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BRF S.A. (NYSE:BRFS)
Q1 2020 Earnings Call
May 11, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to BRF's First Quarter 2020 Earnings Results Conference Call. We would like to inform you that this conference call is being webcast online at brf-br.com/ri, where the presentation is also available. [Operator Instructions] Later, we will begin the Q&A session, when further instructions will be given.

[Operator Instructions] Forward-looking statements during this conference call regarding the company's business outlook, projections and results, as well as the company's growth potential are merely assumptions based on the management's expectations regarding the company's future. These expectations are highly dependent on market changes, the overall performance of the country, and the industry and on international markets, and are therefore, subject to change. We would like to remind you that this call is being recorded.

This call will be presented by Mr. Lorival Luz, Global CEO, and we also have other executives from the company present. We would now like to turn it to Mr. Lorival Luz, who will begin the conference call. Mr. Luz, please go ahead.

Lorival Luz -- Global Chief Executive Officer

Good morning, thank you. First of all, I'd like to greet you thank you for listening in to our earnings conference call for the first quarter of 2020 at BRF.

First, I'd like to inform you that we are publishing this from home. We are respecting the quarantine regarding COVID-19, so if there are any occurrences during this call, I would like to apologize in advance. This presentation should last for an hour. We're going to be talking for about 15 minutes to 20 minutes at first and then we'll open up for the Q&A session immediately, so that we can talk more about our results and the company.

So, we can start off on Slide number 3 and what I'd like to highlight [Phonetic] as shown on the slide. We have four indicators, which are very important and relevant for the company, and the results are shown here for the quarter. And the first of them is our 8.1% growth in total sales volume. And this is especially true in Brazil, 10.7% growth here, and the domestic market grew 6.6%. Important to highlight, in Brazil, the growth of processed foods representing 14.9%. In other international markets, we saw robust growth of over 13%, which was boosted by China, which had 89% of the growth, and this is also the result of the effort we put in over the year releasing new plants to export to China.

On [Phonetic] net revenues, you can see that we had a relevant growth of 21.6%, where Brazil represented a growth of 18% and in the international market, 25.6% of growth. This was especially from Asian and African market, as well as the Americas and Europe, which had a growth of 45.9%, and the Halal Market also had a growth of 14.5%.

Now, looking at the third item, gross profits for the company, the growth we saw was 48% year-on-year. And this is across all markets. Brazil had a growth of 37.4% and the international market had a growth of 58.3%, where we can highlight on the growth in other markets, as I said, Asia, Africa, the Americas, which grew fourfold to BRL523 million. Concerning the adjusted EBITDA, we had an important growth of 67.2% year-on-year, where Brazil presented a growth of 63% and the international market grew by 83.7%. So, the international market, as I said, had a growth from BRL89 million to BRL445 million. So, this is how much the international market grew, especially, Africa, Asia and the Americas.

The next page of our presentation highlights the consistency of our results, reaching a new level for the fourth consecutive quarter, both for gross margins, where we reached 25% on average and the adjusted EBITDA and margin, which reached 14% across the last four quarters. So, this shows the alignment that the company has and the discipline we've had in delivering what we planned in our strategy. So, everything that we have published has been followed since 2018. And it also shows how our management is based on the company's long-term perspectives, where as we said, decisions are made respecting our chain and respecting the nature of our company, which is to have long-term strategies. And of course, we have to manage the short term, but our goal is to have a long-term performance. So, I'd also like to thank the engagement and commitment of the over 90,000 employees that BRF has and also the support of our Board.

During the first quarter, we delivered a gross margin of 25% and an adjusted EBITDA margin of 14% and EBITDA of BRL1.2 billion. And I would also like to highlight here that among this BRL1.2 billion, we also have the provisions that we laid out to prepare the company for the impacts that we might have due to COVID-19. So, about BRL65 million is dedicated toward that provisions for COVID-19 and other contingencies, which are already included in these results here.

In addition to that, as you saw in the report, the company had a loss of BRL38 million in this quarter. But this was due to these provisions which I mentioned, besides the negative impact of the currency exchange of BRL123 million and the provision for the class action which we concluded in the U.S., which also had an impact of BRL204 million. So, we have that negative result which received a negative contribution from of around BRL390 million, due to all of these adjustments and impacts, which I just listed.

Now, to talk about the challenges that we faced during the first quarter, it's important to highlight that 2020 has been a year of many uncertainties of a lot of volatility and we have been working here intense. We, from the beginning of the year to try to mitigate them. We're learning, of course, with the experience that we saw in other countries. We're making our decisions on the information that we've received from other places, so that we can make the best decisions for the company. So, in 2020, it's been a very challenging moment and the company is trying to do its best. And of course, we have to have solidarity with everyone else.

