.
Lorival Luz
Yes. I believe that our President's visit was very important to show, our commitment with these countries. This was a very intense visit to these countries and also for the governments to see Brazil as an additional partner and that helps them with their security, food security target. Ukraine isn’t exporting Saudi Arabia so – there we can see improvements. We have had excellent conversation with the officials, with the government, but the target is clear. They want to reach 60% to reinforce their food security. And this is why we're following these lines. We have brand, we have distribution only in Saudi Arabia. We have 500 people working us and our distribution is very efficient. So yes, we are going to be part of the 60%.
Luciana Carvalho
Okay. Thank you very much.
Operator
Our next question from Leandro Fontanesi, Bradesco BBI.
Leandro Fontanesi
Good morning and thank you for the opportunity. There are two points that I would like to clarify regarding the results. What would be the adjusted EBITDA? There are two effects that you mentioned that would be R$ 57 million in legal expenses and R$ 111 million that would come from provisions and the mobilization expenses that you do not adjust in your adjusted EBITDA. I would like to know if you believe that these two effects will be non-recurring effectsand that they should also be adjusted.
And my second point regarding your guidance, your reviewed guidance of 2.75 would this represent R$ 1.1 billion during the fourth quarter? That doesn't suggest that we will have an improvement. I would like to understand if I'm understanding this correctly and I would like to know about your expectations for the Christmas season and how this can add onto your EBITDA?
Carlos Moura
Okay. This is – Leandro, Carlos speaking. I will – okay. I will answer your question and the Sidney will talk about celebration. When we talk about the corporate effects, we decided not to highlight this as non-recurring item because provision that exclusion for civil cost. Well, this is part of our business. You do know that we do have a labor force of over 88,000 workers and moreover. You have the effects of legal lawsuit and the flow that has been reducing, but we are investing in the improvement of internal processes in order to avoid new legal lawsuits, but in some regions of the countries as were present in many regions, there is a demand effect and the balance has to be ready to respond to this and this is something that is part of the business.
Now the expensive with asset demobilization, we are trying to optimize our asset base and with this you can find adjustments that you will have to carry out throughout the way. I don't consider this as non-recurrent because perhaps you may have moments where you have an impairment or adjustment or the devaluation of an asset and you have to recognize this.
And the third point that is a provision for the municipality of Lucas do Rio Verde, this is a housing project that we had. This is a reserve that we have here and we didn't see it as non-recurring because this is a matter, that is common to our business and as we also have a different amount of employees in the regions, we considered this intrinsic. Regarding our guidance, for example, our approach is always geared toward reducing our debt. I would like to highlight the financial discipline.
Our target is between 1.52 times the EBITDA. Now 2.75 is a reflection of a number of components between exchange rate variation, margin shocks. So really we preferred to show a relevant reduction when we compare it to the 3.15 that we had in the past. And it's not only to do the – to make these see these numbers backward forward. We have to consider here other effects when we see the net debt. We have to see that we have more cash generation, but we also have effects within our debt. Of course here we have the exchange rate variation that can affect us. This – we improved a lot our financial cycle as you have been able to see. But at the end of the year, you always have the effect – a compressive effect on this. So these combined factors resulted in this guidance and we are reassured and we believe that we will achieve this because the financial discipline that Lorival mentioned. So Sidney will talk about the celebration products.
Sidney Manzaro
Okay. Thank you very much for the question. We're really reassured and optimistic with the Christmas products at the end of the year. I think there's a combo of factors here that make us feel reassured. Now, number one, I believe that for example, the – our fund, when you have next lower debt from the consumer, I believe this is transferred to the consumption and short-term consumption. I believe that this combo of scenario with a more favorable short turn economic possibility gives us a good – we have the exchange rate, the exchange rate is above R$ 4. So one of the proteins has greater pressure that is cod fish that is always present during these festivities. Perhaps it will be more expensive and combined with cattle because of the scarcity and prices. Well, I believe that the environment.
