Oct 31, 2014
Executives
Claudio Eugenio Stiller Galeazzi - Global Chief Executive Officer and Member of Executive Board Abilio dos Santos Diniz - Chairman Pedro de Andrade Faria - Chief Executive Officer of International Operations and Member of Executive Board Augusto Ribeiro - Chief Financial, Administration & Investor Relations Officer, Vice President of Finance & Investor Relations and Member of Executive Board
Analysts
Fernando Ferreira - BofA Merrill Lynch, Research Division Alexandre Fuentes van Amson - Crédit Suisse AG, Research Division Thiago Duarte - Banco BTG Pactual S.A., Research Division Diego T. Maia - HSBC, Research Division Pedro Leduc - JP Morgan Chase & Co, Research Division
Operator
Good morning, ladies and gentlemen, and welcome to BRF Day. We would like to tell you that this presentation is being simultaneously transmitted via webcast in our website, www.brf-br.com/ir.
[Operator Instructions] Forward-looking statements related to the company's business, prospects, projections, results and the company's growth potential are 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 change.
We must remember that this conference is being recorded. We have, present here, Mr.
Abilio Diniz, Chairman of the Board; Mr. Claudio Galeazzi, Global CEO; Mr.
Pedro Faria, International CEO; Mr. Augusto Ribeiro, Jr., VP of Finance and Investor Relations; and Ms.
Christiane Assis, Investor Relations. I now would like to give the floor Ms.
Lucy Sousa, member of the board at Apimec Sao Paulo, who will open this call of the third quarter 2014. [Technical Difficulty]
Claudio Eugenio Stiller Galeazzi
And also through the union or the joining up of the sales areas, we have had an increase of 76% in the cross-selling. The real results of the increase of revenue will have already started in the third quarter, and from now on, will expand.
Not to forget that we have a market that could reach 500 points. So the expectation in terms of the domestic market is significant.
And also, we have brought about a rationalization in reducing SKUs, bringing about -- with the supply of more profitable products, optimization of logistics and simplification of processes. The last quarter, in December -- or in December, we had -- the logistics were not good, and we had many problems.
I'm sorry, I found this very, very bad, indeed. Abilio asked for a survey among our clients, and it was very bad.
It was like a terror movie that -- which was truly things we have not realized before. Fortunately, with this request from Abilio, we began to attack the quality of our services vis-à-vis our clients.
We had an improvement, significant improvement in the last few months. And we had a growth since January of 2013 to date of 13% of our services.
So we have really begun to meet the expectation of our services. I think we would have been a strong company for a long time, dominating the market.
So perhaps, what was lacking was humility, and this is necessary to have. One must have humility.
And when we saw that survey, which was like a terror movie, we realized what was happening. It is better, but much still can be improved, and something else which will contribute to our growth in the domestic markets.
In terms of SG&A, it's incredible. This company, the team is always seeking results.
And we must have a considerable reduction of our expenses. We have also implemented -- or we analyzed ZBB, and we are implementing the ZBB which will significantly contributed to the reduction of expenses.
We have also reduced costs in the plants. And here, I wanted to mention that we, in February of this year, made a change with relevant redundancy in the industrial area, particularly in the overhead of management.
We closed 5 regional offices, industrial offices. We had many different levels, hierarchical levels.
We reduced this down to 3. And today, the 3 regional offices were kept.
We only kept these 3 regional positions. And they work out of our larger room and commanding straight from the company.
So that which sometimes took months to do, and because of market demand, until it's flowed through the different hierarchical levels, sometimes was too late. Other market demands came up and nothing happened because we did not have time to implement anything.
Now things are much faster and more agile, that which the market demands, that requires, that wants, flows through immediately and is implemented in the different units. This, both domestically and internationally, and this is very, very important.
There is no more lag time of the decision taken and the implementation in view of this hierarchical levels. And we also reduced by 17% the back office, which has brought very relevant gain.
So these were draconian measures. And when I say that we brought about tremendous change and relevant change in the computation in industrial areas, we have not yet implemented all the industrial steps which should bring all the concentration of certain production lines so they would not be so dispersed.
This has not yet been implemented. This is still another thing that is sort, and this project will start in January.
So Pedro will be commanding that important phase of this project, and this will bring gains as well. And also, we must focus on the core business, according to Abilio, to go after our core business in which we are competent to run off to that which we know how to do best.
Consequently, a decision has been taken that, as much as possible, to divest in -- or from those activities that we are not so competent in. So we have sold off our beef business, which was concentrated on Mato Grosso.
We did not have the necessary penetration to managing the beef business or the competence that Minerva has, so we decided to sell off this unit. We have a share in Minerva of about 16%.
And this is very, very important because we recognize our limitations, and we seek to maximize our qualities. And dairy products as well.
We have just signed an agreement, and this was a decision also to focus as well to sell off this dairy production. And we will have -- we have significant better results than we had before.
But even the better results did not justify our keeping this unit, which was sold to Parmalat, Lactalis Group. And this concentration, I would say, maybe of the successes, preoccupation of doing what we know how to do best, has brought good results.
I could stay around here perhaps another hour telling you of other activities which have been implemented, always seeking results, but I will leave the numbers which will be presented by Augusto to speak for themselves. And he will give you lots of details about the results that we have obtained so far, and obviously, which signal the future.
I was saying that 1 or 2 quarters do not lay down a trend, but definitely, 3 consecutive quarters. And this third one already is giving clear signs of the future trend of expectations which we can have for this company.
My last comment. Well, after Abilio came in and we had a change in management, our stock has gone up significantly, but much more with the expectation of a miracle than the projections of a past which justified this.
He was always saying, both domestically and for the market internally and outside, that it was not the time for the stock to go up at that time. There was nothing which could justify this except expectations.
Wishful thinking perhaps. And now I am very happy and would like to mention that part of my bonus is tied to future results.
