M Dias Branco SA Industria e Comercio de Alimentos
BOVESPA:MDIA3
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M Dias Branco SA Industria e Comercio de Alimentos
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Good morning, we would I'd like to welcome you to the conference call of M. Dias Branco for the earnings of Q2 '18. We have with us Mr. Geraldo Luciano Mattos Junior, Vice President of Investment and Controller; and Mr. Fábio Cefaly, Director for New Business and Investor Relations.
We inform that this event will be recorded. [Operator Instructions] The audio is also being presented simultaneously on the Internet at www.mdiasbranco.com.br/ir.
We want to clarify that any declaration statements made during the conference call concerning the business perspectives of M. Dias Branco projections, operational financial goals, are based on assumptions and beliefs of the company's board and also based on information currently available. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions and other operational factors can affect the future of M. Dias Branco and would lead to results that will differ materially from those expressed in such forward-looking statements.
Now I would like to turn the conference over to Mr. Geraldo, who will begin the presentation. Sir, you have the floor.
Good morning. Welcome to our conference call of M. Dias Branco for the earnings of Q2 2018 and also January through June. We would like to begin this conference call recognizing the efforts, commitment and engagement of the employees of M. Dias Branco.
In spite of the challenging and complex environment with the trucker's strike, higher prices of wheat, devaluation of the Brazilian currency real, the beginning of the integration of Piraquê, we reached a result in revenue, EBITDA and profit superior to those recorded in Q2 of the last year. I would like to begin with factors that determine our results. The improvements implemented in our supply chain last year in order to have a better level of services, also our price readjustments made in line with each product region, the -- also the successful use of marketing resources with focus on sellouts contributing for a rise in revenue, and also a strict expense management, which, at the same time, permitted the growth of profitability in the short term and ensure the continuity of long-term structuring projects.
Concerning Piraquê, we concluded the acquisition on May 16. I'd like to stress that we are more and more sure of the opportunities we have due to the quality of the team of employees of Piraquê, their strength in their -- their strength in the brand and their portfolio of products as well as synergies with a combination of the 2 companies. Right now, together with the employees of Piraquê, we stress the team of expert professionals of M. Dias Branco to carry out the integration between the 2 companies. Also in the Q2, we'd like to mention some nonrecurring effects that had an impact on EBITDA: BRL 1.1 million in expenses related to the integration of Piraquê, BRL 2.8 million in terms of adjustments in Piraquê's inventory resulting from the purchase price allocation of BRL 3.6 million concerning expenses with the independent committee formed on April 19, 2018. Before passing the floor to Fábio, I would like to mention some other important issues for M. Dias Branco. On June 18, we launched germinar, our first program that provides a link with startups and will contribute for the growth of the company through innovations in the current business and development of new opportunities.
Some of our brands received important recognition, like Adria, the brand that according to Datafolha, it is one of the best brands of pasta. For the second consecutive year, M. Dias Branco won the award, the trophy, Transparency for Manufacturing. This represents a recognition of our commitment with best practices of transparency. To finalize, we continue with the effort and focus on executing our growth strategy and in making investments to expand and modernize our infrastructure. And at the same time, we're alert to the challenges that arise in the short term, like the higher prices of wheat and the devaluation of our currency.
Now I would like to pass the floor to Fábio. He will comment with more details, the results of the quarter.
Thank you. Good morning. Thank you, Geraldo. Now please see the slides. We'd like to begin with Slide #3. It is important to stress that in this presentation, the consolidated numbers refer to the result of M. Dias Branco from April 1, 2018, to June 30, 2018, plus the results of Piraquê between May 17, 2018, and June 30, 2018. On some slides, we will also present the results without the numbers of Piraquê.
So please let's begin with Slide #4. The consolidated net revenue with Piraquê grew 7.8% versus the second quarter of 2017, as a result of higher volumes and a higher average price.
Now Slide #5, also concerning net revenue, but now without the numbers of Piraquê. We had a growth of 0.9% in comparison with Q2 '17, with a drop in volumes and a higher average price. Concerning the volumes, it's important to stress the unfavorable impact of the trucker's strike in the last days of May. Even with growth in June, the strike had a disfavorable -- unfavorable impact on our volumes in the quarter.