So I believe that now the consumers will buy more, more poultry. Now we also have swine and beef in last year, because all the surplus of the market swine, I believe or pork was a very good opportunity for the consumer for the Christmas dinner before the foreign scenario. I believe that porks have lost momentum and this combination well. It makes poultry the smart choice for Christmas. And during your Christmas dinner you have a product that will cost BRL 70 BRL 75 and this is for six and eight people and now the other proteins are very distant – for distant from this consumer expenses. So I believe that this scenario leaves us very optimistic for the end of the year.
Leandro Fontanesi
Okay, thank you very much.
Operator
Our next question is from Mr. Barreto, Itaú BBA.
Antonio Barreto
Good morning and thank you for our question. Lorival mentioned that cash flow generation was more robust than in the past quarters? And that's a factor. But let me clarify some aspects here to better understand that. First as to the non-recurrence such as ICMS, I understood that there was no cash effect? Can you confirm seconds.
Second, was there any change with interest as offer working capital gang, receivables or anything like that and towards as to hedge operation. The company has a balance hedge with a longer dollar position of for US$400 million with BRL 125 million cash in the quarter. Does that make any sense at all? So we can have a better idea about the interest component during the quarter.
Carlos Moura
Thank you for your questions. So answering to the effect of PIS/COFINS adjustment as to the ICMS over the PIS/COFINS calculation, please correct to himself. There is no cash flow effect. So your perception is confirmed into interest rates. We have withdraw operations continuously as well as physic operations and that's to hedge that has a longer effect. There is no immediate effect in the quarter as to the position which is just a prospective one so far. We had also on a just about to the investment hedge methodology, reducing the consumption of derivatives with a financial consumption. Some new opportunities are being assessed and will be available later on to go into details about this calculation if that is necessary.
Antonio Barreto
Thank you. I'd like to ask our second question to Patricio. In fact, I'd like to clarify something about opening USA to China. It's always a honor to hear you, but it's not quite clear. When we think about United States opening?
Carlos Moura
We understand that when we talk to the local industry, you have a very good prices for lags in China, $3,000. The towns up here are higher price than the one we get for breasts – chicken breasts. Once you open to the American market, you open competition to a premium – in a premium market on some components and on the other hand you'll decrease that participation unless premium markets and we have the feeling that is a negative impact to the company. But according to Patricio’s comments it seems he believes exactly the opposite.
Patricio Rohner
Well we are participating at several meetings with experts who are analyzing the market. They want to understand more about the booth spreads and those of us that monitor prices and so on. We have a higher migration are for beef to poultry, especially considering price per kilo. Therefore the lag demand is much higher than the one that we were able to produce and exports and by that I mean Brazil as a whole. There is such a high gap off swine proteins in the market that first of all, I do not see any volume above the 20,000 or 30,000 tons per month, which is the capacity of the American market could export.
We have to understand about that plant migration. But I see that cattle proteins and the issue that we won't be able to pay for pork in the market and then migrate to poultry, well million tons missing and the price difference even if that is US$3,000, that is much lower than what we would represented to buy one kilo of pork meat in the market. So we are very optimistic in that sense.
Antonio Barreto
That's clear. Thank you, Patricio.
Operator
Our next question is from Joao Soares from Citibank.
Joao Soares
Good morning everyone. I have two questions, two follow-ups actually. First, it's to Sidney about processed products prices for the fourth quarter. Considering that over the second you said before that you would assess several variables. So what are the main obstacles for new price increase? If there are any obstacles, would that be local demand? Consumers, they still have a pressed wallet or possibly there is no foul ship by competition? Let me just understand the what is preventing pricing increase?
And second question, about cash flow. I like to understand more about working capital. Is that sustainable? Those 18 days of financial interest. Can we expect an improvement because you keep mentioning about finished products line. From a working capital standpoint what to expect from these measures effectively and what to expect for the quarter?