So I definitely can now shout in the ear of my dear colleague and to the President and CEO, and in fact, and by right, of BRF. So now I'd like to ask Abilio to take the floor.
Abilio dos Santos Diniz
Thank you, Claudio. Claudio was sick the last time he participated in an event like this.
You know that I hate to say goodbye. I hate alarm clocks, and I hate saying goodbye.
And I prefer not to see this as you saying goodbye but see things in a different way. We have done a lot of work together.
And I think that the 2 first jobs we did together were great. Let's now wait for the results and see this one.
And it's great to work together, but Claudio, you know very well that the most important thing besides professional work, which you have always done so well, you will be a wonderful companion, always present, always a companion, friend, and this is so important. So we can always attain our results.
But also, very important because this is a moment of transition. So -- and actually, the 1st of January, we'll have a new CEO.
Well, things that have to be done will be done. And I wanted to talk -- tell you about the story of Pedro, BRF and his relationship with me and Claudio.
Before he came to BRF in April of last year, I started this company in depth before I came. And we worked a lot together to get to know this company and these studies, this previous work, led me to get to know Pedro.
And I said to Zeca [ph], "Zeca, good news and bad news. The good news is that we have the ideal Global CEO, who is Pedro.
And the bad news is that we will lose your other CEO. And we then decided that it was not good for Pedro to take over as Global CEO at that moment.
So we were correct, and we chose Claudio to take over in this interim period with all the knowledge that he had. And we decided he take over as International CEO.
And it's good now to look in the rearview mirror, and we can see that the decision was correct for all the things that have happened. Well, why did I choose Pedro?
First, the idea was mine. I chose Pedro, first of all, because I knew him.
I had worked with him. And the first thing is because I found in Pedro a total agreement with my values, humility, determination, discipline, and all the other values which I considered to be important.
We worked together for 2 years. And the more I get to know Pedro, the more convinced I am that he is different.
He's very young. However, he's going to be 40 now.
And if you don't believe me, just think the following. A blend between a Chairman and Global CEO, the average age is great.
So together, I think that we will be able to do a great job. But it's important that you look at this -- when Pedro takes over as Global CEO, presenting his credentials, the work which he has done as International CEO.
This has been an important job. To me, the domestic market was changing so much.
Listening from the other side of the counter, the commercial side of things. The international market, as it is far away, we have a relationship with about 120 countries of the world.
And we opted, as Claudio has mentioned, taking things as a whole. Pedro took part of the external part.
And once again, this decision was correct. The work that Pedro did in the international -- on the international side had an objective, and particularly, because it's caught the company in a very disorderly fashion.
And they had to clear up Argentina, the Netherlands, China. And Pedro will tell you how many offices he closed down in Europe.
Today, things are so much easier with video conference and Internet. And we are much more centralized now.
And so although we still have POSs, they are more like support points. The work that Pedro did in the Gulf.
The Middle East is so important for us. We made no spectacular acquisitions and nor are we going to.
We do consistent work everyday. The work that we did in the Gulf was to buy ownership in our distributing -- distribution companies, and this has been wonderful as a result.
Now we have the budget planning, the company of Russia and the doors that we opened in Asia, Singapore. So Pedro, as Global CEO, has established a very sound platform internationally.
To do one of the tough tactical when I was here, make this company truly global, which is what we are doing. So for the future, we'll look to the future.
So for those who -- like those who are used to doing this, we want to be first. And we are very optimistic to see what is coming.
And now Pedro, with a sound basis, can focus some of the domestic market where we have enormous number of things to do. And he is making an effort these months to learn about the domestic market.
As you know, it's about the international market. We have a new configuration.
In August, I was in Europe when he called me a few days later. He was going to the airport and he said, "I'm going to go past South Africa.
I haven't been there yet." And so he went everywhere.
And now he has to get to know the domestic market. And so I have no doubt that with all the programs and plans that we have, we will make a great leap in the domestic market.
So the prospects are great. I think we are fulfilling the tasks that we have given ourselves.
And at this moment now, I will give Pedro the floor for the first time as Global CEO or indicated Global CEO, and wish him good luck. And Pedro, we are together on this.
Continue to do the same always because the same is excellent.
Pedro de Andrade Faria
Good morning, everyone. It's a great pleasure to be here.
And this is a new experience for me because for many years, I was sitting on the table, taking notes, trying to understand the path of the company. I have followed this company since 2012 as a shareholder.
After that, I became part of it. It is a great privilege to be on the stage with all of you, especially Claudio.
And I usually say that he's given me the baton of the company probably in the best moment this company has been at. And I have learned a lot in this last 18 months.
And I'd also like to thank Abilio's words as well as his fully support that he has given me since the day we started on the journey. It's not only a matter of age but also the fact that, working together, you can have complementary visions, and I can learn every day from him.
This was the first person that made me believe that being here was possible. And he is someone that really fills me up with hope every day.
We have here Chris and Augusto. They are working with IR in a way that the company hasn't worked in the past.
So it's nice to see the company working in all the areas in a nice way. I am here with you, and I'm very happy to be here with you, but I also would like to bring to you some data about the process and the international market.
What we have found, where we were able to do something different, and try to be very straightforward and tell you that, in spite of the company being at a very interesting cycle where a lot of factors are favoring our results, we also have a strong base work that have already been done in the past. And therefore, I am confident about the company's future no matter what is the price of our commodities or the dollar price.
So just trying to bring to you some data. And we try to let you know -- to bring to you the real sources of results of the company.
I would like to show 5 relevant indicators relevant to this transformation of the international market, and that has to do a lot with our export base. We have what we consider a key indicator, our OTC, Order-to-Cash.
Really, that is an indicator that shows our efficiency, the efficiency of our supply chain. And as usual, we are managing our shipments, the right allocation of products on customers.
