Executives: Pedro Parente - Global CEO Lorival Luz - Chief Financial & IR

Officer
Analysts: Isabella Simonato - Bank of America Victor Saragiotto - Credit Suisse Lucas Ferreira - JPMorgan Antonio Barreto - Itaú Corretora de Valores S.A. Thiago Duarte - Banco BTG Pactual S.A. Lucas Ferreira - J.P. Morgan Antonio Barreto - Itaú BBA Thiago Duarte - BTG

Pactual
Operator: Good morning, ladies and gentlemen. Welcome to BRF S.A.

Conference Call to discuss the results of the Second Quarter of 2018. This call is being broadcast via Internet at our website www.brf-br.com/ir, where you will also find the company’s presentation for download. [Operator Instructions]. Forward-looking statements about the company's business, perspectives, projections, results and growth potential are assumptions based on the management's expectations regarding the future of the company. Assumptions are highly dependent on market changes, on the country and industry's economic conditions and on international markets.

Therefore, they are subject to change. As a reminder, this conference is being recorded. This conference will be presented by Mr. Pedro Parente, Global CEO and Mr. Lorival Luz Global VP, CFO IR officer.

Now we would like to turn the floor to Mr. Pedro Parente, who will start the presentation.

Pedro Parente: Good morning, everyone. First let’s start the presentation for the results of the second quarter of 2018. This is a quarter that has brought average challenge environment for the company, but as you all know this is not only for company but also for different industries and this is especially because of the truckers strike.

Now about our Company, this challenging environment also is also a result of a series of that really starting in December of 2017 by the Russian government measures banning imports of Brazilian protein. After that already in this quarter, the second quarter of 2018 there was another measure by the European Union de-listing 20 clients year-over-year in this our BRF plants. And in China, in June also in the same quarter, they have applied temporary anti doping tariffs over imports of Brazilian poultry meat [ph]. This protection and its measures do have an important impact on our operations. In the domestic markets, we then have a normal supply because of the banning of exports especially, banning coming from Europe and Russia.

I have already mentioned the truckers strike. We’ll have more details about that later on. And also as we have informed, we have performed some adjustments in our production change so that we could adjust the demand level and that has the impact of some restructuring cost and also as you know there was an increase in growing [ph] cost that has also affected our gross margin. But we do have here a scenario of opportunities to recover market and this is on the slide of the presentation and you might experience some delay when we change the slides, so please bear with us there and this happens in this type of conference. So as I said we have market recovery opportunities in Brazil.

We may have a recovery of market prices of market – soft markets that reflect these supply adjustments. Also we had a market opening in South Korea, and also we have positive signs regarding the reopening of the Russian market to the Brazilian protein. And now before turning to the main figures, and I think that in light of this challenging environment, one might ask if the goals that we have especially announced, and especially the one regarding leveraging, this could be harmed because of the figures that we are going to mention and I would like to say that we are working on the company, very much dedicated and since starting of May and June and we’ll have some special managers, drivers to generate value in the short time that will have a positive impact on our EBITDA. And that will be a little bit over BRL500 million for 2018, and over BRL1,200 million for the year 2019. I will go into further details and also Lorival will talk more about those initiatives.

Those plan of action that are totally, we have seen that the results are way beyond of what we can deliver, but we are working exactly to make sure that our leverage goals that have been announced in the beginning of July and also our divestments program and that has been maintained and the figures show an EBITDA, adjusted EBITDA for the second quarter of 2018 of BRL373 million, a figure that is lower than the second quarter of 2017, and we had non-adjusted EBITDA to the adjusted EBITDA, a different non-recurring factors that cause an impact. We’ll go into the details of the figures, but we just want to mention that non-recurring factors and also regarding operation dissection and the hedging of our debt also direct impact of the trucker’s striker. The truckers strike is still has indirect impact over the year, but here we have direct impact from this quarter and other factors that are less relevant. We have had a net loss of BRL1,574 million that’s negative, the same factor, the non-recurring factors regarding the EBITDA now can be applied through our net income. In addition to that negative result of FX and the real depreciation, all this factors and in addition to all this also made us adjust our net income by this non-recurring factors and also because of the FX variation and we will then have adjusted loss of not BRL1.5 million, but rather BRL340 million still negative.

