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 2019. We have with us Mr. Geraldo Luciano Mattos, Jr., Vice President of Investments and Controller; and Mr. F?bio Cefaly, New Business and Investor Relations Director. We inform that this event will be recorded. [Operator Instructions] This -- today's live webcast may be accessed at www.mdiasbranco.com.br/ir.
We would like to clarify that forward-looking statements, declarations made during this conference call concerning business perspectives of M. Dias Branco, projections are based on beliefs of the company and assumptions of the company and on information currently available. They involve risks, uncertainties and assumptions because they were linked to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of M. Dias Branco resulting in things that are different from those mentioned.
Now I'd like to pass the floor to Mr. Geraldo, who will begin the presentation. Sir, you have the floor.
Good morning. Welcome to the conference call of M. Dias Branco concerning the earnings of Q3 2019. With a drop in the volumes sold, we have been below the potential for profitability of the company, with challenging conditions in consumption, especially in the northeast of the country and also with a -- with normalization in the inventories at the clients. We have had focus on a sustainable increase in volume, and our efforts began to show the first results, stabilization of the volumes brought, normalization of inventory levels at the clients, restructuring the commercial team that now has a -- different actions and for the growth of North and Northeast, also new coverage of the client bases. And we will give you more details about this.
With the regression of EBITDA and the drop in 4 percentage points in margin cash generation based on our results, we have BRL 267.4 million and 6.8% higher than last quarter. And we -- this is the result of improving the inventories at the clients. And we have had more leverage in line with what we had in Q3.
For the third consecutive year, Fitch Ratings classified M. Dias Branco as AAA due to our robust capacity to generate cash and due to good control over our cost. Our investment, BRL 77 million in the quarter, year 2019, year-to-date, with investments in [ Adria ] and also in Bento Gon?alves to increase the capacity of the silos and also improving our installed capacity in Jaboat?o dos Guararapes.
To conclude, M. Dias Branco's team continues to implement its growth strategy with profitability and also cost control. Thank you.
Now F?bio will give you details.
Thank you, Geraldo. Good morning. Please access the presentation. We'd like to begin with Slide #3. We remind you that the results of Piraqu? now became included in the consolidated results as of this date. The information is consolidated M. Dias Branco and Piraqu?, and we will tell you when the numbers refer only to M. Dias Branco.
Slide #5, where we see net revenue and volumes sold and total average price consolidated data. In comparison with Q3 '18, we had a retraction of 11.1% of net revenue, especially due to the drop in volume in crackers and pasta. In the northeast, the -- of the country, the performance was negative, worse than the rest of the country. Also, since Q2 this year, we are working to decrease inventories at clients, and we improved average prices with management on products and channels in comparison with Q2 this year with a reduction of 2.3% in volume happened due especially in pasta and especially in the southeast of the country.
In the next 4 slides, we will see some changes we are making to be able to go back to a sustainable growth and the first results of these actions.
Slide #6, please. Looking at cookies and crackers and in pasta, which represent 75% of our net revenue, we show our -- the changes in inventory. We see that in January this year, we had high levels of coverage, more than 50 days, which compromised the improvement of the volumes. Through commercial and marketing actions and also other practices in channels, we now have a coverage of 30 days -- 34 days, and this has helped us to gradually go back to growth.
Now Slide #7. Here, we see discounts and rebates. Here, discounts and rebates and our financial demonstration. We remind you that also the tax burden had an effect in Q2 and Q3 '19. We have a reduction in discounts and rebates in a selective way in order to improve margins and also less concentration of sales. Here, we see we have some more actions, but we believe we're on the right track for a gradual recovery of average prices without increasing the price to end clients.
Now Slide #8. On this graph, without Piraqu?, we see the coverage of our client coverage in our clients. So we see those who placed orders in the last 6 months. We maintained coverage still over 70%. We are increasing our clients' coverage and deconcentrating sales. So the lower part of the slide shows the deconcentration of sales. You can notice between Q2 and Q3 '19, you can see that our main clients -- the concentration in our main clients went from 40% to 37%. In the same period, small retail went from 20% to 30%.
Now Slide #9. As we explained in the last 2 quarters, between January and February this year, we had a strong volatility in volumes due to the market. We had to review our plans. As of Q2 this year, all these -- we had many initiatives, and now we see a gradual increase in growth already.
Now Slide #10, on EBITDA. We observed a drop in EBITDA and margin in comparison between Q3 '18, Q3 '19 and a recovery here in 2019. Some points have to be highlighted.
