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BRF S.A. (BRFS)

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BRF-Brasil Foods S.A. (BRFS)

Q1 2016 Earnings Conference Call

April 29, 2016, 09:30 ET

Executives

Pedro Faria - CEO

Jose Alexandre Carneiro Borges - Chief Financial & IR Officer

Analysts

Lauren Torres - UBS

Alex Robarts - Citigroup

Jeronimo de Guzman - Morgan Stanley

Isabella Simonato - Bank of America Merrill Lynch

Presentation

Operator

Welcome to the BRF SA conference call to discuss the First Quarter 2016 Earnings. [Operator Instructions]. Forward looking-statements related to the company's businesses, perspectives, projections, results and the company's growth potential are provisionally based on expectations of the management as to the future of the company. These expectations are highly dependent on market challenges, 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.

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

Pedro Faria

Good morning, ladies and gentlemen. Thank you for participating in today's conference call. In spite of the challenging scenario due to the decline of the Brazilian economy and the rise of corn prices in Brazil, our first quarter results has proven the positive development of our business model. In the first quarter of 2016 we made important strategic progress. We announced another major acquisition, Calchaqui, enhancing our brand and products portfolio in the cold cuts category in Argentina, creating relevant synergies with BRF's operation and acquisitions in the region.

If we combine Calchaqui to the other acquisition, Campo Austral, the combined annual revenue will be around $190 million. With these two acquisitions, our [indiscernible] south cone platform would have pro-forma revenues of over $750 million with iconic brands in its portfolio such as Paty, Vienissima, Calchaqui and Bocatti. Despite this, we concluded the acquisitions of GFS in Thailand, Universal in the United Kingdom and now a distributor in Qatar.

In the case of GFS we had positive surprises this quarter and we have already achieved higher-than-expected results. After this first month we have raised our internal projections and expect an EBITDA of around $50 million for 2016 which makes the acquisition really attractive in comparison to the price that we paid. In addition to volume gains, we're working intensively on the commercial synergies of GFS and Universal EBITDA in our UK platform.

We also have a dedicated supply team of Brazil working alongside our Thailand team aiming for operational enhancement and mutual learning arising from the complementarity of the portfolios. We continue to work on synergy gains, such as the better utilization of our global footprint and better agricultural feed conversion rates in GFS. We also started exporting to new important markets such as Malaysia and Mexico, as well as from the new plants that we have certified with regards to China.

These actions combined, not only bring growth and expand our global footprint but are 100% aligned with our strategy of advancing further down the value chain and transforming BRF into a global consumption company. Nevertheless, a perfect storm hit the sector this quarter and its effects might extend until the end of the semester. The main variables that guide the sector's profitability deteriorated at the same time.

On one hand Brazilian chicken production continues to be at an all-time high, creating oversupply of the international market and strong availability in the domestic market. This is also affecting pressure in dollar prices. On the other hand, we witnessed on appreciation of the FX rate in March that is pressuring our prices in reais alongside, of course, the rise of above 50% year-over-year in corn prices, that was completely uncorrelated with global corn price dynamics, thus reducing the profitability and the competitiveness of the Brazilian industry. However, the results coming from our transformation we're implementing in our international are starting to appear. Volumes rose 17.2% year over year and even if we exclude recent acquisition we would still record double-digit growth in our international platform.

Another important point I would like to highlight and I'd like to give you more details afterwards, is the greater resilience of margins where we have moved forward in the local direct distribution model. Analyzing both Middle East and Europe, regions where this model is already more developed, we noticed that the volatility in margins is much lower in comparison to the markets we're still very much focused on the export of in-natura basic products such as Eurasia and African regions. Thus, in the midst of this very strong unfavorable cycle, our international market reported EBITDA of 12.5% which compared to the maximum margins we used to achieve in previous cycles, worth remembering that in some similar adverse cycles our margins have hovered around zero margin sometimes.

In the Brazilian market our focus is to regain the profitability in our operations. Early January we made a realignment in price of 10% on average. This increase was done in a very granular and specific way, enabling us to make a price repositioning between channels and regions, correctly some distortions that existed. However, the pressure on costs coming from corn prices continues to be high so that increase will not be enough to restore our margins as we would like. So we have already registered a new round of price realignments for May of approximately 7%.

Another very important topic in Brazil is our innovation platform. We launched new products in the quarter, such as Salamitos, a pioneer in the processed snack category and absolute sales success. Also the new lines of ready meals of Sadia and Perdigao which continues to record very favorable sales metrics. These releases are 100% aligned with our strategy of revitalizing our portfolio and our innovation program, especially to support our Sadia brand. In addition, we continue to invest heavily in our team and the improvement of our performance, building up a lot of projects around efficiency and service levels, along with our commercial and logistic teams. This will enhance the relationship we have with our customers and bring further productivity gains to our results.

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