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. Welcome to the conference call of M. Dias Branco for the Earnings of Q3 2018. We have with us Mr. Geraldo Luciano Mattos, Jr., Vice President of Investments and Controllership; and Mr. Fábio Cefaly, New Business and Investor Relations Director. We would like to inform that this event is being recorded. [Operator Instructions] The audio is being presented simultaneously on the Internet at www.mdiasbranco.com.br/ir.
We would like to clarify that any declaration that may be made during this conference call concerning the business perspectives of M. Dias Branco projections, operational goals, financial goals are based on 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 may affect the future performance of M. Dias Branco and lead to results that may differ materially from those expressed in such forward-looking statements.
Now we would like to pass the floor to Mr. Geraldo, who will begin the presentation. Sir, you have the floor.
Good morning. We'd like to welcome you to our conference call of M. Dias Branco for the earnings of Q3 2018 and also the first 9 months year-to-date. M. Dias Branco received recognition as the Best Company in the category Food and Beverage in the award -- Empresas Mais award by O Estado de S. Paulo newspaper and Fundação Instituto de Administração, a [indiscernible] rating consultancy. This recognition shows the effort and commitment of all of the employees of M. Dias Branco. We continue focused on the -- with continued focus on our strategy for growth.
Concerning Q3 2018, our net revenue was 18.7% higher in comparison with the same period in this previous year. And the growth in market share, the growth in market share in biscuits and pasta, 2.3% and 6%, respectively.
If we look at the organic net revenue which, without the results of Piraquê that was consolidated by M. Dias Branco on May 17, 2018, was 7.5% higher than what we recorded in Q3 last year. The price increases made at the beginning of the second quarter respected the particularities of each product and each region together with marketing and commercial initiatives with focus on sellouts. And the alignment of our supply chain and sales objectives were responsible for the growth in net revenue.
Concerning profitability in comparison with Q3 2017, consolidated EBITDA dropped 2.6% and EBITDA margin went from 19.8% to 16.3%, as a result of the increase of 46.3% in the cost of flour we consume and BRL 10.2 million in nonrecurring expenses with the integration of Piraquê and the work of the Independent Committee. Whereas the other expenses such as percentage -- in percentage of net revenues stayed on the same level as in Q2.
Now with the acquisition of Piraquê, we continue investing in our infrastructure and with the highlight for the new grinding unit in the city of Bento Gonçalves and the modernization and expansion of our units for production and distribution. These investments totaled BRL 63.5 million in Q3 2018 and BRL 200.7 million year-to-date first 9 months.
We closed Q3 of 2018 with the relationship of net debt-to-EBITDA 0.7 in comparison with the last year, which was 0.7. Thus we also concluded -- completed the purchase of Piraquê, 100% of Piraquê, for BRL 1.5 billion.
We continue in carrying out our growth strategy, making investments to expand and modernize our infrastructure. At the same time, we are alert to the challenges that appear in the short term.
Now I'd like to pass the floor to Fábio, who will give you more details about the results and year-to-date.
Thank you, Geraldo. Good morning. Please access the presentation.
We would like to begin on Slide #3. It's important to highlight that in this presentation, the consolidated numbers refer to the results of M. Dias Branco from July 1, 2018, to September 30, 2018, plus the results of Piraquê in the same period. On some slides, we will also show the results without Piraquê numbers.
Let's begin with Slide #4. The consolidated net revenue with Piraquê grew 18.7% versus Q3 2017 due to an increase of 20.1% in the average price with increases in all the products as we can see on the graph; and the drop of 1.2% in volumes, resulting from the growth in biscuits and pasta and the drop in flour and margarine and fats.
Slide #5. Here without Piraquê numbers, let's see net revenue. We see a growth of 7.5% versus Q3 '17, with an increase in the average price and drop in volumes. We would like to highlight that the average price increase happened in all the lines of products due to the increases we made in Q2 and Q3 2018. The drop in volumes happened in flour and [ meal ] and also margarine and fats.
Now going on to Slide #6, on average price. In comparison with Q2 2018, with the exception of margarine and fats, we saw an increase in the average prices in all the product lines in the vision with the results of Piraquê and in the vision without the results of Piraquê.