And here, we had a significant improvement. We went from the beginning of the year of a little less than 80%, and now, we are at 86.5%.
That has translated, for instance, in the relevant drop of our working capital because now, we have less products in the ship, less product in the post -- and so the products are not staying there, and we're not there. So that really showed a big difference in our balance sheet.
Well, our major expense account is sea freight. And our suppliers have learned quickly about Claudio's reputation.
Therefore, we were able to work and bring down those expenses. And there is a promise of core efficiency because the vast relationship that we can establish with suppliers is a win-win relationship.
And we tried to provide more efficiency in our chain that allowed us reducing in 22% our sea freight costs. We also reduced a lot our stocks with our sales in international market.
Once again, in a very long chain where we are talking about perishables, it's not a good idea to have a stock without a defined final destination. So we were able to drop close to -- more than 50% since the beginning of 2012.
And adding to what Claudio said and just wanting to make sure that we are controlling our expenses in our matrix packages, making them aligned to the company's efforts, as the international market was able to have an expensive package that was even below than the ZBB. So there was a significant reduction of our overhead.
And it was also possible to control some sources of negative results, which were a loss of products due to FIFO or expiration date. So there was an improvement of our chain, the efficiency in which we are bringing into the market.
And that results on the balance sheet, on the results and much more in the satisfaction and then bringing back customers. Abilio was with me on the largest food fair in the world.
And he realized the change in the relationships among us and all the clients, saying BRF is a long-term strategic partner. Obviously, that has translated in results.
We have an improvement in the figures, and you can see that in absolute figures as well as in percentages. All of those are relevant.
We went from a peak of margin where we have an EBIT that was almost 0 and then EBITDA that was positive. Adding depreciation and amortization now in the third quarter, we already have a profitability level that is special and a growing one.
We have a process in which we know how to take advantage of that favorable moment of the market. But that favorable moment has to do with a sound and structuring work developed in our business.
Obviously, we have price management being done. And this was one of my learnings.
When we managed the international business efficiently, we have commercial margins to negotiate, to review commercial policies with our customers. And therefore, we always have the ability to implement policy prices that are favorable to the company.
So you can see a strong growth of our prices, our average prices in dollars in an environment where we believe that the average dollar prices would drop because that has been the history of the company. Whenever the grain price goes down or the dollar goes up, the counterpart is to have the price going down due to commercial pressure from our customers, traders or distributors.
I think we are able to sustain that based on the action strategic that was conducted by Claudio. We were able to eliminate SKUs, and we were able to eliminate a lot of complexities of our systems and to make the right choices about the markets we wanted to supply.
We left some markets where some product families. And we concentrated ourselves where we have real competitive advantages, just like Abilio mentioned about the Middle East.
Now I would like to tell you a little bit about NOR or net sales, but I can tell you something about the different regions. In Europe, we have a market that has benefited from this consistent policy of integrated planning.
We zeroed all sales of products that were out of a quota. And just to understand a little bit more of the European market because that side of free market, basically, everything that we sell out of the quota represents a product in our portfolio that has a negative gross margin.
Also, we were able to refocus the sales of our products in our platinum customers in Europe, which are the ones and with whom we have a long-term relationship. Therefore, BRF is relevant to the portfolio we are talking about, those that count on our raw material.
And we are able to work on our price policy above the reference price for commodity market because there is a promise to deliver quality service, innovation, which is very relevant. This is a little bit about Europe.
Then they have been contributing to strong results. Americas.
Maybe here, what we could show you is that the major Achilles heel for the company is the traditional presence in the Venezuelan market. I think all of you know about the difficulty of Venezuela allocating payments.
We have done a strategic choice to reduce everything that we send to Venezuela. But that's not good to our EBITDA.
This market generates accounting results, but usually, I say that I rather have cash generation. So here, we took the conscious decision of reducing our market share in that market, obviously, without giving up the market because it is very promising and interesting.
So we are trying to be at a more long-term sustaining base there. But you see that the figures show a drop in our presence in Venezuela that, in the past, has been responsible for a larger margins in the company.
And in the Middle East, I also have to say that we are very proud of what we were able to do there. This is the second market after Brazil.
And that's where we have a reality. We are there for already over 40 years.
Our brand is a preferred brand by the consumers, just like they are preferred here in Brazil. And we have very good and well-established relationships there with our suppliers and with our partners.
So here, we were able to improve our presence in terms of volume. There was a real gain.
And I usually say that this is the volume gain that is really interesting for us because it is based on an expressive market share increase in the main markets of Saudi Arabia, Oman, Kuwait. [Technical Difficulty]
Pedro de Andrade Faria
Also, to have a margin that was related to the chain of our distributors. Therefore, now we are able to dialogue and to negotiate with important markets for us because maybe the dollar will go down, the grain will go down, but the reality is that those markets are going up.
And the price of poultry there at the end is not changing much, and so we are playing a game that is similar to Brazil's game. Finally, Asia Pacific, the growing sector of the company.
We just found out that Asia should be a driving force for the company. We were happy enough to strengthen our team there.
And we know that Asia is better understood by local people. And it is far from us.
Therefore, we are having a consistent ramp-up there. And we are gaining market share.
And even in traditional markets, such as Japan, we were able to do a consistent work to conquer an even higher share in the import market. Therefore, in most traditional markets, such as Japan, and other markets in which we are strategic to focus, such as China and the Southeast of Asia, we are very -- have a very promising base there.
We also have some markets in which the company is strong just like in the Middle East. And the press conference, I answered the question, in Hong Kong, we have -- we are 100% present.
We are in all points of sales with our brands, with our products, and also, with the local processing capacity that is done by our partners. That is a model that we can duplicate and replicate to other areas, to Asia and Singapore.
And we are going to focus that on the next 3 years of cycle of the company. In Russia, and I think all of you know what happened to Russia and the banning of the traditional market that were suppliers for Russia for pork meat.