If it were not by those non-recurring factors. There is another positive figure, which is our free cash flow of variation, we had in the second quarter of 2018, a free cash flow still negative about 63 million, but when compared to the second quarter of 2017, which was 713 million negative we have a positive variation in our free cash flow of over BRL615 million, is still more relevant, is the free cash flow when we analyze it in the first half of 2018 and the first half of 2017. In the first half of 2018,we had a free cash flow negative of BRL300 million and when compared to the free cash flow negative of the first half of 2017 that shows a positive variation of over BRL2 million, and our free cash flow generation. The positive figures that we would like to mention are the number of active clients. We have a constant growth in this number of active clients in the beginning of last year, we were at 163,000 clients.

We have ended December of last year 186,000 and we are already getting closer to 200 clients -- 200,000 clients served, and we know this is a very important figure because it allows us to have a perspective of market share gain and that's what we have been seeing in order to reach the total market share in Brazil of almost 47%, 46.8%. And another priority market for our company, which is that Halal market. We also have a growth in our market share and we have reached 43.6% in June and we were at 40.9% in May. Therefore, these are positive figures regarding the company's performance. Now to go back and talk about our main priorities, I would like to mention once again that the company's management is totally focused and totally dedicated to these drivers.

We are working hard since June and these main drivers and you may find them on the slide number five. The first of them we have announced which was the restructuring plan and our objective is to reach a monetization of at least BRL5 billion and to bring our -- bring down our leverage. We are now announcing that second driver that we are calling the short-term leverages or short-term drivers will have detailed information about that. And here we have included the optimization of Ag operations, also will want to improve price execution, reducing sales disruption that is the demand that we have from our clients. We are able to meet and maintain those demented products we want to have them in our stock.

We also will improve our manufacturing excellence and also will optimize our direct and indirect purchases process. And I think it’s important to draw your attention to this group of measures because they depend only on the company that is we do not have to count on the market or on the price drop of raw material. These are measures, and to each of these measures, we do have a detailed action plan and they will be evaluated and followed within the methodology of the management system and I will talk about that later. As I said, these drivers are generating value in the short term. They aim to cause a positive impact in the EBITDA of BRL500 million or BRL515 million still in 2018, and at least BRL1,200 million in 2019, once again and that's going to be talked by Lorival shortly and we’ll go into details about these measures.

We also mentioned our operating and financial restructuring plan. We have a detailed strategic planning, inspite of this plan and there are some important things that I would like to highlight when we speak about our management system. We will be completing this by September 2018 and we will probably have an Investors Day in the first 15 days of October so that we can communicate our strategic planning for the market. We also speak about our reorganizational structure; we have felt some urgent positions. These new people are coming to the company, but they are still two positions and we intend to inform the market in the coming weeks, when these positions are filled.

So the organizational restructuring of the company is already functional according to what we think will be best for the company. And we have the BRF management system that will allow us to announce all of these initiatives. And we’ll give you more on that in a moment. Our goal is to achieve the results that are desirable for our company. Let’s go to page six, here we give you some details about its value creation levels or drivers for the short term.

For the benefit of time, I will not get into too many details about all of them because Lorival will be doing this, will give you more details and he will present you the expected impact to be derived from these measures regarding strategic planning. Once again we highlight our major markets, Brazil the Halal market and Asia. And it will clearly establish our absolute commitment, more relativity here regarding safety, quality, FX compliance. These are absolute commitment that the company takes on, they will be needlessly [ph] followed. Regarding our BRF management system, what we seek with this management system is total integration between strategic planning, annual plans etcetera.

So this two will not be separate instruments in [Indiscernible] there would be one single instrument as strategic planning system would be a tool for strategic management and we will detail all the goals of our annual budget to the level of execution. And the third point which is absolutely fundamental is that in the management system our goal is to ensure discipline and rigour [ph] in executing the annual plan. We all know that putting together a strategic plan is very relevant and it is very good to have a solid strategic plan, but as important as and certainly, more difficult is to ensure discipline in executing this strategic planning I would also like to draw your attention to the fact that the BRF management system will allow us to deepen the views of our [Indiscernible] budget across the company, so that we have permanent control of all of the costs that the company incurs. These are my initial remarks. And now I’ll turn the floor to Lorival Luz for him to continue with the presentation showing details of our numbers in that the measures that I mentioned before.

Lorival Luz: Thank you Pedro. Good day everyone. I'm on slide 10. I will go over the results. You see that in this quarter, we had a volume 4% higher year-on-year driven by an increase in volume growth of more than 10% in the two year.

And we had an impact on the average price of 12% as the reference of the adjustment as Pedro mentioned. And there is an impact also regarding expert’s restriction imposed by the European Union, Russia and the impact that its having puts an extra tariff on our poultry meat in China. Another important factor is that in this quarter we also had a lot impact through a project regarding adjustments made related to restructuring. But we have announced an impact vis-à-vis the prior year considering increase to price of grains. Stock price of corn and corn in the same period of last year.