Now we'd like to go on to Slide #7. We observed both in the quarter and year-to-date first 9 months of the year an increase of the sales outside Northeast of Brazil, in line with our strategy.
Now let's go on to Slide #8. Here, we see a grain -- here we see a gain in share and in comparison with Q3 last year in biscuits and pastas.
Now please go on to Slide #9, where we observe -- here we can see -- we can see here, we -- in Slide #9, we see the actions by products of our brand and win gifts. That is the strategy -- 360-degree strategy. In the brand Adria, we had an action "details that make the difference" with Rodrigo Faro, a celebrity.
With the brand Isabela, we have family lunch with Ana Hickmann, a celebrity, among other actions. So these are our incentives in health goods.
Now on Slide #10. We would like to highlight the 99.7% of verticalization of vegetable fats, Slide #10. Due to investments made last year in a production unit for margarine and fats in Fortaleza, and since part of the production of Piraquê is being directed to the production units of M. Dias Branco in the cities of Lençóis Paulista and Bento Gonçalves.
Now we'd like to go on to Slide 11. On the graph on the left, we see that the increase in [ CPD ] as percentage in the revenues came due to the higher cost of flour. And as we can see here between July and September, our inventories had higher costs than in the first months of the year.
Slide #12, on operational expenses. As part of net revenue, we see an increase -- an improvement in the expenses with marketing, sales and logistics due to a strict management of expenses. We'd like to highlight also the unfavorable effect of nonrecurring expenses with the integration of Piraquê and the work of the Independent Committee.
Now going on to Slide #13 on operational expenses. When compared to Q3 -- when comparing Q3 2018 with Q2 of the same year, we see the same level of expenses with marketing, sales, logistics and freight and also unfavorable effect of nonrecurring expenses.
Now Slide #14 on EBITDA. We see here a drop in EBITDA. We see a drop of 2.6% quarter-over-quarter. If we [ purge ] nonrecurring expenses, which totaled BRL 10.2 million in Q3, the growth of EBITDA would be approximately BRL 2,700,000.
Going on to Slide #15 on EBITDA margin. We observed that the drop happened especially due to 2 factors: a drop in gross margin already explained by the increase in the cost of flour and nonrecurring expenses.
Going on to Slide #13 (sic) [ Slide #16 ], comparing EBITDA margin. We see that the greatest problems were gross margin and nonrecurring expenses.
Slide #17 on net profit. Apart from the factors already explained, we also had a drop due to the increase in financial expenses due to the payment of Piraquê and loans for working capital. It is important to highlight the nonrecurring impact favorable concerning the updates of tax credits for IPI on packaging concerning January '93 to December 1998 tax credit.
Slide #18, investments. As we mentioned -- as mentioned by Mr. Geraldo, we invested BRL 63.5 million in the quarter and BRL 200.7 million year-to-date first 9 months, especially in the new grinding unit in Bento Gonçalves and also to expand our industrial and warehousing capacity.
Going on to Slide 20 (sic) [ Slide 19 ]. We closed the quarter with a cash equivalent to BRL 771.1 million, below the total of 2017 due to the payment of Piraquê.
Now Slide #20. Here, we see the comparison net debt EBITDA, 0.7, better than Q2 of 2018, which was 0.8.
Slide #21, we see the performance of our shares below the stock market index in the last months.
Slide #22, the Germinar program together with start-ups. We began pilot projects with 11 selected start-ups in innovation, new business and marketing with promising results and in learning and also very significant for M. Dias as well.
Now Slide #23, our social and environmental actions, the highlight for the reduction of 2.2% in water consumption year-to-date.
These were the main highlights for the quarter. Now we would like to begin the Q&A session.
[Operator Instructions] Our first question comes from Mr. Antonio Barreto, Itaú BBA.
I have 2 questions. The first, SG&A. What we heard in the presentation is that M. Dias in 2017 had an SG&A of 27% and Piraquê, 38%. If we calculate, we would believe that including Piraquê, we would have an increase. But here, an increase of 38%. We didn't see this increase of SG&A. I understood that you cut sales expenses. But when we look at these numbers, we have the impression that you already delivered a great improvement in the SG&A of Piraquê. Is that correct? So how is the SG&A of Piraquê? When we look at the numbers, it seems that they improved a lot.