And what is reflected here in our third quarter figures, we have a very negative contribution from Russia for us because within the very complex geopolitical scenario and very important complications, BRF has positioned itself as a leader in the market, not being weak. Therefore, some of our plants were not in operation during the second quarter.
Here now, we have a market that had no contribution in the third quarter so -- and with other positive news that we have about the sector. We have in Russia opened itself to Brazil.
I think this is going to be just reflected on the fourth quarter, not on the third one. Because on the third one, the contribution here of that area is negative.
Finally, Africa. There is an interesting path for growth.
I went to South Africa. I think we are going to be successful there.
I think Brazil has all the right to be very relevant to the area, not only because we are close to them and we have a competitive price, but also we have there a potential of local processing installation. And we are paying attention to that.
Africa is a market that, in the past, for the company, we would basically sell off everything that we could not sell in the market here. We would sell there.
But now we are paying attention to those markets. This is one of the markets that is most interesting for the company in terms of profitabilities and margins.
We are at a very special moment. On November 26, we are going to open the largest Middle East plant.
This is an investment of $155 million. And we have a capacity of almost 70,000 tons of processed food.
And with a very simple economic rationale, we already have a relevant market share in the region and a mature product, poultry and chicken cuts. And we believe that with this plant and with our brand strength and the distribution system established, we will be able to reach organically a market share [indiscernible] to food.
And the 6 lines that this plant will have, they will be relevant. We'll be able to supply growth.
Any adjacent markets that are part of the Arab League. We have been able, as I said, to have a volume growth based on real gains of market share in the region.
Both in Saudi Arabia, as well as in the Emirates, we are able to have expressive shares in what is our business to date, exporting poultry, and that already shows the potential, our brand and our commercial strength, that will leverage that investment and bring a very important return and very important results for the project in which we have been working for the last 2 years. We are very motivated with this landmark of the company's globalization to have a plant, maybe the largest one for processed food in a market that we are already present for the last 40 years.
And that shows that we are concentrating our work. We are always working on that tripod to be consistent, and supplying to have the brand and the robust model of distribution.
Synergically working to have market share gains that are expressive. In Argentina, just to conclude our trip around the world in less than 15 minutes.
That represented a major challenge for us, not only due to the economic adversities that we find there, but also problems with BRF are present in Argentina, had to do with an acquisition of 4 different companies. With all the challenges of integration, with difficulties in the portfolio that was unbalanced.
It was very strong on the one side with leader brands such as patch [ph] and then America distribution of over 98% in Argentina. But we had a challenge to integrate business that are different and different stages as well.
So in despite of the difficulty that we faced, we did a work to recover our operations in Argentina, it was very important. We were able to significantly reduce our operating costs.
We closed 2 plants. And it was important to make that decision, that footprint decision.
And now we are working here Brazil, our operation capacity. Once again, we did a ZBB work and expenses control that was very strong.
And we once again, worked on the working capital because inflation there is around 40%, so a large part of our gain and capacity for cash generation has to do with a smart working capital management. With all of that, in the last quarter, we placed some bonds.
Augusto is going to talk about the local market and about the things that we just had in the company for BRF. So BRF took a totally different position in Argentina.
Obviously, we expect that this market has a robust growing. They will have an important election moment there next year, but I believe that BRF's presence there now is much more robust.
So now, I'll turn the floor to Augusto, so that he can try and consolidate all of the information. That's why what I wanted to bring to you more details.
I still believe that the work that we have done in international market is not 100% linked to the improvement of variables that we do not control, grains, the FX rate or commodity cycle, but there is a backdrop work, and we were able to establish the platform that Abilio mentioned. Thank you very much, and I'll be available for your questions later on.
Augusto Ribeiro
Good morning, everyone. I do not intend to take too long on my presentation, because I think that you might have a lot of questions, especially because a lot of the things that have been said have already been said.
I won't repeat myself. But what I think it is important, it was very nice if you're following the company as I am, and I have participated in some NDRs in the last 2 years.
And we have been walking the talk. You can just see what is being reflected in numbers now.
That's what we have been doing in the last 2 years. Especially last year, we worked hard.
I usually say that in the beginning, in Saudi Arabia, what's harder for us was to work on the soil, because the land was very hard. So now you see a picture of that plant.
And it seems to be a model only, but it is really a plant, so we will be there in November to the formal opening of that plant. So the net operational results of the company.
In summary, here we have some major topics, good growth in Brazil's top line. So Brazil had again a good growth of volume in the side of our economy.
And part of that is associated to our penetration strategy, our go-to-market strategy that helped us increase volume in the company. And the international market that contributed.
We had worked to reduce volumes, and that contributed a lot to the bottom line. The profitability of the company was impacted by the international actions.
Now about costs. We are already having and it is obvious that in that Zero Based Budget that I mentioned.
When you talk about expenses, Claudio talked about SG&A. But in terms of operations and structure simplification, we had an impact in our fiscal structure in our COGS.
Also, we had improvement in the stock reduction of SKUs. All of that impacted our cost base.
Grains specifically here that has a shorter cycle, we already have a benefit, but now, the long chain that depends on processed products and pork that though they take a little bit more time to reflect the results, here, in the third quarter, they show a little bit, we will see that more in the future as the animals are slaughtered. And gross profit, there was a improvement.
After we improved our capacity even with reals evaluation, but we had the positioning in the market as this was already mentioned. And that is reflected not only in the bottom line, but also in all the lines.
So gross margin in the company has increased almost 30% of the consolidated, and I'll talk a little bit more about that. And in spite of not having access here of the Brazil's gross margin here, it's only a top line ROL [ph].
And EBIT, that performance is the same for both units. And I will tell you more about it.
In EBITDA and EBIT, that have an impact, were impacted. And you already have access to this figure.