For the first, we go to Slide 11, where we see the evolution of the reduction in volumes produced, how they produced results in lower fixed-cost dilution. So we see here the effects of vacation, collective vacation, and consequently, we have some negative impacts on the margins.
Let's go on to Slide #12. Here, we will see the impact of the increase of the price of wheat. We report this, and we show here in yellow, the spot prices for wheat. And the other color is for our inventory for wheat. We see that since Q3 2018, we had an average price higher than $230. When we observe, we see an impact on margins on the graph at the bottom. Here, we show the importance of wheat in our margins. It went from 25% to 30% in Q3 '19, remaining at this level.
Now Slide 13. As we mentioned in the previous slide, we see wheat prices in local currency. So we have an unfavorable impact. You can see the red line on the graph. In green, the improvement in margin. You can see, we had nonrecurring tax credits, the other unfavorable variations in -- due to operational deleverage and a drop in sales volume and production.
Now Slide #14 for a comparison of the net margin between Q3 '18 (sic) [ Q3 '19 ] and Q2 '19. Here, we have nonrecurring effect, which gave us a benefit in Q3. That's -- although we have a trend to improve, this was not enough to -- for us to return to historical margins between 16%, 17%.
Now Slide #15, where we observe the same trends described in EBITDA variations.
Now Slide 16 with the -- although we had a drop in EBITDA, some actions improved our finances, especially inventory and also receivables. You can see the comparison with Q3 '18 and also Q3 last year and this year. So you can see here the leverage, which was 0.07 (sic) [ 0.7 ].
Now Slide #17. In the same line, we observe an increase of 43% in cash and cash equivalents. Here, it's important to highlight that for the third consecutive year, our rating by Fitch Ratings is AAA.
Slide 18. In this quarter, we invested BRL 77 million in a mill in Bento Gon?alves in our lines, also in our production lines.
Slide 19. It's important to highlight some initiatives here according to our strategy, social, environmental and governance actions. We reduced at-work accidents. For the third consecutive year, we won an award.
Slide #20, on launches. In the Adria brand, we launched gluten-free cookies and cakes in vanilla and cocoa flour -- flavors, and also cookies and crackers in the Maizena line whole food items.
Here, we see the stock market on Page 21.
To conclude, before we begin the Q&A session, I'd like to summarize the initiatives in progress. In terms of the pricing model, our expectation is to conclude our diagnosis in Q4 '19 and make the improvements and implement them in Q1 '20. Concerning the commercial structure, the team's organized in 2 groups: North/Northeast, that we call the defense area; and South/Southeast and Midwest, which -- where we have an attack -- the greatest potential in growth; implementation of a more comprehensive go-to-market model. We have advanced negotiations with distributors in regions with the highest growth potential.
Also concerning Piraqu?, we -- resumption of Piraqu?'s growth with synergies to -- synergies captured and increased operating margins. We continued working on a better EBITDA, and we had -- saw some progress in S?o Paulo, Rio Grande do Sul, Pernambuco, Bahia and Rio de Janeiro. Thus, we'd like to conclude the conference call.
And now we'd like to begin the Q&A session.
[Operator Instructions] Our first question comes from Mr. Antonio from Ita? BBA.
My first question, F?bio, has to do with Slide 22. When do you show improvements in the company? I need a time line when these initiatives will become mature, especially in the next 2 quarters. You were clear about the pricing model that was implemented -- that will be implemented next year. What are the 3, 4 main initiatives of price -- apart from the pricing model? You mentioned that 2 of them are more mature now. Which will have a more relevant impact in the next 2 quarters apart from the pricing model -- the new pricing model?
Antonio, apart from the pricing model, I'd like to stress reduction in inventories at clients. This is an initiative that we began in Q2. We went from 50 days inventory to 30. We believe that 30 days inventory is a normalized level and helps us to grow, creates conditions for growth. In line with the new pricing model, since Q2, we reduced and we did a new segmentation by channel. This resulted in a reduction in volumes, but we believe that this has helped us to grow gradually and even sustainably.
Another initiative in looking at the channels in a more segmented way and micromanagement is the offer of some exclusive brands for some clients. We just made a -- we signed a partnership with one of the cash-and-carry clients. They will have a brand that will be exclusive for them, and we believe that this will help and contribute for us to increase volume in cash-and-carry clients.
In the short term, these are the main initiatives. One that is relevant also with the new logistics model is in the beginning phase. We hope it will give us some gains during next year, and we want to wait until the end of the year to comment on this.