We had an increase of almost 50% if we consider the price of this year and the price of last year. Obviously, the impact on our cost is not that high given that the priorities and the production change, but there is clearly an impact on our cost. Cost pressures that are seen in our results and in the cost of our products. Another important factor was the impact of the truckers strike. And I will detail this more on the following slide that impacted our net income.

1,574 [ph] million of loss but we had a positive impact regarding a better management of our cash flow. The highlights here are that in this quarter, we had another adjustment of the total return getting back to BRL58 million negatively on our results and also compared to 2017 in this quarter, we do not have assets related to that [ph] period. We have BRL295 million compared to 2017 and that brings an impact when we look at our net income. Moving onto the next slide, we’ll talk about our adjusted EBITDA and I’ll be going to highlight in more detail. We moved to [Indiscernible] million which was a impact from weak and slash exceptional operations.

Growing [ph] with BRL288 million we have inventory adjustment at market value about the BRL200 million. In addition to the inventory changes we had expenses related to consulting procedures etcetera another BRL 40 million and it’s the impact of other about BRL 41 million. But this is related to inventory adjustments, inventory of products. Adjustments that we had to make. Another relevant line item is that designated debt hedge accounting.

We have a debt imbalance and designated as hedge accounting in the past, while this quarter the amount is high as given the majority of the bonds that matured and that were paid in the month of May, and that is why we have a higher amount here. This operation is very positive for the company. This hedge accounting was designated back in 2011 and 2012. And that brings large volatility and less impact on our results around this quarter. We also had an impact from the restructuring plans that we announced.

We announced about 40 days ago. So 144 about 65 million were related to contract of terminations, many contracts were terminated and we also had the payment of of indemnity of integrated partners about BRL30 million, an increase in the adjustment of inventory, raw materials, we closed down some production lines and that include some adjustments. In the inventory adjustments, raw material adjustment packing that was not use, mainly also have an adjustment here of about BRL50 million, all together BRL144 million. And also regarding truckers strike, we had a negative impact of BRL75 million. This was an impact on logistics about BRL50 million and then we had losses.

Related to the truckers strike we had some additional costs that were incurred during the period about BRL60 million. This impact we'll still be seeing in the coming months in the third quarter related to the yield of our production, because we have an impact in terms of the flow of food that was ideal during the truckers strike. So, the total – this is the total of non-recurring items, BRL660 million. Let's quickly move to and highlight the discipline in managing our cash. Free cash flow of the company, you can find it on slide eight, BRL650 million in the quarter, BRL2 billion for the half year.

On the next slide, it talk about the depth of the company, we close the second quarter with 5.69 times net dept over adjusted EBITDA. We of course have to manage the company and we communicated the plan of BRL5 billion to bring the leverage down to 3 times in 2019. In the bottom chart we'll show you the debt profile. In the bottom line second quarter is what we have in the balance sheet. We have the number for 2018.

We have about BRL2.5 billion in 2019, BRL1.8 billion. However we negotiated some of this debt along the month of June. So here we put the pro forma maturity of that for 2019. As you can we see a relevant reduction with BRL2.8 billion [ph] for 2018, BRL3.3 billion for 2019, so that in the next 18 months we have exactly BRL5 billion which is amount that we expect can be covered with our cash generation. And now we'll move – start working on our debt profile for 2020, 2021 trying to roll over the debt profile without having the risk of financing and having more liquidity for the short term.

Now, highlighting a little bit, Brazil. We've had an excellent quarter regarding the commercial execution with the significant increase of our active client base reaching 195,000 active clients, but last year we had 171,000, so we are going towards our goal of 200,00 active clients. This is a relevant growth in the total product and processed foods. There was a growth in all the channels with a relevant market share of 46.8% and also a growth of almost one percentage point, the average price year on year where we – that's where we have the impact and I refer you to the right chart, so you have here the processed foods and natura in the past we have 74% of processed foods and 26% of in natura and now we have 30% and 70%. We have an impact in the average price but here I would like to highlight the growth and the price increase that we had in the first half of 2018 and this increase is of around 10% when we compared the price increase and at the closing of the first quarter of 2018 to the second quarter of 2018.