Now Slide #6, on average price. In comparison with Q1 '18, we see an increase in all the lines of products, and in comparison with Q2 '17, we see an increase in all the lines except pasta. Apart from the price readjustment made in the beginning of the quarter, these increases were also influenced by the portfolio of Piraquê, which has an average price that is higher than those that -- than those of M. Dias Branco's products.
Now Slide #7, with the evolution of average prices without Piraquê. When we compare Q1 (sic) [ Q2 ] '18 with Q1 '18, we see an increase in all the product lines as a result of price increases which considered the particularities of each line and each region, apart from the optimization of commercial discounts.
Now please, let's go on to Slide #8. We'd like to stress some of the campaigns that we had in the last few months, with focus on sellouts and which contributed in a positive way for higher sales. We see on the slide also the campaigns for Richester, Vitarella and Finna.
Now please go on to Slide #9. We observed gains in the share superior to that of volume, gains in the share in value as a result of the prices we had in April and the inclusion of portfolio of Piraquê.
Now Slide #10. The cost of the products sold. As a percentage of net revenue, although the costs in Q2 2018 were a little above those of last year in the same period as a result of the higher prices of wheat and also wage increases in the period, we see a drop in the comparison with Q1 2018 as a result of the increase in prices and a greater dilution of fixed costs.
Now we'd like to go on to Slide #11. We observed a drop in verticalization of wheat, especially due to the volumes consumed by Piraquê, which are still bought from third parties.
Now concerning operational expenses as a percentage of net revenue. We see a drop in the comparison with Q2 '17 and also if we compare with Q1 '18, especially due to the positive evolution and gradual evolution in our supply chain and due to the priority we gave to investments in marketing with focus on sellouts.
Now please go -- let's go on to Slide 13, on operational expenses. It's important to highlight 2 nonrecurring expenses that had an impact on the quarter: BRL 3.6 million concerning the independent committee, BRL 1.1 million concerning the integration of Piraquê.
Now Slide #14, on EBITDA. We observed an increase in nominal EBITDA from 11.3% and 0.6% in the EBITDA margin, both in comparison with Q2 '17. In the semester -- in year-to-date, we see a drop in the margin due to the results of Q1 2018.
Going on to Slide #15, on EBITDA margin. We see an increase in the margin even if we consider the higher prices of wheat, devaluation of the Brazilian currency and nonrecurring expenses with the integration of Piraquê and the independent committee.
Now Slide #16, please. We see an improvement of 3.5 percentage points when compared with Q1 '18.
Now going on to Slide #17, in terms of EBITDA. Without the results of Piraquê, the margin will be 18.9% versus 18% in Q2 last year.
Going on to Slide #18, on net profit and net revenue. Net profit, sorry. We see the same trend, only with lower growth in the quarter and a greater drop in the first semester as a result of increase in financial expenses due to the use of investments for the payment of Piraquê and also loans for working capital.
Slide #19. In Q2 '18, we invested BRL 70.1 million and in the semester, BRL 137.2 million, with the highlights of choosing a new unit for wheat in Bento Gonçalves and the expansion of storage capacity in Maracanaú and the project to use wastewater in the unit that produces margarine and fats in Fortaleza. Slide #20. We closed the semester with an equivalent cash of BRL 588 million, below the total for December 2017 due to the payment for Piraquê.
Now going on to Slide #21. Also as a result of the payment to Piraquê, we closed Q2 with a net debt-to-EBIDTA position of 0.8.
On Slide #22, we observe that the company shares had a performance below the BOVESPA index and the corporate governance index between January 2017 to July 2018.
Slide #23. On June 18, we launched our first program to have a link with startups, structured in 3 fronts: new business; also food ingredients and technology; and marketing and point of sale.
Although it's in progress, the phases already done show that this will contribute for the growth of the company through innovations in the business and the development of new opportunities.
Now going on to Slide #24. We had important evolutions in our social environmental practices, especially in water consumption and reduction of the number of accidents. And also energy intensity had a small increase of 1.4%. Finally, 2 of our main brands received important recognition: Adria was elected one of the best brands for pasta according to Datafolha; and Vitarella, 10th place in Brazil in terms of growth in brand footprint.
These were the highlights. Now we can go on to the Q&A session.
[Operator Instructions] Our first question comes from Isabella Simonato with Bank of America Merrill Lynch.