Right now, our priority is to really work on volumes. So if you look at the releases, so all these adjustments aim at really leveling volume, normalizing volume. So in the Northeast, we have strong leverage, while volumes -- production volumes dropped in cookies and pasta; fell 19% in cookies; and pasta, drop of 20%. The production volume fell even more in cookies and crackers, 26%; pasta, 30% drop.
So with the high price of wheat, so the main issue that affects margin really caused this. So our priority now is to really have an action on volumes.
One more question concerning cash level. The company continues generating a lot of cash during difficult times from what we understand. So we have tax benefits that are nonrecurring, and we see the profit calculations, including tax benefits. So we know that dividends are more difficult with the current cash. How will you use this robust cash that you are generating with leverage dropping? So how do you intend to use the cash?
Antonio, Geraldo. Thank you for the question. You've mentioned correctly. Cash generation is robust. We cannot use tax credits for dividends, but we still have the 0.7. We also have contracts with the FINAME government program. With the drop in interest rates, many operations became less interesting. For example, if the cost of money is 7%, 7.5%, at the time, the -- when we took out these loans, they were a good deal. But now we have to analyze each financial operation to see if we should pay our debt in advance because of the drop in interest rates. So this cash, we have to use -- see if we will pay debt in advance, loans in advance.
As you know, we're always looking at opportunities for acquisitions, although, right now, we are only looking at possibilities. So we have to analyze the distribution strategy. Of course, as time goes by, with higher cash-generation opportunities, we can think of increasing distribution of dividends.
Our next question comes from Ms. Isabella.
My question is about volumes in cookies and crackers and pasta. When we look at your graph with only M. Dias Branco, we see a recovery as of August. But when we look at the group in Q2, we still see a drop, an important drop. Talk about the performance of Piraqu? in this quarter. And how do you see the performance of Piraqu? in October, November?
Isabella, F?bio. The performance of Piraqu? in volume for cookies and crackers year-after-year was positive. You can see that the brand is gaining traction, both in its home state, Rio de Janeiro. We began to see some positive results even with the initial volumes in the Northeast. But the brand has a positive trend in cookies. Pasta was not positive in terms of price, especially in the Aldente brand from Piraqu?. We saw a drop in volumes in pasta. We are making fine adjustments in price to recover volume, reminding you that in terms of revenue, cookies and crackers in Piraqu?, we have -- this represents 80% of the total revenue. The main business in Piraqu? is cookies and crackers, which had a positive result in volume.
Our next question, Mr. Thiago Duarte with BTG Pactual.
I would like to ask 3 questions. The first concerning the volume levels in retail. Could you comment how the volumes behaved in Q3, Q4 last year? You told us it's normal, but how did this -- I'd like to see the difference year-over-year third and fourth quarter last year and this year.
The second question is concerning the sell-off. With this drop in inventory, you talked a lot about this. We see production dropping more than sales. But with this drop in Q3 market share, we see -- shown improvement according to Nielsen. I'd like to understand how you interpret this data looking at July, August? Maybe it improved in September. It seems that we have an effective sellout on market share, also the changes in channels, there was a drop in channels, and also retail. When you talk about adjustments, price policy channel, do you believe that these levels in Q3 are adequate? Or should we continue seeing more gains in small retail stores and cash and carry in the future?
Thiago, F?bio. Let's begin with the first. We began to follow this information about inventory in retail this year. So I will obtain this information from last year that you requested. Now it's important to say that this inventory level of 30 days, considering the shelf life of cookies, crackers and pasta, it's an adequate level. 50, 60 days was too high. So in -- 30 days is the adequate shelf time. When we have this information about 2018, I will send you and everybody this information.
Concerning sellout. It is not immediate. When we go from 50 days inventory to 30, it's important to improve the quality of the inventory at the retailer in terms of mix and guarantee that those items that sell the most be available. Some retailers had high inventory, but this high inventory was for products that did not have a strong turnover and sold less. So we begin to see a gradual improvement. Now the issue of share. We will need a few more quarters to confirm our recovery of market share.
The third question that you mentioned, readjustment in channels. It's important to clarify that we're not abandoning any channel. All the channels are important for growth. What we did with a reduction of discounts and rebates, we obtained an adequate position in all channels. We want all the channels to sell our products well. So as we said, cash -- in cash and carry, some clients in cash and carry, we're working for them to have exclusive brands from M. Dias Branco.
Well, anything else?