Antonio. Fábio. There was an improvement, yes, in the cost structure of Piraquê. Now looking forward, there are many synergies still to be captured. And when this happens, we will communicate to the market. But your vision is correct. There was an improvement in the cost structure of Piraquê and in the next quarters, we will give you more details. I believe this was the first question. The second?
The second is the integration of Piraquê. When we look at the presentation, the share in volume of biscuits was 32.5%; Piraquê, 3.8%. If we add up both, we would get to 36.3%. When we see what you reported now in Q3, Page 8, 34.6%, a difference of 150 basis points. So why is the market share in biscuits a little lower when we add up both? So is it because it's the first quarter together? Please, if possible, explain.
Antonio, yes, you are correct. The share we reported in Q3 is with both, M. Dias plus Piraquê. There was a small drop in M. Dias without Piraquê and stability in Piraquê. So this sum shows -- and this sum shows what we're showing -- what we have in the release.
Fábio, could you explain more concerning share? Is this due to the price increase? Is this until the market gets used to price increases? How can we interpret this issue?
Probably the result of price increases that we made in Q2 and Q3, and our expectation is to have a positive situation in the next few months, including Q4. And the more recent information shows this, an improvement.
Our next question comes from Mr. Thiago Duarte, BTG Pactual.
The first, the price increases. When we talked to you in the last 2 quarters, I had the impression that when we looked at the increase in April/May and also the increase in July, we were talking about 10% with both, 10% more price increase. When we look at the average price of M. Dias, I understand that Piraquê is different in terms of price increase. When we look at the price increase in M. Dias in biscuits in these 2 quarters, the sum is 4.5%; in March, 7%. Especially in biscuits, I'd like to understand can we imagine that the other 10% should be -- price increase should come in the next quarter? Or is this because of exchange rates or the price of flour in U.S. dollars? So that's the first part of the question. And then the second part concerning price. You mentioned a third price increase in October, and did it happen? And the second question, a follow-up concerning Antonio's question concerning market share, could you give us details about the market share of M. Dias without Piraquê? Just to see -- it seems that -- we'd like to understand where there was a drop, in M. Dias or Piraquê?
Thiago, I will begin with the second question. The drop in share happened in M. Dias. Going on to your first question, price increases; and it is possible that in Q4, we -- in the second half of Q4. Now with the local currency becoming stronger with the U.S. currency dropping, it may be difficult to increase prices. Now we will see. We have to follow. Now in terms of volume, we had an expressive increase in the price of flour and also a devaluation of the local currency. So these 2 price increases in all categories -- so average prices went up. Now in Q3 and Q4, the scenario changed. Now the local currency is getting stronger, real is getting stronger. So we will have a strategy, maybe discounts, we will follow to see what happens.
Our next question comes from Ms. Danniela, Bank of America.
My first question has to do with price in the Piraquê. We saw that the price for pasta dropped 6% in Piraquê in comparison with Q2 '18. At that time, there was only 1 month of Piraquê after the acquisition. Is this due to adjustments in the mix? Or are you making adjustments in the price positioning of Piraquê? My second question, for Geraldo, could you talk about whether -- for example, you are leaving the company. Do you have a name about the successor? Will you have someone from inside the company substituting you? Will it be someone from the family or from the market? Who will substitute you? And the third question concerning the Independent Committee, have they finished the investigations they were doing? And these expenses, will they end in the semester for the Independent Committee or will they continue?
Danniela, Fábio. I will begin. We have price positioning at Piraquê. Pasta is more sensitive to the price of flour. And to guarantee a good performance in volumes, we would -- we're not repositioning the prices in Piraquê, no.