So, we see that in the beginning of the year, we were facing some challenges. There were many questions on contract negotiations in China, you might remember that. And the company, since then, has has done all it could do to have a very relevant position, to have a good long-term contract with China. So we didn't suffer any impacts from that and that shows in our results.

In February, we also had additional challenges regarding a suspension of our exports in a couple of plants. So we managed to redistribute that to other plants so that we didn't suffer a great impact. And in March, with the pandemic being declared for COVID-19, that is something that we had to work on and managing our operations here in Brazil. And the class action, which I've mentioned before, came to a conclusion, and I just want to highlight how important it was to conclude it right now, which is really our strategy to turn the page so that we can move forward in operating the Company.

Now to talk specifically about everything we've done regarding COVID-19, I think from the beginning we started focusing on three main goals. One of them or the first of them was to take care of the health and safety of all of our employees and everyone who is involved in our production process. Our second was to work effectively being aware of our responsibility in this moment. We run an essential activity, which is to produce and distribute food to the population, so we are protagonists during this moment.

And the third was to also work effectively and with solidarity to others in such a difficult moment, and that's why we announced from the beginning that we were going to provide donations of over BRL150 million in food, but it also included hospital equipment, hospital supplies and research funding for -- in order to find a treatment for COVID-19. So we also announced that we were hiring about 5,000 employees, and the goal was to ensure production capacity during the pandemic.

Moving on to the next page, we're now on Page 7, and it discusses COVID-19 and its impact on the first quarter of 2020. The demand, as we've said before, was stable and it remains stable on an aggregate basis in Brazil. Of course, there was an impact on channels, especially foodservice. Exports were not affected by COVID-19 and we've kept the same workflow as we had planned before from the beginning.

Continuing with the next slide, I just like to briefly make side note from COVID-19 just to remind you that African swine fever, ASF, is not being so widely discussed, but it still continues. It's still there, it's a problem that hasn't been solved so far. and we see that the production in China dropped by 26% and we expect to see further drop of 20%. And obviously, as we said in other opportunities, this is reflected in the number of about 50% since September 2018.

I'd just like to reinforce the message that I previously said. The demand from China for protein will continue, it will remain strong throughout 2020. So we are still far from the end of the cycle. We see that our breeding sows are recovering, but they are low to -- excuse me, slow to recover, which makes this recovery a little bit slower.

So referring to some of the operational highlights we had in the first quarter of 2020, in Brazil we saw that our clients base is in the number of items per client went up as well as our net revenue as I've said. And we also focused on innovation with a new line being launched in this quarter. Also, in the international market, we saw robust growth, which demonstrates, once again, that the Company has been present and effective in international markets, and it's also working very effectively in the logistics so that we can supply for the robust growing demand that we see internationally. That's how we're working.

And in the Halal market, we also had a market share growth, a lower growth in terms of volume and revenue, but I just wanted to highlight the three points. In the first quarter of 2019, if you remember, was when the Halal market suspended a number of exports from Brazil, which made prices go up and that generated an opportunity we had in the first quarter of 2019. And in the first quarter of 2020, we had some challenges in Turkey regarding exports to the Iraqi market, which started again in the last quarter. So, we suffered impacts there and also the suspended exports to Saudi Arabia, which ended up having a negative effect.

Moving on to the next slide, Slide number 10. Just to make sure, this is our strategy. We have been talking about it and that's how we've been acting and we've been operating 2019, 2020 in the expectations for 2021. Of course, in 2020, we have this challenge presented by COVID-19 and all we're talking about the kinds [Phonetic] of impact that March have.

On the next slide, Slide number 11, we have a picture of how robust our financial strategy is. We talked about our financial leverage. We are now sitting at around 6 times early '19, and now today, first quarter 2020, we are 2.68 times. The numbers on the top of the slide are worth noting. The growth of that came mainly from an FX variation, especially that equates to our dollar bank [Phonetic] debt at around BRL3.3 billion. In terms of capex, we are around BRL490 million, and I would like to highlight our operating cash flow, which sits at an amount BRL1.5 billion.

Our debt went up, but it was driven by a non-cash effect mainly due to FX variation, in such a way that our leverage now at 2.68 have an impact of 0.36 times, and which, of course, as I said, was impacted by the FX variation on our debt. That FX impact if you were talking about [Indecipherable] [0:19:55.6] effect at around 4.0, we will be having a leverage level of around 2.3 times.

Our cash, on the next slide, Slide -- 2020 remains quite robust. Our net cash sits at around BRL9 billion. We have reinforced throughout March our cash position with new hirings to maintain our cash in a robust level. And we have our credit facility at around BRL1.5 billion, which provides a liquidity level of around BRL10.5 billion. And it's also important to note that our average term for debt has been going up with the new operations that were contracted last year. So, the average sits around 4.5 years now. And maturities in foreign currency will only start in mid-2022 [Technical issue] investments made in 2021 mainly coming from operations done in Brazilian real.