Two questions. The first in expenses. We see here a drop when we look at it as a percentage of revenue, both in Q1 and also Q2 last year. What happened? Because thinking of Piraquê, how should this line behave also from now on? And the second concerning cost and price dynamics. There is a graph for the acquisition of wheat in relation to the market. You're paying much less. How do you see the evolution of cost in Q2 -- second semester? And also new price increases in flour and also biscuits? And also the increase in prices that will be necessary?
Isabella, Fábio speaking. Beginning with expenses. What happened is that -- is the following. We have many evolutions during the last quarters which affected this in the supply chain, and now we're seeing some results of our efforts. We saw a drop in the volume of transfers, drop in overtime and drop in transportation. So we've seen some gains in efficiency in our supply chain. And this had an impact on the results of Q2 -- the earnings of Q2. Together with this, in this quarter, we focused our investments in marketing and sellouts to generate revenue in retailers. So these 2 initiatives worked very well. I believe there is an issue that we are evaluating, we will monitor this during the next few months, concerning the freight prices. We haven't concluded our studies about the impact, but in Q2, we had a very good result in expenses. Concerning wheat, it is possible that in Q3, we may have a peak costs. We work with 4 months of inventory for wheat, and right now, we're evaluating another price increase. It is possible that we have a price increase. As a percentage, we have not yet decided. We're still evaluating this.
And the increase would be in the 3 categories or especially in flour?
We're looking at everything. We're looking at the main lines of products, flour, obviously, which is related to wheat, and also biscuits and the smaller categories too.
Our next question, Mr. Barreto from Itaú BBA.
The impact of the trucker's strike, you haven't given us many details. In the volumes, we see a good volume for biscuits and pasta. Do you have an idea of the impact of the trucker's drive -- trucker's strike, sorry, on Piraquê?
It's difficult to give you a number. Our understanding is that the net impact was negative for volumes. In the last days of May, we had a significant drop in billing. Now with a lot of work, with a lot of focus, we were able to recover a part in June. Now to give you a number is not possible. The next impact was negative for volumes. This is our understanding.
My second question, a follow-up concerning wheat. As Isabella mentioned in the previous question, it went up much less than the graph of the market. So from what we know, it's at its highest level. So do you believe this -- do you believe that this can continue in the long term because of the wheat situation in Argentina? Or do you expect that the price curve will follow the market in the next quarters? So how do you think this will close?
Market -- did the market price rise, and -- or do you expect new things from now on?
Antonio, the price that we report in our release is the price that you can use as a good reference because it is a price that is very relevant in our mix for wheat. Now these variables that you mentioned, we will have to monitor during the next few months. I would like to highlight a point. We began price increases before the impact of the wheat. We -- so we increased our prices before the price of wheat went up. And as I said to Isabella, we're evaluating another price increase for our products. Later on, we will give you more details.
Next question comes from [ Marcel Morales ], Santander.
My question has to do with the installed capacity. How do you see the evolution for the different categories? Do you believe there will be an increase? What is the ideal level of the usage of your plants? And when would you get there at this capacity?
[ Marcel ], Fábio. If you look at the last 3, 4 years, you will see that we are using a capacity between 70%, 80%. We're working at 70%, 80% capacity. In this quarter, we saw a drop in the usage due to the inclusion of the plants of Piraquê, which allow us to have accelerated growth in the southeast region and south region. In the regions that we grow the most in terms of volumes, today, we are in a better situation than we had before the acquisition of Piraquê. And these 2 points of Piraquê, we have the industrial plants for vegetable fat, which is being used to supply the other brands of M. Dias Branco apart from Piraquê in the south and southeast, and also the plant in [ Quemados ] that has a very modern plant with an available capacity that is very interesting for the growth that we are foreseeing for the next periods.
The next question comes from Luca Cipiccia, Goldman Sachs.
I'd like to ask a little more about the impact of Piraquê in the EBITDA margin. I thought that although we've had it for 1, 1.5 months, I thought the impact would be greater. I'd like to understand, are there elements that could change? Do you have reasons -- do you know the reasons why the EBITDA margin had this result in spite of the gross margin because of the -- everything because of the impact of Piraquê? I would like to understand more about this, how you see perspectives and margin in the next quarters in terms of EBITDA, considering the whole impact of the acquisition.