Well, let me begin with your third question, the Independent Committee. And then concerning the Independent Committee, the work is almost at its end. We hope the council expects to receive a report by the end of the year. Everything within our expectations, we informed the market, the beginning of their work. The payments for the other company, which has nothing to do with M. Dias Branco, we communicated this to the market a couple of months ago. And things are going very well. All -- everything that the Independent Committee requested, we did. And we're waiting now for them to send the report so everything is going well. And this has nothing to do with M. Dias Branco. Now let's talk about the issue of the transition. What we wanted to do was to do this in a very calm way, these announcements, to avoid any surprises for the market. My history at M. Dias Branco is associated to the IPO. I had the opportunity to manage the preparation for the IPO. So I really did this after the IPO. In these 12 years, we had the privilege to contribute in all these processes. When we decided to make this announcement, it was to avoid surprises and to show in a transparent way that all the issues are communicated to the market, showing that no one has to be concerned. There will be a continuity. I have been talking to the M. Dias Branco family for some time, for some months. We have been talking about the best way to do this. So we decided that the family, in the next assembly that will happen in April, they will suggest my name to be part of the council. They will submit this to the general assembly, which makes the decisions. So the family will do this at the right time. Also, the idea that some specific topics, I may still help through a consultancy. And we're beginning now internally to really look at the organizational structure of the company and to discuss a solution for a person to take my place; the professional -- a professional. So we're discussing this with a lot of transparency, talking internally, talking to people and we are sure that by April/May, when we have the general assembly, we will be informing to the market the change, the transition. So we wanted to inform everyone without surprises. I will continue participating in all the events. And we will have the, also, M. Dias Day on December 5. Our meeting, we will be there. And then I will participate in the council. I will always be present with you in all the events. So this is all being done in a professional way, and we will get to the best solution for the company. This is a project, maybe the most important professional project of my life, and I am totally interested for the company to continue in the best possible way. And you may be sure that no problems will occur due to this transition.
Our next question comes from Mr. Lucas Ferreira, JPMorgan.
My first question, market share, could you give us more details? You mentioned that the loss happened in M. Dias. Was this in a specific region or a specific line? And my second question on costs, looking at the price of flour, wheat, the price of wheat, we see here the acquisitions in August, price was lower. I imagine the price will drop in the future, but we're not sure. Can we say that the price of wheat will be higher? Because we know you have inventory. This inventory of wheat, well, will it be higher in Q4?
Lucas, Fábio. Let's begin with the costs. Since we operate with a wheat inventory for 4 months, reminding you that in Q2, wheat had already had a price increase, and we delivered good margins. We delayed the increase for Q3 -- to Q3, the price of wheat, and this had the gross margin drop. Until we have this, it is possible that we continue in part of Q4 with higher costs than the spot price in the market. You can observe that on the graph. So your perception is correct. Concerning market share, we -- there were some details we don't show, but in Q2, Q3 due to the increase in the price of wheat, we had 2 price increases. It's normal when we increase prices, we lose a little bit of market share and volume. So in these 2 quarters, we gave priority to margins and average price. So it isn't in one category or in another. So the small drop in market share and volume. So in terms of value, we had an expansion. As I mentioned in one of the first questions in the call, more recent information, pasta had an increase. Now in biscuits, more recent information shows a recovery of volumes, too.
Our next question comes from Mr. Antonio Barreto, Itaú BBA.
Concerning price, it was clear in your answer. You mentioned that in Q4, Q2, the drop in the cost of wheat, we may see discounts. These discounts, do they come because of lower costs? And also to recover market share more rapidly? We understand that you may be more aggressive in price. These discounts that you mentioned, could they be due to a drop in cost, in part, to recover market share?
Yes, I believe so because the 2 things are -- go hand-in-hand. We work on price and volume and during the months using all the marketing tools and campaigns. And this is done in a granular way, region by region. We analyze each region, each brand, each product. So as you said, this is our day-to-day work. So if the cost goes up, we increase the price. If the cost goes down, we adjust the prices. This is what we have done. We had consistent gains in market share in pasta and biscuits. So yes, that's possible.
Since there are no more questions, I'd like to pass the floor to Mr. Geraldo for his final comments. Sir, you have the floor.
I'd like to thank the participation and the questions, the clarifications. I'd like to invite you, let's be together on December 5 in M. Dias Branco Day and also the visit to Piraquê on the 6th, December 6. We will show you the installations, the facilities. It's very modern. So please, if you can be there. Thank you, and we will meet you in the next calls. Thank you.
Thank you. The conference call for earnings of M. Dias Branco is concluded. Please disconnect your lines. Thank you.