Moving to the close of our presentation, we have a list of our pillars for our long-term strategy. And that's what grounds our company's long-term expectation, working toward achieving those objectives. In a more detail, we seek to have a high performance organization, focused on management's stability, diversity, and of course, looking at company's action. I'd like also to reinforce this next pillar of our strategy, and the Arab market, very important. We have just acquired a company in Saudi Arabia to produce processed items and we're increasing our production capacity by fivefold, and that, of course, aims at reducing the effect of other companies, especially the one in Abu Dhabi, which has been brought to a halt. And that, of course, has consequences on all the other initiatives and you can see the results in our excellence program aiming at more efficiency, better management in the operating, commercial and logistics fronts.We've seen the results with operating margin going up, and also the EBITDA margin, which has been delivered this quarter.

Moving on to the final slide of the presentation, a summary of the four main events for this first quarter. Once again, a very solid and robust result had taken the numbers to a different level. We have taken proactive measures to fight COVID-19; the focus has been on people, continuing production, and been able to bring food to people's tables. Always following a very strict financial discipline. And before I'd stop, I'd like to say that the pandemic is a recent event that started early March. So, in the second quarter, we will certainly have all the main impacts coming from these last three months, but we are trying to track and manage those impacts. My expectation is that from the demand side, which we always address on the mid to the long run. So, I can tell you that demand tends to be somewhat stable, but of course there'll be differences between different channels, different categories. But the perspective is somewhat positive, given the effect coming from a potential recession across the globe. But we tend to benefit, especially from chicken protein, given the quality that we offer in terms of chicken protein. And also in cattle, our quality is recognized. So, in a recession environment, we tend to believe that quality will be much valued on the offer side than the supply side.

Of course, we are going to face big challenges in terms of low supply and as the disease of the virus advances in different areas of the globe, in different cities, different plants, our production plants will be affected. And of course, we also have to keep in mind that decisions might be taken by government or local administration that will affect us as well.

And with that, I close this first part of the presentation and we'll start the Q&A session.

Questions and Answers:

Operator

Ladies and gentlemen, we'll now start the Q&A session.

[Operator Instructions]

First question from Citibank, Mr. Soares.

Joao Soares -- Citibank -- Analyst

Good morning to all.

Lorival Luz -- Global Chief Executive Officer

Good morning.

Joao Soares -- Citibank -- Analyst

Can I ask few questions?

Lorival Luz -- Global Chief Executive Officer

Yeah.

Joao Soares -- Citibank -- Analyst

Yeah, OK. Well, first one about processed items, the price of the swine in Brazil dropped significantly. So, that might have led to some kind of impacts and kind of a relief in the price of processed items in Brazil. Can you give us some more color on that? And you also mentioned about chicken and the supply of chicken, albeit [Phonetic] the COVID-19. Specifically for chicken, we saw in the U.S. quite a strong adjustment, especially in the second half of April in a drop of the health conditions of the chicken, eggs being broken. Can we see a positive impact in price in the second quarter globally speaking? And do you see any kind of or somewhat similar adjustments being made here in Brazil?

Lorival Luz -- Global Chief Executive Officer

Well, thank you for your question. I will address your two questions together. Number one, under this scenario in the second quarter, we need to pay attention to the short-run dynamic. I'm sure, we'll have a very volatile scenario. As I mentioned, we might see a drop in local market in terms of prices for swine and chicken, but we're always looking at the mid-run, when we make our decisions and we trying to look at the overall picture. And then, we go to your second question, based on our experience and based on what we see happen in the U.S. right now, and based on the level of the stock that they have right now. We imagine there will be a reduction in production capacity and in the production for the second quarter coming from two factors: a different base of advance for COVID in different regions that might link plants to operate with fewer employees, depending on where they are located, and others might reduce some of their employees as a preventive measure to avoid a higher impact on production. So, that's what we have been seeing around the world.

And what do I mean by all of that? That drop in pricing, which we might see happen in sometime in the second half, I do not expect it to affect the price of processed items. And why not? Because given the production scenario we have now, this would lead to a different level once again, in terms of supply. So, we see a scenario, where we will have a higher stability of prices, both for processed items and for prices as a whole. But of course, we need to keep close attentions, impact we might have, both in terms of housing and in terms of production capacity. And depending on measures that are taken by government professionals and local authorities, when we have that in hand, then we might have some difficulties in supply that might lead to product lacking in the market. And then, we will have an imbalance in supply and demand, and that will reflect end market prices, no doubt.

Joao Soares -- Citibank -- Analyst

Okay, Lorival. Thank you.

Lorival Luz -- Global Chief Executive Officer

Thank you for your question.