As Claudio mentioned some of the reasons. He addressed well.
I'm not going to go much further into it. But here you will have a historical result for the company to have this type of profitability.
And every quarter, I say and I talk about extraordinary, in fact, saying, in January, now we do not have the publication of that adjusted EBITDA anymore versus the EBITDA of the company, but there are costs for Argentina's restructuration, for instance. There are also costs for another restructuring process that we held in Europe.
So net positive and negative points, because we also had some asset sales that generates gains, but net, we had an approximate loss of 80 -- BRL 60 million to BRL 80 million in other operating results. Therefore, our EBITDA margin in the quarter would be of around 16%.
Every quarter, I mention that. This is not written anywhere.
This is just a reference, so that you can have an idea about what we had in terms of the profitability of the company in the quarter. When we follow the net income of the company, the relevant comment that we could make here is that -- and despite of the problem that we have in the second quarter of 2014, that was caused by our bond buyback.
That had BRL 217 million in our financial expenses in the beginning of the year. So if I do not have had that impact to our net profit according to EBITDA, according to EBIT, and gross margin would be improving quarter-on-quarter, and we would have around BRL 400 million approximately of net profit in the second quarter.
In Brazil, and I think I could say that, first, volume, therefore, we are not in a recession, much on the contrary, but we have a more difficult moment in the economy we're following of the information. We were able to grow not vis-à-vis the prior year, but vis-à-vis the second quarter of this year.
This was a growth of 4.5% in volume. And Claudio has already mentioned, but this was the first quarter in which we had full with the new go-to-market structure implemented on the small retail.
You see what we call the small retail route, that was in improvement there. So now, the name of the game for us, obviously continues being the potential growth of the points of sale, but also the efficiency of the salesforce, the productivity of the sales reps.
This is a focus that we will have for the next years. And something that's interesting and important to say is that in despite of EBIT Brazil being flat vis-à-vis the first quarter of '14, the gross margin of Brazil year-on-year has increased almost 3 percentage points.
If we analyze the margin growth, and you don't see that reflected in EBITDA and seeing -- considering that SG&A also was dropped, that means that we are reinvesting in our brands so that we can sustain the market shares that we have in the company. We had year-to-date of 60% of trade marketing vis-à-vis 2013, so it's a conscious decision of the company, we are following that.
And I do believe this is something very important that we should continue working on. And the international growth, I will not go much deeper because Pedro has already mentioned those figures.
Dairy, I think I could say something about it, we had a difficult beginning of the year. This is a cyclic and seasonal process.
The big news here is the agreement to sell the division, but the third quarter provided good results in the dairy operations. In food service, there was a change in profitability.
Now we start with sold bovine what we have here. And it is a more profitable portfolio.
There was also an increase in the profitability for food service routes, which already reflecting in the results of the third quarter an increasing volume, 4%. Actually Brazil's behavior as a whole in the third quarter vis-à-vis the second was a growth concentrated in volume rather than price.
So quarter-on-quarter, this is something that we are trying to implement in Brazil. And here, a quick summary.
This whole slide here was as more important is that 75% of our debt is the average cost here. We have the average cost of 5 to 2 years, 7 years our debt in dollars, 60% of our debt is with the capital markets.
So this is a strategy, above 50%, depends on many lines. We are taking money from the NBS and other banks, but this is a more active market.
And we intend to keep a profile which is similar to this for the next few years. Net debt over EBITDA.
We always mention this, and we continue to keep the leverage. The net debt, there is a slight increase in value, but very little, and especially because of the payment of interest over capital and also exchange variation.
But the company continues in a process of cash generation. We could see that in the next few slides.
And the deleverage short-term in this particular unit indicator. CapEx, the guidance we'll keep BRL 1.5 billion for the year, excluding the leasing et cetera.
And the same M&A. We -- a lot of focus on efficiency support, and growth has had a lot of consumptions, because of the plant in Abu Dhabi, but we maintain the guidance of approximately BRL 1.5 billion in 2014.
If you remember the second quarter, I mentioned in the call that we should have a slight deterioration or an increase of the capital. In fact, the reason has been dedicated to the increased stock of grain.
We have said that the strategy because of the [indiscernible] price, we are one of the few companies, the only company in Brazil with a capacity for storage. So we have advanced our position especially in maize, with the physical storage of grain is about 4 stage in variation from the third to fourth, because of the physical storage and also buffer stock.
So we generally have -- generally, in the third and fourth. The third builds stock, and the fourth when we execute the sale, the stock falls, but it's concentrated in January because the sale -- we have a lot of sale in equipment [ph].
So we have a stock of 4 to 5 days, which gives us a stock of 46 days. There is much more opportunity ahead.
Working capital, this is one of the demands I receive. We have the opportunity.
We work very strongly. In accounts payable, there is still room in stock.
The international market was one of the great contributors to reduce stock in the company. And we still have room as we advance in those indicators of efficiency and supply.
We still have room here. So we could still work on inventory in the next year, and accounts receivable, too.
The international market offers good conditions for receivables. It's a question of strategy.
So working capital will improve. And consequently with this, we had have cash generated in the third quarter '14.
And in spite of increase of profitability, and in spite of CapEx having kept around BRL 400 million here, as working capital, the variation of working capital both as indicated down a little, but it's still robust, about BRL 415 million. And what we have been talking about in the last quarters.
And now, thank you very much. Before we go onto questions, I would like to deliver on behalf of [indiscernible] Sao Paolo, seal of [indiscernible] or diligence, which represents the number of years.
First of all, the cycle was opened by CDF, but the company has been holding meetings with our association. And I would like to say, Abilio, Claudio, Augusto, Pedro that you are, as a group, the company that has had the longest relationship with the Regional Analysts Association in Sao Paulo, so I'd like to congratulate you.