No, that's it. Please make a follow-up for the performance in the northeast of the country for the Piraqu? brand. So I was surprised when we look at the revenue by region, we see that -- the Northeast increased its share and not in volume. We have the impression that in total revenue, the northeast of the country increased its share. And we know that Piraqu?'s importance in the Southeast.
This point is important. Thank you for asking. The issue is -- it involves more pasta in the Southeast. We have to make adjustments in prices to recover volumes in the Southeast. The loss of volume in pasta in the southeast of Brazil was concentrated in Adria and Aldente brand from Piraqu?. These were responsible for the drop of volumes in the Southeast. Aldente is a Piraqu? brand, Adria is not. But biscuits and crackers in Piraqu? that have the best margins had a positive increase.
Our next question comes from Mr. Lucas Ferreira, JPMorgan.
My first question is about next year. I believe you must have finalized the budget, the categories and also details about market growth in volume or categories where you can increase the price.
My second question, how much will you invest in brands, channels to recover the losses? You've talked a lot about transforming the Piraqu? brand into a national brand. So what can we expect in terms of growth?
Geraldo. We won't be able to answer this question now. Because right now, we aren't discussing the budget for 2020. And last week, we discussed this and volumes were -- discussing volumes, strategies. We are making progress. We should have the budget closed in the second week of December, and we will submit it for approval, the budget for 2020.
So the idea about volumes and expenses with advertising to recover market, we are right now in the process of discussing this. So we won't be able to speak about this right now because we're discussing internally and with the council, the prospectives for 2020.
A follow-up. The adjustments you are making in the channels and that we should have a better average price according to adjustments but not an increase in price, is that correct?
So yes, you understood correctly.
The next question comes from Ms. Luciana Carvalho, Banco do Brasil.
I'd like to understand the competition. When you talk about the discounts and rebates by channel, how do you see a competition? How do you evaluate competition, especially more in the Northeast?
Luciana, we don't see any major differences in relation to Q1, Q2 and the competition. We lost share in pasta and cookies. Now this loss was well divided. It was -- it -- our drop did not go to any specific competitor. We didn't see any change in the competition.
Our next question, Mr. [ Anderson ] [ Bradesco ].
Please talk about wheat. We see in Brazil and in Argentina, the effect. How can this impact your costs from now on the rise in wheat prices? Do you believe wheat will continue with the same situation? Do you expect higher prices in wheat?
Also, Argentina, do you see any problem that can impact wheat? And the -- and also, the agreement with the U.S. -- trade agreement with the U.S.
Anderson, this is F?bio. The issue of Argentina, we will have to follow. It's a little early to make any comments. Most of the wheat that Brazil consumes and that we use comes from Argentina.
Concerning the price, we placed in the presentation the spot price. We see that in September, there was a drop in the price of wheat. This is more of a trend. We see now in Argentina low volumes of wheat sold.
Now as Geraldo mentioned, the same questions that you asked, we are discussing for 2020. We don't have a final answer. We're looking at current results. We have high wheat prices in U.S. dollars. And apart from that, we have the devaluation of our local currency. This removed 500 points from margin when we compare with Q1 '18. We mentioned this in the presentation.
Your question has -- also asked about the trade agreement. We have also -- we know that there is a surtax of 10% for wheat from outside South America. We will have to analyze because of the -- we buy it from the U.S., Canada, Argentina, south of Brazil, so we have to follow all these movements. Right now, we can't tell you the price will drop.
Okay. We can anticipate maybe high levels of price reducing our margins. This has been happening since Q2 2018. Now in the short term, we believe in better volumes to recover margins.
Also, please talk about the mill in Bento Gon?alves, how big is the mill in Bento Gon?alves?
The mill was inaugurated, and there are more -- there is -- the CapEx was done. It's in operation. It will help us in verticalization, so -- and also the sale of flour in the Southeast. We don't have any other relevant news about Bento Gon?alves.
Thank you. 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.
Okay. First of all, I'd like to thank you all. I'd like to thank you for the questions. This is the 55th conference call I will be participating and also the last one I will be participating in.
I'd like to say that we have a great company. You can be sure that we will continue making our best efforts, working with our partners, employees. And I will be leaving, but I believe that this is a great company, I can tell you that. We have -- we're having difficulties as we had already in the past due to structural issues. But everything is being done to have a much better 2020 with better margin as we had in the past.
Thank you and -- for your attention, for participating, and we will meet again. Thank you.
Thank you. The conference call for earnings of M. Dias Branco has concluded. Please disconnect your lines. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]