Operator

Next question from Isabella Simonato from Bank of America.

Isabella Simonato -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. Good morning, Lorival. Thank you for taking my question. I'd like to address two issues. Number one, Brazil's revenues, the volume of processed items. And then, we see a lot of share in the first quarter when compared to last year's fourth quarter. I like you to share with us how you see the dynamic by category and what kind of impact we will have in market share in the second quarter? And also cost, we see a cost, which is quite controlled, despite increasing grain prices. You had enough grain stock for the first quarter, but how can we look forward in terms of cost, especially if we do have stable demand as you just predicted?Thank you.

Lorival Luz -- Global Chief Executive Officer

Okay. Isabella, thank you for your questions. As for revenues in Brazil, it is a very important pillar of our strategy and I'd like to congratulate our commercial teaming and all channels, all categories for the strategy they put in place, and by the level of service they provided to meet demand. Throughout last year, as we had predicted, we prioritized the company's profitability even under a scenario, where we had some loss of market share. But I do believe we have recovered that in the past few months. When we look at the last few months, we can see it recover in monitoring and other categories for processed items. And that is our strategy, profitability, but with a strong positioning of our market share.

When we see a growth of 50% year-on-year, it somewhat goes against that drop in market share year-on-year. But there is also growth to prove that our activity in different channels will reflect that. I want to have cash and carry channel things operate different and that's why it's difficult to have another overview of that. But again, we always have our eyes on higher profitability and the right position in different channels, different categories. Always would like focus innovation, new launches, value-added products. That's the perfect company intends to thrive throughout this year.

Of course, we will need to make adjustments because this is a very special different year, because of the COVID-19. As for your question about costs, we have been announcing our cost-reduction measures. I do believe we are well-positioned, especially for the first half of this year in terms of costs. And we are well-positioned to buy input from the four different regions and that number dropped in the first quarter and we hope to expand this strategy throughout the second quarter as well. And that has allowed us to avoid the possibility of making purchases at the peak of the crisis because we were well just in terms of inventory. Though we suffered, we didn't go through all the stress presented by the peak of the crisis. We didn't have to operate in a stress market because of our high inventory levels are enough to face that period. So, strategic management of imports and inventories was key to our synergy of keeping prices and cost under control and be able to likely manage our working capital. That's how we've been working in that. That's how we are going to be working going forward. Thank you.

Operator

Our next question comes from Thiago Duarte from BTG Pactual.

Thiago Duarte -- BTG Pactual -- Analyst

Hello, good morning everyone. I have two questions. Number one, I'd like to go back to the volumes of processed items in Brazil. If you could give us some more color in terms of how demand advanced in the quarter? We know that, starting in March, some retail categories saw an important leap in demand. I would like to understand if that level of growth was somewhat spread throughout the quarter or was it concentrated at the end of the quarter as the effects of COVID-19 changed consumption habits? And if you could tell us have you seen something different. In April, so that we can understand the commercial dynamics that you mentioned in the previous question? And the second question, as to the Halal Market, in the last earnings call, you highlighted from the concerns you have in terms of price, demand coming from Saudi Arabia, and that of course, pressured margins in the fourth quarter. I was under the expectation we would see something similar now. Margins though they were lower than others, they were surprisingly positive when compared to the past quarter. How can you interpret that? Can we see some recover in terms of profitability? Can we assert that profitability has improved? Can we state that an FX variation was also an important driver? So, if you could give us some more color on the Halal Market, I'd appreciate it.

Lorival Luz -- Global Chief Executive Officer

Okay, thank you. Thiago. Just to let you know, we have other people connected to answer, but since we're working remotely that is each one in one location, we're trying to concentrate on questions here, just to avoid any problems with connections. I just wanted to make that clear before I answered you.

Now, Thiago, regarding processed foods. I think your question was very important. It's true, the company's strategy had a drop and that was the effect in the first quarter you saw, especially from March, some changes to the trend. So, you see for example, on margarines, regaining market share, we also had an expectation for people to buy more since people are staying more at home. So, they end up consuming some more margarine and that generates an opportunity for us, given the leadership we have in that sector. Also cold cuts saw some recovery, which was important and relevant in terms of market share. So, there was a growth there, and again, that was an impact from the consumption changes that people have had overall.

So, Thiago, it is important to highlight that we are on the right path. We're launching new products in terms of processed foods. But now to answer your question about how things are doing in April, well Thiago how people behave and how they consume is a variable that we are trying to service and they've been different now. So, really, in fact, we had a relevant reduction in the foodservice channels. And on the other hand, you had an improvement in a relevant side of the business, which is retail, especially local retail, cash and carry, which ended up bringing some stability to offset the losses that we had and the lower demand that we had on the foodservice side.