That shows a good discipline of the market and acknowledging the cost increase that we have, the cost transfer that we had, the logistics cost that we have that had to transfer and also the impact from the truckers strike. This is an important factor here that we should mention. Now on the next page, I want the repetitive. I just would like to highlight, that these figures show our relativity in prices when we compare the processed foods to the second layer, so you see our share, the share of processed foods and also this is the number of active clients to the bottom left of the chart, its important to say that the company is already focusing on launching products. This is very important so that we continue positioning our brand correctly with the right value and with the right principals that they do have.

So, we are launching the new lines, Sadia Bio, this is zero antibiotic, zero performance a 100% vegetable foods and it has an innovation. Our clients will be able to follow the whole process and know who were the growers, were the producers of that food that they are buying. So this a new product. I think this is going to tackle a new market range. We'll have the right pricing meeting a demand of the consumers at a more selective consumer that really looks for this type of product.

So this launching is going to happen very soon. Now talking about the Halal division on the next slide, we also had a strong volume growth. Our market share also has increase maintaining our leadership in this market. This market is very relevant. It’s a priority market.

For BRF its important to have this relevant share position, that growth results were very strong, BRL186 million in EBITDA just in this market. In the past this growth was of BRL30 million, net of Banvit affect, the response of BRL497 million in EBITDA, so this is very relevant, very strong results in this market. And I think that brings relevant results to us. In the international division we see a greater impact, drop in volume, in general of 13.7%. If we analyze specifically Europe and Russia market we see a drop of 65% in volume going from 89,000 tons to 36,000 tons, this is a very significant figure in just in this market of Europe and Russia, there is an EBITDA drop of BRL60 million with the negative EBITDA of BRL8 million [ph].

And then the EBITDA of that division closed at zero with BRL3 million also adding the commercial dynamics that is very challenging in Japan as well we have high inventory levels, 150,000 tons and then the price is of $1800 per ton. So this is the main challenge that we have for the next quarter and this also the challenge has been announced as one of the divestments in Europe and Thailand and the international market in the Southern Cone market we still have our trajectory on Europe that we had in the past quarter. I will go briefly through those data, because we already started divesting on the assets from Argentina. Now going back to something that Pedro mentioned is, our main priorities, our main priorities areas, I will go into details about this plan of BRL5 billion. We are working with Europe, Thailand and Argentina divestment, some mandate have been already executed with investment banks.

Some investors have already received information last Friday, Europe and Thailand will be send next week that information. And we have schedule in the classic process of M&A, and we expect to conclude these transactions over this third quarter. There are some stakeholders interested in the process that is very relevant and that really provide us a lot of confidence on those transactions. About non-operating assets, we are preparing [ph] an auction that should happen in the beginning of the third quarter as well. We have inventories of raw material frozen that's a relevant amount and we are working with a lot of discipline to have a commercial as a key execution in local international markets and in the productive fashion that's already providing a significant values in the cash of the company, and this will be reported over the third and fourth quarter of the year.

About the securitization of receivables, probably we have seen, we released the material fact where we have already authorize the mandate of syndicated banks to [Indiscernible] FIDC in a initial amount of BRL730 million and that should happen about our industrial footprint, also we have had mandatory vacation leave, lay off and also adjustment in the Turkey production lines, the two points we already mentioned. About the indebtedness I already mentioned, I talk about the extension of the debt and this is following the same lines. In the short term drivers as Pedro has mentioned we are also working to identify item by item because there are too many details in agriculture and we are focusing on our plan, on our execution so that we can have the best practices and also to adjust all our productivity to the market that we serve considering that we have the closing of some relevant markets, so we have to produce or we do not have the production cost for those markets, so we are just in ourselves that – we then have to see whether the right cost of production to market we serve we cater to, and we are working on that. Also we are working on the best practices of price execution and a better management of our inventory change, the production inventory not only to decrease shrinkage and also to reduce costs. We are working in order to ensure manufacturing excellence, when he just got to the company and I think he brings about a lot of experience and the lot of competence to work in this area in manufacturing and also to work with our supply team aiming greater efficiency in our operations.

And also we have our strategic planning, as Pedro has mentioned, it has to do with the organizational restructure. We have already disclosed it. We have here two positions which I'm still in enacting position as CFO. And Pedro also is very much dedicated to the management strategy. So we have the team almost complete and these people do know the industry, they work in the industry and they come to BRF with great expertise in their competence areas, but above all there is an alignment among all of us in order to aim common objective which is to recover BRF.

Therefore, having said that, I end my presentation. As I said before we then turn to our Q&A session.

Operator: Ladies and gentlemen we will now start our Q&A session. Each participant may ask one question. [Operator Instructions] The first question is from Isabella Simonato from Bank of America.

Isabella Simonato: Good morning, everyone.