And I hope that our meetings will continue forever. So symbolically, I'd like to give this seal to Claudio, and thank him for his work, and thank you, all.
Congratulations. 32 years that you have been around.
Ladies and gentlemen, we will now go on to our Q&A. We would like to remind you that those who want to ask a question, we would like to ask to please, in the auditorium, raise your hand and give us your name.
We will start with our Q&A.
Unknown Analyst
Thank you for your presentation. It was very interesting.
Unknown Executive
I'm sorry, I cannot hear the person from our desk who was asking a question.
Unknown Analyst
Thank you for your presentation it was very interesting, and I'd like to understand you talked about the reduction of SKUs and if, in fact, the volumes have dropped in the last 2 years, about 15%. And the -- but the factory size is much the same -- number of factories is much the same as 2 years ago.
So what can you do about this revision of factory footprint, and what savings can be generated with this review? And perhaps, the reduction of the plants?
Unknown Executive
Well, we have an idle capacity of about 30%. When we report the plant footprint, we do not intend to increase capacity, but rather productivity.
So basically, that is what I would have said. Pedro?
Pedro de Andrade Faria
Yes, a very good question, something which I always learned in BRF, it's very difficult to infer a lot by looking at the whole. We have to look at the parts.
So though you see a reduction in volumes, there are some parts of our portfolio where we have had significant increases of volume, which has given us more competitiveness in some markets. I could mention the example of the Gulf because we gained in market share.
And today, I would say that we have a grilled -- or grill [ph] scale which is quite different. Also, the reduction of SKUs has come in some places where we have the opportunity of presenting here as in the case of Europe.
Everything which we sold outside of the quota. So all of this just to say that the opportunity of the factory or plant footprint is real.
It does not mean the reduction of plants, but it means, first of all, a greater -- clearer objectives for the factories. Some plants will have a greater capacity, reaching the objective of being more productive, reducing idleness, rethinking business, and concentrating on the factors that are more productive and realigning some of the factories between domestic market and export market.
And the third element which has become more clear with Abu Dhabi, rethinking our footprint on a global basis, because we are still caught in a paradigm of having a productive line in Brazil, but now we are operating on a productive basis which is worldwide, where we do not have the manufacturing assets, like for example, now we have Hong Kong. So the journey of the footprint starts and it is mapped out, but I think that there is a capacity to add now to this which is very important.
Unknown Analyst
Giovanna [indiscernible] from [indiscernible]. My question is regarding the margins of the international market.
You said, Pedro, about all the initiatives which were taken and structural markets in the international, all the structural changes. So what about this delta margin of the margin?
How can you explain this? And in the future, what kind of margins could be normal for these margins, ex the cyclical effects, and the question of the commodities, protein and grain?
Unknown Executive
This question, I think, is worth billions. In fact, we consider this internally.
And there is a certain level of inferences or assumptions that we must say. But the best thing that we can see is, in the process of one cycle which begins to show internationally is a reversion where we will be able to sustain our margins.
I am also curious to know how much the model will be resilient, but I am very confident that we will not go to historic levels internationally of productivity. I would like to compliment the question of the drop of volume.
We have made a harsh decision for a company that has its industry. We have reduced by 220,000 tons the production for exports, which also contributed to reduce volume.
One of the main objectives, recapping all of this is to increase the profitability of the company. We wanted to and we want to continue to reduce the degree of risk and volatility which we have in our assets on the international market.
So more to come as future margins or participation. This is what is important for valuation.
More important is that we are sure, we believe with confidence and everything that we have done, and with Pedro, the international team have delivered that we probably have no more room to go back to the EBIT results which we had in the first quarter of last year which was almost the breakeven. So more than ever, we have to decrease volatility and keep a good profitability.
Fernando Ferreira - BofA Merrill Lynch, Research Division
Fernando Ferreira from Merrill Lynch. Going back to the plan which you announced in August of 2013, remembering that those 4 pillars which were proposed, the question of demand, the go-to-market, planning, support and all the area of upstream, thinking about the evolution, the growth that you've had up to now, I'd like to understand which of these 4 are you more advanced in?
And where do you still have to make progress, so we could manage to make it by 2016, 2017 and see the number of BRL 1.9 billion? And when can we get to this number?
I'd like to understand what is the quality at this point? Where are you more developed?
Where must you still make progress? And more or less, where are you with the rest of the plan?
Unknown Executive
Well, remembering that BRL 1.9 billion would be the result of capturing or 28 shares, we are much in line, a little ahead, not much, but a little regarding the ramp for the capture this BRL 1.9 billion. We don't even mention BRL 1.9 billion.
This has been already incorporated into our budget. So we are in line.
And some points have already had larger results, others less. But on average, we are in line.
Well, I think qualitatively speaking, in the main projects are the -- that we have been successful in the go-to-market, in May, we joined many sales forces together, this allowed us to work in a more structured and organized way. And on that chart, we draw your attention not only to the group of view [ph] POSs, but the synergy, and that you can offer where we sold just 1 brand, now you can sell 2 brands and vice versa.
And so GTM has advanced very quickly and vis-à-vis the level of service. You will see the chart, it dropped to begin with some changes in the system, but then it ramped up systematically.
So qualitatively, I say that GTM is what we are trusting and we continue to bet on it. And logistics also, we are working very hard on.
It's more complex, it involves systems and we are implementing the new systems. And this is the implementation curve which will go up to next year.
And logistics software, which is going to allow us to help -- to qualify things, understanding the real costs of the chain. And this is going to add a lot.
So I think that logistics is also something we are running after greatly. Now, not after, perhaps but comparatively, we were a little bit behind compared to GTM, for example.
Alexandre Fuentes van Amson - Crédit Suisse AG, Research Division
Alexandre Amson from Credit Suisse, And congratulations for your results. My question has to do with the domestic market, and not only the average prices sequentially, there seems to be a slight drop which was followed by an increase of volume.