So, what we've been doing is that we're also directing and trying to adjust our production and our production capacity to service this demand, which has shown to be more stable for now. Where we should see more variability and volatility is especially in the In Natura market, in Brazil, 25% to 30% of what is sold is in the domestic market and that means that we have a lower margin. So, as I said, we need to have a good understanding of the market because it also will generate uncertainties in terms of supply and in terms of our production capacity for the entire industry, not only for BRF. So, that's what we need to keep in mind and we've seen that these categories are growing.

Now, just to comment on the Halal Market, it really is the market, as you said, had challenging results in the fourth quarter of 2019. We thought there was a slight improvement, but I think we still have many opportunities to develop further. And that improvement also will come in part from the recovery in Iraq as well as the results we expect from Turkey. This is a situation that hasn't been resolved yet, but we need to look at the exports to Saudi Arabia. This is something we haven't solved. Obviously, with the current conditions, it will be difficult. On Friday, we're going to start producing processed foods in Saudi Arabia, so that will be the first Brazilian company to produce foods in Saudi Arabia. So, that might also show an improvement toward our results. So, these were the main things that we are seeing right now that are showing some improvements. But, we see that the Halal results in the Saudi market are still challenging in terms of volume growth, especially now with the COVID pandemic.

Thiago Duarte -- BTG Pactual -- Analyst

Okay, thank you, Lorival.

Operator

Our next question comes from Victor Saragiotto from Credit Suisse.

Victor Saragiotto -- Credit Suisse -- Analyst

Mr. Luz, congratulations on your results. I just like to refer back to your introduction just to see, if I understood it well. I see there is an important discussion in the U.S. about absenteeism. So, if you could talk a bit about your position with egg laying, are you reaching the same level that the industry has or is BRF gearing prepared to have a lower egg laying, considering the current scenario.

My second question is about your working capital dynamic. We saw in the first quarter a peculiar dynamic with inventory levels and suppliers, so if you could tell us a bit about that. What should we expect from your working capital dynamic, because your cash conversion is reduced? Also just I'd like to ask about Iraq again. You mentioned that some discussions have been arranged, but I just wanted to ask if this is already going back to the pre-crisis levels. And if you see it normalizing from now on? Thank you.

Lorival Luz -- Global Chief Executive Officer

Thank you, Victor. All right, so let me answer your first question about absenteeism. I would say that it's not just a matter of absenteeism. there are two things there that are important to highlight and to state clearly. So, from one side, let's call it supply itself. and absenteeism, as you said. What tends to happen here is first, as cities and states and other countries open up and they have a higher contamination level, what will happen is from the moment you have someone who has been contaminated, we have to actively seek their family members or people around you and you end up having people being away from work. That's just something that happens naturally and that can lead to a reduction in the number of staff and in production capacity, and that's why in the past, we have made additional hirings to, in a way, offset this reduction in our production capacity. So, I again have to say that it does tend to happen. It would be impossible not for it to happen because, of course, the contamination is still spreading.

But on the other hand, you can have some measures taken by some local authorities that might start a lockdown or might suspend your activities in a plant. So, you also have that effect. So, I have seen overall in other markets that we have to be careful and look at what's being done. And this is what we have been doing and we've been very careful about these factors. The idea is to adapt our housing and adapt our future slaughter capacity. You know how our chain works. It's a living chain which cannot be contained immediately. So, you have to anticipate what will happen. So, that's what they deal, the idea is to avoid stress points, where the alternative would be colleague. So, that needs to be done very carefully with a lot of responsibility and you can be sure that BRF has been doing this very effectively.

Regarding your question on working capital, we've been very efficient in managing our working capital, but I have to say that I want to reinforce that right now. Our management is being done in order to supply our clients to supply their needs and to hold back some effective inventory, so that we can service our consumers. So, what you can expect for the second quarter, Victor, is that BRF will do everything it can, everything that's necessary to supply the population and our consumers with what they need, even if at a certain point, we might have to hold back on more inventory than we usually do. Because in the future, we might have challenges, the market have some challenges in operating that supplies. So, that's what we're going to do, managing working capital is important. We do it with a lot of discipline. But it's not what's going to dictate the decisions we make. We have to make sure that we have the capacity to have the inputs we need such as grain, have the appropriate levels of inputs to avoid any kind of difficulties or stress that we might have.

Regarding exports to Turkey, I'm going to ask Patricio to answer. He is here and he can give you some more detail because he is working on that every day. Patricio might be able to give you some more information on how that curve is going and how that responses then. Patricio?

Patricio Santiago Rohner -- Vice President of International Operations

Perfect. Victor, thank you. To answer your question on Iraq. Iraq started recovering earlier this quarter. But we're working on strategy of diversifying our exports. So, we are developing products for [Indecipherable] and then we see that we are able to exports to other countries, like Libya, which were unexpected. So, exports are higher than our historical level. I don't know if that answers your question.