Concerning Piraquê, Piraquê has a gross margin that is higher than that of M. Dias with the mix of geographies and the mix of portfolio. 80% of Piraquê is biscuits, while in our other brands, it's around 53% to 54%. So they have a higher average price at Piraquê. The mix has more value added, is -- but in the expenses, the weight is heavier when you compare with M. Dias without Piraquê. So these are opportunities both in cost and expenses that we're working on right now, we're working on this. So this 14% margin of Piraquê in this quarter was expected, very close, very similar to the adjusted margin of 2017. And now we have great expectations for the next periods to improve this margin. We trust that Piraquê will really help to improve the consolidated margin. It will not dilute EBITDA margin. It will add value.
Now just to confirm, so I believe we can use this as a baseline for the next quarter in terms of gross margin, this level makes sense.
Yes, and with a gradual evolution during the next quarters.
The next question comes from Fernando Leitão.
[Audio Gap]
The average price dropped. If I'm wrong, please correct me. Now how will you use this channel of Piraquê to develop more products of M. Dias Branco to increase the margin?
Fernando, good morning. Geraldo. Thank you for your question. I believe that you mentioned something very important, which is the importance for M. Dias Branco of this brand, Piraquê. The Piraquê brand is not only an extra brand in our portfolio. The Piraquê brand is a brand that adds value, and as time goes by, its founders and followers built a successful brand with excellent acceptance, good quality, and we're seeing many possibilities to use this brand. Maybe the first product that we see would be in crackers. We believe toast, toasted bread. That's where we would use the first brand, toast. Two, we want to use this brand as a value -- to add value where we have a lot of care for this brand. We know how much it can contribute for the future growth. Our strategy is to grow in the south and southeast, and with less concentration in the northeast. And the acquisition of this brand, this company really is helping our strategy, which is in our plans for the next few years. So now you are right when you say -- talk about the percentage of pasta. The price drops with the volume of pasta, but we are growing the market share for biscuits. The market share is not bad, it's totally correct, but it shows our actions. And it's important to see that we have had growth in our market share. And we are available for more clarification.
The next question comes from Luciana Carvalho from Bank of Brazil.
My first question is the volume of the brands. You mentioned organic growth. Could you give us more details about the growth in volumes? And please comment on the future in terms of volume, competition, and also verticalization. We saw this due to Piraquê in the semester. So what is the strategy from now on? A new level for verticalization, or will you have this strategy in Piraquê, also verticalization?
Luciana, Fábio. Concerning the volume in -- for pasta, we'd like to highlight the common pasta, which is the segment that had very low prices in the last quarters in that period when the price of wheat was dropping. We lost some space in this segment, and in the last months, with higher wheat prices, we saw that the prices in the market began to go up, began to rise in the middle of Q2. And the prices began to rise and our products became more competitive. So we saw a recovery in volumes, especially in common pasta. Now concerning verticalization, Piraquê is not included in the verticalization process yet. Piraquê buys flour from third parties, and we're evaluating this, the price of third parties or flour produced by M. Dias. The company's strategy is to increase verticalization. The details are being evaluated right now.
The next question, [ Leandro Pontanelli ], Bradesco BBI.
Two questions. The first, please comment on the inquiries from the state subsidies, and in Q1 -- also the results in Q1. Second question, the performance of market share in M. Dias Branco excluding Piraquê. And is there anything abnormal in market share?
Okay. Fábio. Concerning the incentives -- state incentives, the calculation of incentives is based on the price of wheat. When the price of wheat goes up, the incentives also go up, total incentives. So it's a calculation that is linked to the price of wheat. That's all. Now concerning market share, market share of M. Dias, which is what we measured in Q2 until the middle of June, the volume had a small drop. This is normal because M. Dias was the first company to increase its prices in the market. So when we increased the prices, we had a small drop in market share, but this was foreseen.
Next question comes from Thiago Duarte, BTG Pactual.
I have a follow-up of a previous question concerning expenses with sales, sales expenses. It dropped a lot, even more than I imagined. Considering the impact of Piraquê according to the numbers given to us previously, I believe -- I thought this line would suffer pressure. So when you say that most of the initiatives that had been implemented since last year, when this line went from 18% to 20% of sales, you said that most of the initiatives are already having an effect. This line should go closer to the 18%, is that what you mean?
Thiago. The message is that logistics stabilized. The additional expense we had during the last quarters, we were able to capture efficiencies in logistics.
