BRF plots ambitious expansion

BRF plots ambitious expansion

BRF, the Brazilian meat giant, is undergoing significant change. The company has initiated a massive behind-the-scenes restructuring drive to streamline its operations and build a structure that will deliver stable returns. BRF has now turned its attention to expansion, setting out an ambitious growth agenda. Can it deliver? Katy Askew investigates.

The merger of Sadia and Perdigão in 2012 created a Brazilian meat colossus. The newly-formed firm, BRF, benefited from some of Brazil's leading meat brands as well as a sizeable export presence. The company is now one of the biggest producers of frozen and chilled protein products in the world, accounting for around 20% of global poultry sales.

However, this new scale also presented operational challenges. The firm's structure was overly complex and inefficient. Poor channels of communication retarded the decision making processes and the meat giant lacked the agility necessary to respond to market conditions.

As CFO Augusto Ribeiro told just-food in a recent interview: "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."

All that started to change when famed Brazilian businessman Abilio Diniz took over the role of chairman in 2013. "He brought in a lot of changes," Ribeiro reflected. The pace of BRF's transformation stepped up another gear when Claudio Galeazzi was appointed chief executive a few months later. 

Galeazzi joined BRF from investment bank BTG Pactual, where he had been a partner since 2010. In the two years prior to this, he had served as chief executive at Brazilian retail giant CBD, which had been founded by Diniz. Galeazzi was well-placed to tackle the challenges facing BRF. His investment banking background lent itself to BRF's drive to slim down its operations, improving efficiency and generating shareholder returns. As a supermarket operator, he had a deep understanding of the Brazilian FMCG space.

BRF subsequently underwent a structural review. The resulting organisational change has been far-reaching, with a focus on reducing administrative and distribution costs, cutting operating expenses and improving sourcing efficiency. BRF has implemented a new go-to-market strategy, rationalised its distribution system and cut SKUs by over 30% in Brazil and internationally. Regional administrative offices have been closed and non-core businesses - such as dairies - have been sold off.

The results have been significant. The company has successfully reduced SG&A costs by 20% year-on-year. In its most recent financial update, BRF reported third-quarter gross margins of 29% - its highest on record. 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%.

Industry commentators reacted warmly. JP Morgan analyst Pedro Leduc said BRF was "flying even higher" as he raised earnings forecasts. "We are raising our 2014/15E EPS estimates by +6%/9% to above consensus on the back of strong market data, weaker BRL forecasts, and more internal efficiency gains," he wrote in an investor note.

Favourable currency exchange and lower grain prices - as well as internal cost cutting measures - all leave BRF well placed to drive impressive earnings growth this year. "The strong earnings momentum justifies the rich short-term multiples," Leduc argued.

BRF has done some sterling work to adjust its base business. The company is upbeat on its ability to deliver stable EBIT margins that stand at around the 6-8%, even when its operating result is not being inflated by favourable market dynamics.

A new task now lies ahead. If the company is to continue to please the market in the longer-term, it must generate brawny - and profitable - top-line growth. BRF believes it can achieve that by moving away from being "a trader of commodities" with an "industrial mindset", as Galeazzi termed it at a recent investor day in London. BRF will instead focus on developing its brands and value added products in its international and domestic markets.

The rationale behind moving up the value scale is clear: the further you are from commodity products, the more buffered you are from the volatility of commodity markets, the more stable and predictable your returns.

BRF is also zoning in on the customer in all this. The company is working to improve its service levels. The recent SKU reduction, for example, not only reduced complexity. It enabled the group to improve its on time and in full delivery count.

The group is welcoming a new CEO, former Tarpon asset manager Pedro Faria, to oversee this shift. Faria sat on BRF's board for three years and, in November 2013, became the CEO of BRF´s international operations. In this role, he was responsible for the decision to prioritise markets and products with higher profitability, reducing volatility and strengthening BRF's brands abroad.

International expansion will be key for BRF, Faria told analysts at the group's investor meeting earlier this month. The company has prioritised key growth markets including the Middle East, Asia and parts of Africa.

In the Middle East, BRF believes it can ramp up its presence in value-added categories with the opening of local production for processed products. BRF has made "notable progress" in gaining market share in Middle Eastern markets, "becoming even more of a clear leader in that part of the world", Faria suggested.

"Asia has become a remarkable driver for growth for BRF," Faria continued. China is a "substantial" market for branded products and BRF's operations in Hong Kong and Singapore have become a "showcase for us" as "our most profitable" international market, he added.

"We have also taken [the] significant strategy decision to strengthen our business in market such as South Africa and Angola."

Meanwhile, BRF believes it can further grow its branded business in Brazil by increasing its points of sale. The company has re-evaluated its go-to-market strategy, which has increased efficiency, generated a 76% increase in cross-selling of its various brands and enabled the firm to expand its points of sale from 130,000 to 160,000 customers.

BRF management told just-food it expects to generate double-digit sales growth in the coming years. UBS analyst Alan Alanis is somewhat cooler. "Our forecasts are more conservative on sales growth - along the lines of high single digit growth," he told just-food.

BRF has indicated it wants to move into the "white space" of being a "truly global" protein group. But while there might not be another company that operates on the scale that BRF envisions, there are strong national players in each of the markets the company wants to move in on.

Alanis says BRF should be able to use the benefit of operating in Brazil to its advantage. "BRF is already the largest exporter of poultry in the world. It accounts for roughly one in each six pounds of poultry traded globally. As a country, Brazil has unique advantages to support BRF in maintaining this leadership long term. It has vast arable land and water to plant soy and corn which feeds its poultry, which in turns allows them to produce chicken meat at the lowest cost globally."

The company is also likely to look to M&A to expand further on the global stage. BRF has already completed some bolt-on acquisitions in markets such as the Middle East and Asia and, with its strong balance sheet and good cash generation, more deals could well be on the cards.

Given these advantages, BRF seems best-placed of all those operating in the protein space to develop as a global, branded food business. If it can deliver on this promise, the outlook for the next few years looks bright.