Victor Saragiotto -- Credit Suisse -- Analyst

What did you say at the end, you said that you have historical highs?

Patricio Santiago Rohner -- Vice President of International Operations

Right, so our experts are at a -- higher than the historical levels because we had some opportunities and we had already worked months before to try to diversify our exports to offer some specific products for the Gulf countries. So, that was a pleasant surprise, we didn't that these exports would come so quickly. So, right now, we're at a very healthy position in terms of exports.

Victor Saragiotto -- Credit Suisse -- Analyst

Thank you, Patrcio, and thank you, Lorival.

Operator

Our next question comes from Mr. Lucas Ferreira from JP Morgan.

Lucas Ferreira -- JP Morgan -- Analyst

Good morning, everyone. Lorival, my first question is about China, if you could tell us a bit more about how the Chinese recoveries doing in the last few weeks, so to say? So, what should we expect for the second quarter, if your -- I know that there are some logistic issues, but how is deal flow right now toward China growing. And if you could tell us about results specifically not necessarily only about China, but how much did it contribute to your strong results and should we see any changes in the trends we saw so far.

Lorival Luz -- Global Chief Executive Officer

Okay, I'll answer your question and then I'll ask Patricio to add some information. But, Lucas, as we said from early January, when we got several news that China was asking for contract renegotiation, we said that in our case we were not open to that. And we can see that what we had believed was true. It really did end up happening. So, we work in China in a very structured way. We have consistent partnerships with clients. So, in terms of logistics, definitely there will be challenges. There were many challenges in the first quarter. There are new challenges now in the second quarter, but we've been working ahead of the problem to try to avoid any impact on logistics. So, it is a challenge, but our teams based on the relationships that we have and our way of working has been doing very well. So, we've been able to minimize the impacts we've had.

And another important point that I have to mention before I pass it forward to Patricio is that remember what we showed in terms of protein production in China; African swine fever is still there. Their herd has gone down significantly, it hasn't recovered. So, 2020 will no doubt be a very relevant year for exports to China. They're going to have a strong demand and high prices, given the scenario on the contract. So, I'll let Patricio answer, anything that I didn't.

Patricio Santiago Rohner -- Vice President of International Operations

So Lucas, just to make a quick comment. China started pressured this year. They had excess supply, many containers being renegotiated and China was improving its stocks, despite all the problems that Lorival explained. Our estimate was that the demand would go up for exports and the results we saw were higher than the expectation. After the Chinese New Year, people tend to have a higher demand. So, the local stock was pressured significantly and the logistics right now are bit difficult. So, releasing the container so that they could go back to exporting countries. So, in February and March, we had some issues with that, but then March began to normalize back and the situation has improved. There was also a volume that we're expecting from the U.S. But you might know that this situation for production in the U.S. has led to different results. The prohibition of the consumption of animals from wet market was imposed, and that ended up resulting in a better situation than we expected. Thank you.

Lucas Ferreira -- JP Morgan -- Analyst

Thank you, Lorival. If I may, I have a second question. This has been thoroughly discussed, but maybe Sidney could add something to the discussion. What can you expect for different channels vis-a-vis this new COVID-19 reality? Where do you see consumers going? Are they going to consume merchandise that they can reach out to closer to home? So, what kind of change in the channel dynamics are you expecting? And another I'll comment on the product mix if you could, as consumers gotten used to this new supply dynamic, would they not be looking for products with higher added value or not? What can you tell us about -- what you witnessed for the past few weeks in terms of consumer habits?

Lorival Luz -- Global Chief Executive Officer

Thank you, Lucas. I'll turn the floor over to Sidney. And he'll comment on the change of behavior for the different consumption channel. Sidney, Can you hear us?

Sidney Rogerio Manzaro -- Vice President of Brazil Market

Yes, Lucas. Thank you for your question. What we have seen in terms of changing behaviors is the following. People used to consume outdoors and now they consume indoors. That's a very concrete change we have witnessed, because, of course, restaurants are closed. And of course, that leads to a change in the channels, especially in what relates to transformation in the foodservice area. As consumption migrates to homes, consumers will buy more in retail and that's a concrete change. So, the mix for retail is different from the retail -- from the mix in foodservice. And that makes food retail, of course, rose. And we are well-structured to meet a high demand coming from retail. And of course, as you've said people are buying from places close to home, mom and pop stores, larger chain. In any event, we have strong brand and we do have a very large footprint across all those channels. And we do have, of course, supply plans in place, which are monitored closely so that we can follow up on the growth of that close-to-home retail, if I may. That's where we see the main impact in terms of behavior change. Once again, we are well-positioned. We have good market share, strong brand. And all of that combined allows us to keep up with this change.