Pedro Parente: Good morning.

Isabella Simonato: Pedro and Lorival, I have two questions. The first one is about the guidance of BRL500 million in gains over this half of the year. And how does that work with the EBITDA guidance with the BRL5 billion that you have announced in the restructuring plan.

We could more or less understand the EBITDA for the year. I want to understand that considering that you mentioned in that guidance and that the BRL500 million information, I want to know this BRL500 million are above of what we already had in the EBITDA guidance or if you're in fact to see more complicated organic results and maybe even more in the international market than in Brazil considering the performance of the second quarter? And those BRL500 million are now trying to offset that difficult organic performance maintaining the level of leverage at the end of the year stable or any fact that the announced plan before already was contemplating that type of efficiency? That's my first question. And then I'll ask the second one after your answer.

Pedro Parente: Thank you, Isabella. You know that we do not provide EBITDA guidance.

I understand your numbers, but as we have mentioned before we are maintaining our leverage goal as Lorival has mentioned, and these measures that we are announcing, that we are calling value generation drivers in the short term, they show that the company is really taking seriously the commitment taken with this leverage level and that we will met our target. Once again I do understand your figures, but we do not have guidance for EBITDA. But yes, it's important that you maybe sure that the company is really committed to meeting that leverage goal that we have establish. Okay.

Isabella Simonato: Thank you.

And my second question has to do with the performance in international market. I think with the exception of Halal division, all of others had a negative EBIT in another word the performance that below with the expectations and below recent quarters. I think that European band is difficult to reverse, so as also the China issue. So I'm looking at the main regions. What kind of improvements can we expect along the second half of the year and full 2019?

Lorival Luz: Isabella, hello, this is Lorival.

Well, regarding international market indeed regarding Europe it is difficult to reverse the band in the short term. We don't have any expectation that this will happen in the next quarter. As mentioned in the beginning of the presentation we have heard that there is a possibility. There is some signaling of resumption. This could be an upside, a positive expectation that we might have for the second half of the year.

The Halal market is an important driver to us. And in this market we have positive expectation. We already saw a very robust result in the second quarter and we continue to be optimistic regarding that. And regarding the Brazilian market, we are focusing on a strong execution expanding our client base. And with the prices that we had in the second quarter, as well as the discipline, all of that put it together points to a positive outlook.

So we have a more positive expectation regarding Brazil, the Halal market. And again, the international market as a whole could bring this good news regarding the opening of Russia. Thank you.

Operator: Our next question comes from [Indiscernible].

Unidentified Analyst: Hello.

Thank you for the opportunity. Just a follow-up question. We understood that you're committed with a leverage target. I just want to understand this BRL500 million would be part of what you're expecting for next year or is this additional? And the second point in the domestic market you gained market share. And you had a price increase for processed foods.

How did the market react to this price increase? And if this market share continuing as a trend in June, do you expect this to be competitive strong looking forward? Thank you.

Pedro Parente: Thank you. Let's go back to the previous topic. Two observations regarding the debt. Firstly, we have a vision that the credibility process means, promising and delivering to the promise.

So for us it is really important that we make clear that the promise made by management regarding leverage expected for year end is maintained despite the results that we observed in the second quarter, which obviously felt really below the potential of the company. We knew and we are working to communicate our results, but also to communicate that we are working to adopt measures that will allow us to meet our leverage goal by year end. Another point and I've talked about this. These measures, all of them depend on the company. We don't depend on third-parties.

We don't depend on market variables. Its just in the hands of the company and that's they are importance to give peace of mind that by year end we will be delivering this leverage goal once we go forward with our divestment program, and as we mentioned in the beginning of July and now today in more details by Lorival, who mentioned that this plan is unfolding. Again you know we don't give any EBITDA guidance because what really matters to us in fact you all understand that we are working at full power and working hard so that the problems that we saw in the second quarter will now be repeated in the coming quarters. We are adopting measures across the company to deliver to the leverage promise for this year and for next year. As per the second question I turn the floor to Lorival.

Lorival Luz: Regarding your second question we continue with very positive perspectives regarding market share. This has been quite consistent in recent quarters. In regarding price increases that I mentioned in the quarter-on-quarter comparison there are two factors that I would like to mention. First, like I said it is important because we had an increase in the production cost for the whole industry given the price increase of grain [Indiscernible]. To that manufacturing cost we'll have to adapt to the increase in grain price, and that's what reflects on the price cost.