I'd like to understand a little bit in greater detail how you see the competitive markets here in the domestic environment, whether this drop was perhaps a question of mix. What led to this drop?
And was there an impact to the competition? Or has the consumer become less avid in buying or what has happened?
Unknown Executive
Well, here it's a little bit of everything, I think. A question of price relativity, and depending on the channel of the network, the competition, in fact, generally speaking, and in some areas, we increased the price in the second half of the year.
Some competitors did not follow, and so it was a question of adjustments. But it was not only this.
There was also a question of product mix and so much so that the margin, we increased the gross margin of the financial products. But in the average price, you have a big mix.
And the average price of some products is high. So when you reduce the price, it becomes more selective, this affects the average price.
And so let's say, it's a composition of all many different factors. It's not a question of reducing the price more, it's a mix, it's a little bit of channel and some networks, the relative price versus competitors, and also positions of portfolio of products.
Thiago Duarte - Banco BTG Pactual S.A., Research Division
Thiago Duarte from BTG Pactual. The question is about growth and the use of cash.
We have seen the chart that Augusto showed about leverage and further on, there is probably the sale of dairy products and the seasonal question of the working capital, we will see the leverage of the company on levels, I can't remember what you showed us. And will the company also opted, I'm not sure if this is correct, correct me if I'm wrong, opted for growing less.
The volumes of the external market are less, less SKUs. So what is the next growth cycle of the company?
For the use of this cash, will there be more dividends? Will there be more acquisitions?
And what is the growth level that you're thinking after these adjustments that you have shown quite a lot of optimism about? And regarding the question before you cut me off, the question about -- the question of several billion, worth billions for Pedro.
You have talked about a normalized level of margin of 6% to 8% for the upside market, generally speaking. And is this a level which makes such to think about without the endogenous adjustments, cyclical adjustments of the business?
Pedro de Andrade Faria
We have noticed that to grow less, we opted to make more money. The responsibility of this company is huge.
We are the largest poultry exporters in the world, and we have significant exports. And the world consumption of poultry is huge.
So we have to manage our supply and our inventory according to demand. So this was a decision, an intelligent decision of managing our production and not produce something, which I said to you in August of last year, just produce and salespeople had to sell.
Now the market is different, the market is the consumer. And these are the changes.
Paying attention to the market, to the sales of the consumer. And let's manage our production.
Second, excess cash or too much liquidity is not good. And we have our responsibility of giving the best to our shareholders, with this liquidity and this money.
We also had a proposal that I mentioned when we came here of we are going to examine each cent that we are going to invest, so that there'd be an adequate profitability for our shareholders. We are looking -- at the end, we look at the profitability for the shareholders.
And we see here, in the case of the demobilization of beef that this did not involve cash. We had an interesting business with Minerva.
And now, the dairy, yes, there will be a considerable inflow of cash. And we will continue to examine things, doing our work that we have been doing, growing in an organized way, particularly for in the external market, with the increase of POS.
Well, the growth through acquisitions will be in the international market. We have the basis for growing.
Let's grow. And we will grow with intelligent acquisitions as we are doing in the Gulf.
And the Asian market, finding opportunities, and not just go anywhere just to make up volumes. So you can't just buy any company, you don't know the synergy of this company.
How much will it increase in value? We seek value.
Anything that we buy has to add value to the whole, and not just at that moment. So I think that we are managing this very carefully.
And we know the responsibility we have, that we have to remunerate to our shareholder well, not just leave money and cash and give the shareholders, plus a little bit more. No, we have to give them their fair value.
I think perhaps, I have answered you well. Just to tell you, Abilio, I think that this a very strong characteristic of the Abilio, Claudio and myself as well.
I think that this -- we should become aggressive with the rest of the team is worried and not the country. Obviously, we have to examine this question, and it's more anti-cyclical than pro-cyclical.
The other thing that you mentioned, if it is below your lower limit, if I will be worried, but the number is okay. Regarding the growth or not, in fact, this year the objective was not to grow.
We never had this objective. The objective was to prepare the company for growth.
I think that from now on, we have a very good sound basis, well-established basis which allows us to give, to take a tremendous growth leap. Our objective was resulted to prepare the company for yet another cycle so we have sacrificed growth, yes, we have, but this was on purpose and it was planned.
Unknown Analyst
Andus [ph] from the Bank of Brazil. My question regards the domestic market in competitive environment.
So much has been talked about go-to-market, I think this is quite a developed process and the growth of brands and productivity, et cetera, and the opening of POSs, but how do you see the competition environment for the next 2 years? How can the company create entry barriers?
Is this a problem or not? So I'd like you to elaborate please on this thing.
Unknown Executive
Pedro?
Pedro de Andrade Faria
Well, obviously, in the last few years we are experiencing a new competitive experience, regional -- some regional companies are growing, regional brands. We are well aware of this.
And now, there is a second competitor in most of the categories. And in some categories, it's right behind us.
So yes, the competition has heated up. But I think you were talking about the next 2 years, what has been planted in the company, this basis that Claudio mentioned, both from the industrial point of view and efficiency of what is being done from the marketing point of view.
Augusto has said how much in this guideline of what we are giving back to the market. And as we have the great wealth of the company brands, and the most valuable in Latin America, one coming back now in 2015 in categories that are very relevant for us as ham and sausages, I think that the competitive scenario, I think that we are very strong players.
And we have a strong competitive differentials. Well, there is one point.
I would have lived all my life with hot competition and recurrent competition, that's the name of the game. And competition always copies what we do, but we can rest easy.
They can never copy what we are, so let's just get on with it. Thank you.
Diego T. Maia - HSBC, Research Division
Diego Maia from HSBC. My first question is a follow-up about competition and what you have for next year.