Okay, Lucas?

Lucas Ferreira -- JP Morgan -- Analyst

Thank you.

Operator

Our next question comes from Ms. Luciana Carvalho from Banco do Brasil.

Luciana Carvalho -- Banco do Brasil -- Analyst

Good morning, everyone. Lorival, thank you for taking my question. Quick question about capex, just to see if I got it right. Given this higher concern with liquidity, how can we look at capex spending going forward? Are you thinking about reaping opportunities that might emerge or would you think about new acquisition, just to ratify to make sure I understood what you said in the presentation?

Lorival Luz -- Global Chief Executive Officer

Thank you, Luciana, for your question. Yes, we got to adopt in this scenario, you're adopting a more cautious stand in terms of capex, those initiatives toward improving production, improving efficiency, we're taking gradual, cautious steps. Of course, we have continued to build our plants to serve the sausage market that will continue. But of course with all caution in terms of capex management as to acquisitions and other investments which are not organic, we are being much more selective, and this will continue to be the case until we have a clear scenario ahead. We won't be making any significant move in that front until then.

Luciana Carvalho -- Banco do Brasil -- Analyst

Thank you. If I may, just one more question about the last acquisition you mentioned -- you announced at last Friday. Can you give us more detail in terms of expectations, EBITDA figures? Thank you.

Lorival Luz -- Global Chief Executive Officer

Yes. That acquisition is quite relevant, quite strategic for the Company because we now are able to produce higher added value products in Saudi Arabia territory, and that brings to immediate effect. We can bridge the gap which was created because we closed our plant in the region in Ethiopia and we're now producing locally to serve the local market. We have a very strong footprint in that market with our brand Sadia.

So, initially, we have a capacity produce to 6,000 tons of food products and related products. And we are positioning to invest another $7 billion that will allow us to grow our capacity fivefold and keep up with demand as it grows. So as I said, that acquisition was quite strategic and quite relevant for the Company.

Luciana Carvalho -- Banco do Brasil -- Analyst

Thank you, Lorival. Thank you.

Lorival Luz -- Global Chief Executive Officer

No. Thank you.

Operator

Our next question comes from Mr. Marcel Moraes from Santander.

Marcel Moraes -- Santander -- Analyst

Good morning, everyone. My first question is about something you have already mentioned market share and recent news. I can see why quite difficultly in terms of phasing[Phonetic] on pricing. And you are closely monitoring grant preference. So can you give us an idea of how that has been involving for the past quarters? I'd appreciate it. Thank you.

Lorival Luz -- Global Chief Executive Officer

Okay, Marcelo. I'll then call Sidney to help me out here. But you are correct. This is a very relevant topic and we have working to position our brand based on campaign -- marketing campaign. And we'll do that both for Sadia and Perdigao, and Qualy and other brands in Turkey. And that has increased the preference of the brand, no doubt. And therefore for more details, other indicators, I give the floor over to Sidney, who can help me out here. Please, Sidney.

Sidney Rogerio Manzaro -- Vice President of Brazil Market

Yes. Thank you for the question. We need to be in line with our strategic planning. That's very important. That's right off the back. What's important for us to have been able to reposition the brand under a sustainable approach that allows us to move ahead with our plans, both in terms of brand positioning and in terms of sales growth.

So what can we see already? Well, we can see results coming from that combination. If we analyze market share, we have -- with the measures we have exceeded the level of 55% of market share in monitoring. We have also evolved in cold cuts getting close to our ideal level, which is around 50% in cold cuts. And after three consecutive periods, we are now -- have not exceeded the 45% level for frozen items. So that combination, as I said, good positioning of the brand and effectively executing as Lorival mentioned our excellence program, our models and plans to better structure our services, better logistics and our go-to-market approach in sales, all of that combined allows us to show in a consistent manner, strong results. In other words, better process, better discipline in executing our processes.

Marcel Moraes -- Santander -- Analyst

Okay. Can you share either a number or an indicator for brand preference? Do you have an updated number so that we can understand if that's going forward at the same pace as market share? Was there any loss, in other words, in terms of brand preference?

Lorival Luz -- Global Chief Executive Officer

If we compare this quarter to last quarter, we see a more mid-run or mid-term change. We haven't brought the numbers today, but we can share those numbers with you later. And you'll have a better idea of how Sadia, Perdigao, and Qualy have moved forward. If you remember from our last earnings call, we have exceeded the level of 30% in preference for Sadia, we exceeded the 50% level for Perdigao, and we maintained the 50% level with Qualy. So for the three brands when we look at the first few months of 2019 of the first quarter of this year, and even on an annual basis, when we compare growth, we see numbers going up, even though we have recovered gross margins. We feel investors in our brand, which are of course, our main assets, and those campaigns go on. Those campaigns are well adjusted between the three brands as they continue to grow.