In addition for that very same reason the market reacted very positively because if you remember in the first quarter of 2018 there was a certain depletion compared to the prior year, a depletion of prices. So the market reaction was extremely positive and even the reaction of the retail segment was positive. The standards have been maintained. And this is the kind of gauge that we have also for the third quarter. So we have a positive expectation regarding that in terms of price adjustments.

This will be maintained with the new prices and will maintain for the third quarter.

Unidentified Analyst: Thank you very much.

Operator: Our next question comes from Victor Saragiotto with Credit Suisse.

Victor Saragiotto: Good day, Pedro and Lorival. Thank you.

My question goes back to cost. We saw that the company being able to grow volume year-on-year and we talked about increasing the capacity and fixed cost, but when we look at that IDR reduction of materials and input and when we divided kilos sold, excluding non-recurring items, we see a significant increase even with this volume increase, so does this pressure come only from the grain increase, in fact this or is there anything else that we're seeing? And how do you expect that this will behave in the future as grain price pressures are likely to continue along this year?

Pedro Parente: Victor, thank you for the question. I think you are correct in your valuation. I would just like to stress importance and relevance. Of this movement to adjust prices, to have more adequate prices because our manufacturing cost is strongly impacted by raw material price increases like I said, the spot price year-over-year is 50% increase, which is a material increase.

And that is why I think it is so important that we adjust our prices accordingly after our raw materials are very important for manufacturing cost. In addition Victor, there is another important relationship that has to do with idle equipment. We see some markets closing. And we have a higher idleness in our cost analysis. There is also an impact.

This will be adjusted over time. We closed down some plans and some manufacturing lines as we announced. We had the impact of the restructuring and although we mentioned that there are BRL70 million related to the truckers strike there's also an intrinsic cost in the operation that we cannot really highlight and connected to this strike. I'm going to give you some examples of that. At the moment you have a limitation, you have delay in foddering of animals, you lose performance and you miss the right moment and the right timing to slaughter.

And this is normally included in the cost, and it is statistical to break it down. And we cannot link that as an impact to the truckers' strike, but I did have an impact on euros. Because sometimes if you take two, three days to slaughter animals, there is an impact on weight, there is an impact on the commercial sales price. So, yes, that happened in the second quarter. I just wanted to give you more color on that and to clarify, but above all, we are taking action -- all of the necessary action for us capturing these BRL500 million that we mentioned in the third and fourth quarters.

Victor Saragiotto: Thank you. Super clear. And if I may, I would like to ask another question. Could you quickly comment on the freight table of price list. Is this impacting unrefrigerated foods, I don't think there is a lot of change, but for grain market, it seems that it's a little messy, the market is a little messy after these freight list.

Can you comment on how this can impact the company? Thank you.

Pedro Parente: This is Pedro speaking. Well, the freight price lift, it is rather concerning to us. We have seen a lot of discussions about this across the country. This thing is being discussed at the Supreme Court as well.

We're waiting to see if this discussion will lead to some change that will be favorable, but as the company dependent on freight, of course, we are impacted. Like I said, we are waiting for the evolution of this topic so that we can in due time and depending on the of this debate, define how we are going to react and what kind of measures the company will adept, because it is important to clarify that we see this measure with concern because it will entail a general cost increase to the Brazilian economy.

Victor Saragiotto: Thank you, Pedro, Lorival. Thank you very much.

Operator: Our next question comes from Lucas Ferreira with JPMorgan.

Lucas Ferreira: Pedro, Lorival, good morning. My first question has to do with Turkey operations. The Turkish lira is depreciating approximately 40% this week. What did you do expect in terms of business impact in comparing this to real. Can you mix -- can you change your production mix to export more to offset that effect? And my second question about prices in the second half in Brazil.

You said that you had price adjustments to offset cost increases in the second quarter. But my question is more specifically about what do you expect in terms of reducing recovery and improving working capital? Can this lead to additional promotions, price reductions, any impact on pricing? Thank you.

Pedro Parente: Thank you, Lucas. And I will start by your second question about the expectations, you said it well, these are positive expectations with these price adjustment for the second half of the year. There is no negative expectation regarding that.

Now, about the inventory levels reduction, as you said, we do have no price reduction effect in order for that to happen and no promotions either. This will come from about our commercial execution. It has been discussed in the last few months. And also, it will depend on the expansion of our client base. So, [Indiscernible] this is a best exposure to our client base, a better commercial execution.