Can you tell us a little bit more what your plans are for next year for Perdigão? And more than that, how do you intend to work, and how do you intend to avoid cannibalization between Perdigão and Sagia?
How are you going to deal with this issue internally? And second question about international market, that this quarter was very good, but do you have any idea of how much would have been the positive impact if virtual market was normally opened to you?
How much more that margin would have been?
Unknown Executive
Well, going backwards, we do not do that math, how much it could have been, because it doesn't add much what could have happened. But fact is that in the third quarter, all international area has been impacted by all areas and that was good.
So we did not do that math of how much I would have made if I had sold for a specific price. That's very difficult to estimate.
And the domestic market, we already talked about the competition, Perdigão's strategy, we cannot tell you anything about it. Much on the contrary, there are a lot of people listening so, that strategy -- going back to the market, this is an internal strategy, you understand?
But it is obvious that the less we cannibalize Sagia's brands better to the company, the more we have Perdigão coming from competition much better. So we understand that Sagia and BRF still has 56% of market share in the categories.
Ham, for instance, is over 60%, so we do have a higher market share. So maybe a small degree of cannibalization can happen.
We're so analyzing it and it's part of the strategy of reintroducing the brand. So we cannot talk much further about it, sorry.
Unknown Executive
So now we are going to start answering the questions of the participants that are following us in the call conference. [Operator Instructions] The question is from Luca Cipiccia from Goldman Sachs.
Unknown Executive
Since our friends from the Internet have not asked any questions yet, I am back here on the floor. Would like to -- so if anyone from the audience would like to ask a question?
So now back to [indiscernible].
Unknown Analyst
I have a question about acquisitions in the domestic market. I will repeat the question.
I would like to know about acquisitions, opportunities in the domestic market. We know that there are limitations, but you have said before that the company would like to hold a smarter position.
Wouldn't it be smart if you look at the long-term and leverage that ability of promotional for added value and add new categories to it. Where not necessarily the company operates today, but that could be a new platform and new capacity, another focus more for [indiscernible] for products of added value more than you have been working within the past, so that is my question.
Unknown Executive
I think what is the most important has to do with the way you stated your question. The market has a mistaken understanding about the companies not being able to do acquisitions out of Brazil.
And we don't have a brand platform that allows us to think not only in adjacent categories, but also things that are related to our core business. Therefore, we have to create a correct strategy to follow through it.
Thank you.
Operator
The next question comes from Pedro Leduc from JPMorgan.
Pedro Leduc - JP Morgan Chase & Co, Research Division
About SG&A that is in absolute figures 4-something-percent year-on-year showing that you have -- you'll be more efficient in the fourth quarter. Can you tell us a little bit more about it?
Is this more or less of the same that what already has been done, or we can expect different figure? Are we still talking about SG&A, when we look at 2015, the Brazilian market shall be more challenging, and do you still see a drop in SG&A for next year or do you believe you are going to have to increased marketing expenses to reintroduce Perdigão in the market?
Unknown Executive
Actually, we have a strong restructuring in the Zero Based Budget. In the beginning of the meeting, we discussed that.
I think I talked about that with journalists as well. The ZBB, this is an annual planning.
Obviously, the first leverage comes out right in the beginning, but that is something that is here to stay. We have an expenses discipline in the company today that is much stronger than in the past.
Next year, we are going to have a new round of Zero Based Budget. We want to keep on working like that.
And now we are focused on the consumer, that is still our core. So as we do intend to heavily invest, know that we are very aligned to our strategy, not only in marketing, but also in marketing, we have to improve a lot in the point-of-sale.
Once we have new points of sales, we need to ensure that we capture and we gain that point-of-sale. So SG&A, it still shows opportunity.
And here, we anticipate there are major restructuring process, but that is just like nails, you have to trim them every week, but it's difficult to say what we are expecting in terms of SG&A for the next year, but I can tell you that we will have much more control on our SG&A, much more than what we had in the past. Whatever is considered redundant and it's not adding value to the company, will be worked on.
I think this is a good indication of the company's strategy. Everything that the consumer see probably should increase our level of expenses, and whatever the consumer doesn't see, something that should decrease the costs.
So I think and I hope that this adds up to a good profitability creation to the company. Thank you.
Operator
We now conclude our question and answer session. And I would like to turn the floor to Mr.
Abilio Diniz for his final remarks.
Abilio dos Santos Diniz
I think I made it very clear that I deeply trust in this company. I trust the team and the teamwork.
So now starting in 2015, the company is going to be under Pedro Faria's management. And I would like to say that I truly believe in our country.
We are coming out of a very difficult moment, a moment in which there was an uproar in the market, the period that was right before our elections last weekend, the company that -- I mean, a country that is divided in 2 major blocks, President Dilma and candidate Aécio Neves had a very close margin of difference. Therefore the country is divided.
But on Sunday night, President Dilma, I think said that she is going to govern for all Brazilians. This is an indication that is very important.
I believe that she will do it. She will work for that.
I believe that right now, in a moment where the country seems to be divided. This is reconciliation moment, a moment when we have to understand ourselves.
And for those that analyze the economy, I don't think we have serious problems. We do have sound basis.
We might have some problems here and there, threatening inflation, but I believe that inflation is still under control, and everything else that is happening could be corrected, could be adjusted. And so I would like to convey to you my optimism message.
And I truly believe that things are going to be okay. We have gone through the worst.
There was already a volatility in the market. The scenario is defined.
We already know what is the day after. So I think now we businessmen have to work and try to build.
That's what we have to do. That is what is better for the country, for the companies and for all of us.
We that are in the consumption market such as BRF, we do have a very positive scenario ahead. I believe consumption will increase.
We have an international scenario, in which the international economy is recovering. The United States is showing signs of recovery.
China is still at a good pace. I think we do have very good perspective, excellent perspective for BRF.
Thank you, all, for being with us, and see you next time. Thank you very much.