Since the merger of Sadia and Perdigão, BRF has worked on supply chain, portfolio and sourcing to improve margins, Ribeiro says

Since the merger of Sadia and Perdigão, BRF has worked on supply chain, portfolio and sourcing to improve margins, Ribeiro says

Brazilian food giant BRF has an ambitious agenda. The company hopes to expand in what it calls the "white space" of the global protein sector. The group has laid the groundwork by undergoing a far-reaching organisational transformation, which CFO Augusto Ribeiro tells Katy Askew, will enable BRF to deliver a stable margin profile - forming the foundation for planned international expansion.

BRF is today one of the largest global producers of protein products. The Brazil-based company is the single biggest global poultry exporter, accounting for around 20% of the worldwide poultry trade. The group also has interests spanning pork and beef, as well as processed and value-added foods.

The firm was created through the merger of two already sizeable Brazilian companies, Sadia and Perdigão, in 2012. While the combination provided BRF with significant market reach and leading brands, it also left the company facing the challenge of bringing two large corporations together to form a single, efficient, competitive entity.

Unsurprisingly given the size, scale and complexity of the enlarged company, the process has taken the best part of two years.

"The changes that we made were across the globe," CFO Augusto Ribeiro tells just-food. "There was a lot of complexity in the company and that is something you can understand given where we came from. We are a company originated from a merger between two big companies. We spent the last two years talking and thinking about SAP, distribution, a lot of basic stuff."

BRF started a structural review last year and the resulting organisational alterations have been far-reaching. As management works to strengthen BRF's base business, the focus has been on reducing administrative and distribution costs, cutting operating expenses and improving sourcing efficiency.

"We decreased the number of offices outside Brazil from six to four and we decreased the number of general managers outside Brazil. But the major restructuring efforts have [centred on Brazil] given our size and way we are currently structured, with 90% of our factories still placed in Brazil," Ribeiro reveals.

"Year-over-year we decreased administrative expenses, SG&A, by 20%. [There are now] less people involved where you have the higher per capita salary. The idea was not to decrease the [headcount] or increase profits. The idea was to improve communication within the company. It is a fact in administration that if you have less layers, less people involved in order to take a decision, decisions tend to be taken faster. It is a matter of balance between control and speeding up decisions."

BRF also reduced the number of people within its operations structure, Ribeiro continues. "We closed operations offices across Brazil. We used to have five of them. They were layers between the factory and management in headquarters. We closed 100% of those offices. We used to have six regional directors within Brazil, we now have three. And we empowered the factories. What we saw after that was decision making within the operations framework has improved a lot."

By removing these layers, on an operational level BRF emerged a more streamlined, efficient and effective organisation, Ribeiro suggests.

Before these structural changes were made, management had faced difficulty in implementing decisions and the company lacked agility, he continues. "Sometimes we took decisions in our sales and operational planning [departments] on demand management and we were not able to implement them right away in the factories. We could say 'I want to sell more of X product because of the margins involved' but if that production would imply an increase in costs in a certain factory that factory would complain and create barriers."

Another important area where efficiency could be improved was supply chain management. The company totally overhauled the way it approaches the supply chain to take a more coordinated approach, Ribeiro continues.

"We call it an integrated planning area. We created an area where the guy took almost 100% of his time to look from the animal raising through the production, distribution, until the products are placed with the customers."

By bringing all of these areas together BRF has been able to take a holistic view of supply chain management, Ribeiro observes.

While BRF has been stripping complexity out of its organisational structure, on the one hand, it has also been working to simplify its product portfolio, on the other.

"We have decreased a lot of our SKUs, around 40% in Brazil and 30% outside of Brazil. Outside of Brazil is the toughest part because ... you have a huge amount of SKUs, which creates complexity. So we decreased the number of brands."

Discontinuing less profitable SKUs enabled BRF to focus on higher-value items. The company has been able to reap price/mix benefits, the finance chief says.

"When we decided to take out SKUs we looked at the entire chain. We looked at it from a profitability perspective and that includes [thinking] what kind of products do I want to sell more than other products? We looked at production set-up and increased simplification of the chain. We went back to the farms to ask would we have any impact regarding animal raising? We looked through the entire chain and then we took the decision that we had a lot of space to decrease complexity. [We removed] less that 5% of net revenue - almost nothing."

While the company cut SKUs, it also decided to lower export volumes in order to shore-up pricing in markets where oversupply threatened to hit value sales. "At the end of last year, we announced that we would decrease our exports by 220,000 tonnes. Half of it was related to poultry. We decided to be more selective in attending some countries. Part of the production decrease that would otherwise be exported we diverted in to our internal market as raw material."

BRF reduced its exposure to Venezuela given the credit risk, resulting in pressure on revenues in Latin America. However, much of the reduced volumes can be attributed to lower tonnage to Africa. This region, Ribeiro says, is having a "great result" this year. "We took out the amount of volume that we used to sell to Africa. We changed the volume mix.... There are some countries that when you over supply the prices will fall very, very fast."

The combined result of these initiatives has been a significant improvement in BRF's operating performance. In its most recent financial update, BRF reported third-quarter gross margins of 29% - its highest on record. The group cut operating expenses by 4% year-on-year. Consolidated EBITDA was up 61% and EBITDA margins reached 15.2%, compared to 9.9% in the prior year period. EBIT margins surged to a record high of 12.2%.

These results did have the benefit of a number of significant tailwinds. The company's margins were lifted by a 4% rise in pricing. Lower commodity costs - and lower grain costs in particular - also worked to BRF's favour during the period. Currency exchange was another factor that improved profitability at the Brazilian firm.

Nevertheless, Ribeiro says, improvements to the group's base business mean that higher margins will be sustainable and the company expects to deliver consistent margins over the long term. "We have made so many changes within our company that more than 50% of what we have in terms of result is because we did it internally," he insists.

So, without external market factors giving BRF a leg up, what margin profile does the group's CFO envisage?

"If we were able, in bad times, to have an EBIT [margin] of between 6 and 8% we would be very happy. If you look at past history, we used to have a lot of volatility within our results, from 1% of EBIT margin to 10% or 11%. We are delivering now 12%, or 12.2% exactly. It is a huge variation, so we are trying to decrease that.

"The SKU reduction, the portfolio segmentation, reshaping our regions, the focus on certain regions... all of that has nothing to do with the market scenario. It has everything to do with our ability to deliver these improvements. And they are here to stay. We don't think we will move back to times where we have 1% of EBIT margin, which we did in the first quarter of last year."

While stripping costs out of its business is an important aspect of creating this margin stability, perhaps the most significant change underpinning this goal is a shift in BRF's mindset, Ribeiro reflects.

"We tended to have an industrial mindset. So we are trying to move from that mindset to a consumer mindset where the pull actually [creates] demand for your products... Since the middle of last year we started thinking back to the consumer market."

Now the BRF operations machine is more in-tune with its production needs, the company has turned its attention to building a client-centric business culture, moving away from its industrial roots. In part two of the just-food interview, Ribeiro discusses the group's next step - the transformation of BRF into a "truly global" protein powerhouse.