And also on the other side, a better management of our productive chain and production itself avoiding discounts that we usually have on a yearly year basis than know it well. So, we do not remember -- we do not have an impact or do not forecast an impact regarding that. And in Turkey, we do have impact of that conversion, because of the Turkish currency and that will open room for a different flow of exports now in this third quarter for the countries and the region. And with that, we'll have an adjustment of local prices that also will help us -- that's positive for us, because we open an opportunity to export. And when we do that, there is an impact in the local prices and that in turn will affect the whole industry.

So, I believe that will have a positive perspective regarding exporting and a better adjustment to local prices in Turkey regarding our Banvit operation. Thank you.

Operator: Next question is from Lucas from Goldman Sachs.

Unidentified Analyst: Good morning and thank you for taking my question. I would like to better understand the possibility of having more significant impact of restructuring cost and adjustment cost for 2018 and 2019.

We have seen that the second quarter, obviously, we did have non-recurring events and the impact was very significant. And I would like to know if you can quantify or at least give us a direction if most of the restructuring costs have already been accounted for in the second quarter, we will see more of them? And also, what about regarding operation week flash and operation deception? So, anything else on this topic that would be interesting to better understand how much impact the second quarter had on proportional share of the cost?

Pedro Parente: Thank you very much Lucas for your question. Yes, most -- and I would say that most of that impact of restructuring has happened already in the second quarter, considering that the generating factors did happen in the second quarter. So, the laying off people, the contract terminations or closing some plants, so all of that did happen in the second quarter. We may have some remaining effect of lower impact, considering as I said, the truckers' strike and others because then we have an yield impact, an industrial impact straight into production.

So, we may have that. But I would say not as large as an impact as we had before. And these are the one known so far. So, at this moment we do not have any other fact that would be causing any extraordinary cost or expense. So, yes, most of those impacts have already been accounted for in the second quarter.

Thank you.

Unidentified Analyst: Yes, now just adding to the question, when we talk about the deleveraging goal for 2019 based on an adjusted EBITDA, I would imagine that the difference between the adjusted EBITDA and the EBITDA shouldn't it be looking at 2019, shouldn't be a significant, right?

Pedro Parente: Yes, that trend and according to what we have in terms of visibility so far is that really this will be -- those figures will get closer.

Unidentified Analyst: Thank you.

Operator: Next question is from Antonio Barreto, Itaú BBA.

Antonio Barreto: Good morning everyone.

I have a question about productive potential regarding biological assets. I know it's very clear this restructuring plan focusing on the rationalization on the productive potential of the company you have announced the closing plants and also rationalizing production to adjust your industrial footprint. But when we analyze the quarterly information, the number of mature companies is almost 16%, a very little in the second quarter. And number of immature breeders have grown. So, it makes us believe that the productive number of breeders in the next quarters will be even greater.

So, my question is that productive potential in terms of biological assets, shouldn't that be following the rationalization of the industrial production, how can we reconciliate that with your restructuring plan? Is this a matter that will be addressed later on? And now we rather focus on industrial production? Or you have that understanding to recover the market, then you can maintain your productive potential in terms of biological assets?

Pedro Parente: Well, Antonio, thank you for your question. You are right, we did have that in the quarterly information. But we are now managing a very long chain and the decision was made a lot of times, will have an impact in the quarterly information, but they are regarding decisions made three years before. So, what I can tell you is that the adjustments, both in cultural areas as well as in the industrial area, yes, they are very much in line. But the timing that you see them and the quarterly information, that timing maybe in different moments.

And that a lot of times will cause us to take a few actions or make a few decisions in terms of short-term adjustments that may refer to the sale of live animals or a plant so that we can anticipate that adjustment. But what I want to assure you is that there is no mismatch between actions taken regarding biological assets and our industrial production. These actions are in line and that adjustment we'll see that in time. Okay?

Antonio Barreto: Thank you for your answer. Lorival and my second question if I may.

We really have increased the prices at the end of June in 10%. And when we look at the market variables, all of them have worsened a lot. When we look at prices of pork meat in the local market, they're down again after the truckers' strike. And could that some of impact how much this price increase will be accepted by the market?

Lorival Luz: I think it's important to analyze the seasonal dynamics. We also having dynamics.

We have dynamics for poultry, swine, and they will have other impacts and also has to do with the oversupply because of closing Russia market. And we will have another dynamics for processed foods and another one for the margarines market. So, these are different dynamics and what I can tell you is just a general overview. In case of BRF, we do have some brands, robust brands and we have a distribution capacity and a service capacity that is very well -- that has a great penetration. So, we have a strong price when compared to the first quarter.