Sidney Manzaro
Hello Joan. Good morning and thank you for your question. We have here two different contexts. First one, first scenario. In natura we believe that with this scenario that Patricio has just mansion, a greater demand for poultry can see during this scarcity of pork and that migration to poetry that will take the markets to higher levels of price in Brazil and consequently that we will open a window of opportunity to repass. The fact that that did not happen before does not mean that it will not happen in the future; we believe it will and considering that equation of export flow, the last quarter was different from our forecast, but we believe that that pressure will go on. This is the in natura scenario as to process a products, we have a different scenario.
We have elasticity, we have competitors and we have offer and demand and in the end we have an equation that will allow better profitability and higher market share. There is a market share look or – and the fellowship of competition is closer to our movement. And we as market leaders, we understand that we had our first initiative to provide a position but that fellowship is taking place and therefore there is an equation versus the competition followship versus the margins that we designed in our strategic plan. So that is an equation between market share and profitability designs for Brazil markets as part of our budget.
Lorival Luz
This is a broader calculation any time that we'll say that Brazil will export more raw material that is correlated to that, that allows price opportunity and also opportunities to build up a portfolio with our products, which we are left. This is a market analysis that we have to be very careful about. Objective margins and market share equation versus export costs.
Sidney Manzaro
Okay. Joan. Let me just add to Lorival, comments. A quick follow-up please. Now you may talk Joan. Go ahead.
Joao Soares
Talking about Christmas products, but maybe you should conclude your reasoning?
Sidney Manzaro
Yes, just adding fast. We have to highlight the BRF integration level and to process food industry that is key. So once you have pro – other proteins prices especially the beef price increasing, there is a migration to our proteins definitely. And in addition to that, our possibility to capture that considering that our integration levels of 100% for poultry and over 90% for swine is, so that represents a differential and an opportunity that BRF has to generate and work well in that market.
Would you like to add anything?
Patricio Rohner
No, no, no. No, that’s very clear now. Thank you, Lorival. Talking with smaller players, it seems that there was a balance in the past year, where smaller players they reduce their volume of categories for Christmas products. And it seems now that the markets is much more adjusted where big players, they are well positioned in terms of Christmas market share products. Do you see a greater occupancy in relation to the past two years? Maybe that would help with that price calculation?
Lorival Luz
This is a short run operation, right? So I may – I guess that by the end of the year we can give you a clear statement or explanation. Last year we grew in market share, thanks to a combination of factors, poultry and the pork. However, this year's scenario is totally different than last year's, we are rather pressure over the cane considering the raw material left in Brazil and all players in the markets they operate.
Joao Soares
Is still working with raw material left?
Lorival Luz
But this year we have a totally different markets, we have exchange pressure – current exchange of pressures we have a swine, we have a price repositioning for beef, poultry and swine, taking that to a level of much higher prices in comparison to last year. But conversely, we have a positive aspect which is guaranteed funds, short run, investment, injection and we believe that the poultry market will grow, there will be a spike considering that reasonable growth in this category 1 percentage points to 2 percentage points, this is a soft and mild growth about poultry in composition, swine, beef cattle and the poultry.
Poultry will grow more than beef and swine. So for those of us who have higher concentration in poultry, we have to be optimistic as we hope to get an year with results and volume higher than the one we got last year.
John, just to closer to your second question about the financial cycle and investments. The balance has to work on behalf of the company and we have a different cycles, a long and complex chain, but we had reached at the level of a net financial cycle, but you may need to raise the inventories considering the grant cycles and also the client base behavior and for that you have to allow different offers.
And talking about consumer's relationship and purchase success, where we have to get the best business and financial negotiation to the company. Therefore, today we have – I have 18 days in average for liquid time, for net time and we have to ensure that, leading to cash flow as well as administration of the working capital in a very efficient way to the company. So I believe that in the next quarters will be around 18 to 22 days max. But I believe with that we are in the proper level.