So I imagine, it should drop.
That's the way I see it.
And I have 2 additional questions. The first, concerning CapEx. CapEx is dropping a lot year after year. Investments in Juiz de Fora are being now evaluated again after the acquisition. So do you have a new schedule for CapEx for the next few years as you used to give us with the changes after the acquisition of Piraquê? And finally, when we look at the average price, excluding Piraquê, to avoid distortion in the comparison, pasta and biscuits grew 2.3%, 2.4%. The increase you had implemented, if I'm not mistaken, was 4%. So we should expect, ex Piraquê, an additional effect of the 1-point-something percent that is missing plus the price increase that you mentioned that you're considering but haven't decided yet, right?
I will begin with the issue of price. Every price increase that was -- all the price increases in April were captured. And also additionally, we optimized the discounts that had a positive impact on average price. Fabio will talk about the first part of your question, CapEx, Piraquê, drop in CapEx.
The CapEx this year was record due to the acquisition. We never -- we had never made such high investments. But with this, there is the need right now to rethink some things that were planned, like the plant in Juiz de Fora. We're reprogramming. We hired a consultancy company that is helping us to prepare a new schedule and a new plan for our plants. So in light of the number of plants and locations, including the 2 plants of Piraquê, we're deciding what to do to have more efficiency considering logistics, tax incentives and also consumer market. So the consultancy was hired. It's in progress. It should conclude the studies of the next 60, 90 days, and then we will define in a more clear way the investments that will be made, which products we will use our plants to -- the Piraquê plants. How we will use the Piraquê plants, for which product. Now I believe I will ask Fabio to help me for giving -- to give you a better forecast for the rest of this year. We prepared a budget for -- we're preparing the budget for 2019 to guide the studies. So we are reviewing, but we will try to give you a more clear idea for this year.
When I asked about CapEx, this excluded Piraquê.
Yes, yes. We understood. We understood.
The next question comes from Fernando Leitão.
What will be the treatment -- accounting treatment concerning Piraquê? Will it be a controlled company? Will it be included? Merged? Will the numbers be merged? Have you decided this?
This is being discussed. We're discussing this. There is no definition yet. Of course, if we look forward, we can see Piraquê as a branch of M. Dias Branco, merging it with the same operational system that we have today. So all of this is being discussed. I say that with this integration, it is equivalent to many adjustments. So first, we are analyzing all of this. There are tax implications, also tax credits. We're looking at all of this and the decision will aim at bringing gains for our shareholders. The systems, we have a vision. In the next year, 2019, we will include Piraquê. Now if we -- whether we will treat it as a branch or include in M. Dias Branco, we are evaluating to have the best possible return from this investment. And the objective is to include Piraquê in M. Dias Branco in the shortest period and with the best results.
The next question comes from Lucas Ferreira, JPMorgan.
Well 2 -- now 2 months after the integration, how was the integration work, and also the exploration of synergies? Please talk about the synergies, and whether it's going to be diluted in the company's margin, close to 20%. Is that correct? Do you have an idea of the size of these synergies, the impact of the synergies, and whether we will see in the next quarters, synergies, or should we wait for the next year? Another question concerning freights, the impact of the new freight prices. In total sales, how much is freight? Is it a relevant part? Is it a small part of the expense?
Hello, Lucas, Fábio. Concerning Piraquê, we have many people working on this and carrying out the integration program. Our expectation is that we should have improvements in the results of Piraquê during all the next quarters. This is our expectation, and this is our internal challenge. Concerning freight, we can see our amounts spent in freight. I don't have this year. I can send you the numbers or help you access these numbers. Now concerning the impact, we're still evaluating. It would be premature to give you any guidance right now quantifying the impact.
[Operator Instructions] Since there are no more questions, I'd like to pass the floor to Mr. Geraldo for his final comments. Mr. Geraldo, you have the floor.
Once again, I would like to thank you all for participating in our conference call. Thank you for the questions, good opportunities to clarify points, and I'd like to say that we are committed at M. Dias Branco to do our best for our shareholders or company -- where the company -- to have a company that will bring a good return and also give good service to its clients. And so I would like to conclude once again. Thank you all, especially our employees. During these challenging times, they showed that they can make a difference. Thank you.
Thank you. The conference call for earnings of M. Dias Branco has ended. Please disconnect your lines now, and we wish you a good day.