So, it's important to look at that as a starting point. So, we did have a peak right after the truckers' strike and we are in over 10% probably you'll have seen at the moment 30% to 40%. And then after that peak, we had a drop. So, that percentage of discount and it's depending on this curve you are analyzing, but when we get the average price of the first quarter and the average price of the second quarter, yes, we do have that positive side to price increase.

Antonio Barreto: Thank you very much.

Operator: Next question is from Thiago Duarte, BTG Pactual.

Thiago Duarte: Good morning everyone. Good morning Pedro and Lorival. I have three quick questions. First, talking about the price increase -- just ended in the last question.

Is that price increase part of this plan of those short-term initiatives to generate BRL515 million more of EBITDA is still in 2018? When we analyze this qualitative description of initiatives, most of them seem to be efficiency or cost initiatives. And I would like to understand if the price increase is part of that short-term driver in order to improve EBITDA degeneration. And still on price increase, I would like to understand how much you believe that the trade-down process of channels, brands, categories, how that has affected your business in the last two years? And I know it has in cash and carry, the loss of market share of [Indiscernible], the change in category to -- cheaper categories. And how much access have you had, so we are going to look at the results of the third and fourth quarter results in a like-for-like basis, and we should see in the processed food an increase of 10%? And do you think you still have room to amortize the price increase while migration of channels, categories and brands? That's my first question. My second question is on CapEx.

Also, it has to do with the prior question. In the first half, you have a total investment of BRL845 million. If I'm not mistaken, including that increase of 60% investment in breeders. So, if we -- it looks like those investments in breeders will come down in the near future. But when you think about the CapEx, the company is below depreciation.

So, I would like to understand what would be the right figure for the next half of the year or the next year that would be interesting? And my third question if I may is about the Halal division. When we look at Banvit contribution, it was a little bit less than one-third of the revenue in the quarter. And basically, half of EBITDA, so it looks like that the remaining part of the business that is exploring Banvit is running really at lower margins than those 8.8% you have disclosed. And I would like to understand that when you change that halal slaughter that has been demanded by Saudi Arabia, from what I understand, you have already adjusted yourself to this change, but I understand this what cause a price increase. So, if you exclude Banvit, how the Halal division is running in terms of profitability, it seems to be a little bit lower than this 8.8%.

And I also want to understand the impact of the slaughtering change process -- slaughtering process change. And I'm sorry for asking long questions.

Pedro Parente: Well, I apologize. I will have to talk to you later, because your questions are very broad and are many as well. But I'll try to be brief and address them quickly.

Price increase within those BRL500 million, we are not considering as drivers any price to reach those BRL515 million. Effectively, basically, all of that we have already mentioned about price increase and trade down and all of that, I think that we are with the right strategy. Remember that we are expanding our client base and that will allow us to have the right opportunity as well. And we also will have a deli positioning, especially in the cash and carry market. So, you will see the figures and details and will help you understand the impact of that trade-down execution and what is really the impact of entry of deli [ph].

About the CapEx, yes, it does have the depreciation. And if we look at the last four, five years, what was invested in the company in terms of CapEx, you will see that was a relevant amount, very high. It's very strong investment. And so now, yes, we do have the impact of the breeders. But also we made it to optimize the capital that was invested.

We need to invest on the plans in order to have the right return. So, we have dropped those plans. Yes, so you will see a better efficiency in the use with higher depreciation and the CapEx. And remember that part of the biological assets and most of them have come from also the impact of the price grain. Because when the grain price increases and our biological assets, which are our breeders, will also have an increase on the price of the asset itself.

So, you cannot consider that as an increase of our CapEx, but rather that reflects the price increase on the basis of biological assets; that is live.

Lorival Luz: With regard to Saudi Arabia, there is a positive effect indeed. Over the year, regarding sales and adjustment of the process. We already have a procedure to meet that demand. But I think that will be positive to continue to supply this market.

And it involves not only Banvit, but also the fact that we are shipping more products in preparation. But this is a one-time off effect in the case of that market. Later on, I can give you more detail. Thank you.

Thiago Duarte: Excellent.

Thank you, Lorival.

Operator: Ladies and gentlemen, we're running out of time. So, we are now closing the question-and-answer session. I'd like to turn the floor back to Mr. Pedro Parente for his final statements.

Pedro Parente: Well, in the interest of time, I -- well, I guess, that all of the relevant messages have been conveyed. And with this, I would like to thank you for joining us. Our Investor Relations department continues to be at your disposal if you have further question and if your question was not answered during this webcast. Thank you very much and enjoy the rest of the day.

Operator: BRF SA conference call is closed.

We would like to thank you all of you for participating and have a good day.