Joao Soares
Thank you very much for answering my question.
Operator
Our next question from Henrique Brustolin from BTG Pactual.
Henrique Brustolin
Good morning to everyone, and thank you for taking my question. I would like to go back to Saudi Arabia to talk about your new plant. Lorival, you mention there is nothing defined regarding raw material, that this would be exported from Brazil if you would buy local raw material as you have a part of local purchases, I would like to know how you see the margin of this new plant. And also just to clarify, if there is something to be – is going to be defined?
And the second question regarding the region, if you could tell us how you see the supply and demand with this plan together with Abu Dhabi? Thank you very much.
Lorival Luz
Thank you, Henrique. Now talking about sourcing of our new plant. Nothing has been defined yet, because this will all depend on the products that we make and many times it's not even a matter of price, it would be the competitiveness between their market and the Brazilian markets, there they only produce the griller, that is the small poultry, if you need to marinate the breast, well, mandatorily you're going to have to import the breast from Brazil, because of the size of it.
So it's not even a matter of competitiveness of price, but yes, it would be the adequate. Well we need the right product so that we have the proper product at the end to guarantee air quality. And this is something that we are going to pay attention to.
And I will give the floor to Patricio, and he will talk about how the plant will work when it will be ready and he will talk about the market dynamic.
Patricio Rohner
Okay, good morning. And also to – I would like to strengthen that today that our Abu Dhabi plant buys from the two or three main producers of Saudi Arabia. We developed this together with them because you have to remember that you cannot package the entire chicken. And Saudi Arabia is the market that has greater penetration of whole poultry because women were in this market and the percentage has changed, so when you got the poultry, because you have a dislocated leg or wing, this was a problem for the producers, so it ends up being a problem because they cannot sell the entire poultry.
There are local raw materials that are cheaper than what we import from Brazil and we have developed good quality with these local producers today, we already buy from them and as Lorival said well, now if you need something of a bigger size and you need a chicken of over 2.5 kilograms, and I believe that the local market cannot produce this type of poultry and they won't able to – they won’t be able to produce these poultries in the meat.
Now regarding the two plants, today with the Kizad plant that is in Abu Dhabi, well, in a certain way we haven't able to hire many food service customers. One, because there are flexibilities in terms our lines, our lines are very robust for the market. And number two is because we ended up producing for our brand Sadia, no, this would be for the retail market. So to have a plant in Saudi Arabia was one of the needs that we had analyzed in the past two years, that would be to have a more flexible plant in order to reach more channels, especially in the food service because this is something that they need more and more.
And number two, we – what I always say is, you know about consumer driven for consumer driver, it would be to develop more categories and we are seeing a very interesting opportunity in Saudi Arabia, you see more women in the labor market, you see more women outside of their households and they need more convenient products. And today, you do not have to supply locally. So yes we do, well, I believe that the scenario is making our life easier and I believe that both plants will be able to compliment themselves. So this is more or less the scenario for two plants and for raw material.
Henrique Brustolin
Thank you very much.
Operator
So our Q&A session has come to an end. I would like to give the floor to Mr. Lorival Luz.
Lorival Luz
So thank you very much to everyone. Thank you very much for posing your questions. I would like to thank the entire team of BRF. I would like to strengthen once again our trust in the results that were presented and how we trust all the effort and I believe that this makes our result very consistent. And I would like to draw your attention to the future prospects when we see not only the impact of the international market, but also everything that has been done in Brazil.
And I believe that this reassures us and we will be able to advance and advance our trajectory of financial discipline, lowering our leverage and to see prospects of growth and to recover the investments according to what was recently announced.
So I would like to thank everyone and I would like to wish a good end of the year to everyone. Thank you very much.
Operator
BRF’s earnings result has come to an end. I would like to thank the participation of everyone and have a very good day.
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