Marcel Moraes -- Santander -- Analyst

Thank you. Just one more question as to hiring those new employees to cover a potential absenteeism issue at the plant. How do you expand that to impact costs? How can we see that going forward for the next three or four quarters? Thank you.

Lorival Luz -- Global Chief Executive Officer

All right, Marcelo. Thank you for your question. Not only the cost of the new hires and as I said, the priorities to be able to maintain our production capacity, that overall, the risk of operating in this condition has been higher. And that will have an impact in the second quarter. And that, of course, affect transportation, equipment, imports, PPEs we are offering, all of that will impact costs -- expenses. And they will emerge in the second quarter and the second half, but they are of course adjusted to the overall expenses of the Company.

Marcel Moraes -- Santander -- Analyst

Okay. Thank you.

Operator

Our next question comes from Leandro Fontanesi from Bradesco BBI.

Leandro Fontanesi -- Bradesco BBI -- Analyst

Good morning. Thank you for taking my question. My question is a follow-up. You did mentioned throughout the presentation a few of the things I'd like to touch upon. But just to be sure, when we look at the demand for frozen items or overall demand in Brazil, we see an effect in retail, we can tell consumers giving up stocks because of the COVID-19. That happened early on, right, in February and March. How has that affected the Company's performance? And what type of effect will we have now, May and June, as those inventories -- first those early on inventory building strategies sort of revamp?

And also about China, if I may, do you already see a higher demand in that area? And then when you compare consumption preference for protein both in-house and outside of the home, what kind of dynamics do you see there and what kind of an impact on demand for chicken that might have?

Lorival Luz -- Global Chief Executive Officer

Okay, Leandro. And then I'll ask Patricio to help me out in China, specifically. But as Sidney has said and Lorival [Phonetic] has said, actually in the first quarter in an aggregate basis, the impact of, as you said, of people going out and giving up home inventory that happened early on and that impact is not that relevant actually. Of course, you can stock some products, but not all products. Our product, because it's a frozen product, you are limited to the size of your fridge. So the impact is not as relevant as it is on other products, which can be stocked in the garage or under the bag, for example.

In our specific case, we see an impact, but it is less relevant than in other industries. And then, of course, we see a similar scenario as to what we saw in China, in Europe. On weekends you see a slightly higher demand. Those products are consumed throughout the week. And then the weekend, and then the following week, you see a weakening demand once again. So it is a more random or erratic type of dynamic. But in summary, no major impact, because as I said, in aggregate terms, it was -- it remains stable, because it in a way it offsets the drop we saw in the foodservice industry. And I'd like to call Patricio to help me out in terms of China, how things have been playing out in China.

Patricio Santiago Rohner -- Vice President of International Operations

Thank you, Lorival. Leandro, just as a complement to what Lorival has said, I am in line with what he said. Fish protein is more consumed in China. China also setup their chicken production, and we're talking about 13 million tons in China. And then when we speed up that production, we lose control of sanitary measures of course. And so it's difficult for them to reach the levels they want. And then of course, it's a very complex market. And of course, they do have this issue of having to distribute items nationally in a very vast country in a situation affected by the COVID, it's a very complex situation.

So to be able to build inventory and distribute, it's always an evolving issue. And then you have to also to allow consumers to get ready for that. So once we saw was an increase in demand earlier in the year, fish price went up last year, also because of supply/demand creation, and it's such a huge market trying to feed 1 billion people the same type of protein it is a complex issue. So there is a gap which is difficult to bridge because to be able to do that with one single protein it's not an easy task.

Leandro Fontanesi -- Bradesco BBI -- Analyst

Okay. Thank you.

Operator

We now close the Q&A session. I'd like to give the floor back over to Mr. Lorival for any final remarks.

Lorival Luz -- Global Chief Executive Officer

Thank you. Thank you, everyone, for participating. Once again, I'd like everyone to thank for the commitment, the support from all our employees, our Board and all our executive team. And thank you all for participating in our call. Have a nice day, nice week. Thank you.

Operator

[Operator Closing Remarks]

Duration: 78 minutes

Call participants:

Lorival Luz -- Global Chief Executive Officer

Patricio Santiago Rohner -- Vice President of International Operations

Sidney Rogerio Manzaro -- Vice President of Brazil Market

Joao Soares -- Citibank -- Analyst

Isabella Simonato -- Bank of America Merrill Lynch -- Analyst

Thiago Duarte -- BTG Pactual -- Analyst

Victor Saragiotto -- Credit Suisse -- Analyst

Lucas Ferreira -- JP Morgan -- Analyst

Luciana Carvalho -- Banco do Brasil -- Analyst

Marcel Moraes -- Santander -- Analyst

Leandro Fontanesi -- Bradesco BBI -- Analyst

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