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, and welcome to M. Dias Branco's Fourth Quarter and Full Year 2017 Results Conference Call. Today with us, we have Mr. Geraldo Luciano Mattos Jr, Vice President of Investments and Controllership; and Mr. Fábio Cefaly, New Business and Investor Relations Officer. We would like to inform you that this event is being recorded. [Operator Instructions] After M. Dias Branco remarks, there will be a question-and-answer-session for investors and analysts when further instructions will be given. [Operator Instructions] Today's live webcast may be accessed through the Internet address at www.mdiasbranco.com.br/ir.
Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of M. Dias Branco management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of M. Dias Branco and could cause results to differ materially from those expressed in such forward-looking statement. Now, I'll turn the conference over to Mr. Geraldo who will begin the presentation. Mr. Geraldo, you may begin the conference.
Good morning, everyone, and welcome to the conference call of M. Dias Branco referring to the results of the fourth quarter and year 2017. I would like to start this call acknowledging the dedication of our team of employees and partners that despite a few challenging context have worked very hard to produce food of excellent quality seeking to satisfy our customers and generate value to shareholders.
In 2017, our net revenue totaled BRL 5.4 billion, 1.6% higher than that recorded in 2016. In the same period, we won market share in pasta, cookies and crackers. EBITDA grew by 5.1%, net income grew by 7.6% and we invested BRL 307 million in CapEx. In addition to the satisfactory results, the year was also marked by important achievements in our growth strategy in terms of the geographic diversification and optimization of product portfolio.
Maintaining our structuring measures started in 2016 such as the restructuring of our sales team, increase in marketing investments and the [ sales steps ] to develop the supply chain, I would like to share the initiatives that took place throughout 2017. We have launched products of higher added value, such as lines of cookies and crackers, Adria Plus Life which has wholly grain cereals as their first ingredients and in less than 1 year, it stands out among competitors that provide similar products. We increased the geographic diversification of our sales. In the year outside of the Northeast, we had a growth of 7% resulting from higher investments in marketing, reinforcement of our sales teams in the South and Southeast region, growth of brand Vitarella in the Southeast and investments in our production and distribution infrastructure. We have improved our service level that went from 73% in 2016 to 85% in 2017 resulting in improvement -- from improvement implemented in our supply chain. We increased our investments in marketing, focusing on sales growth and building strong brands. Adria brand with its new positioning Life [ happens in the detail ] was elected one of the 50 more valuable brands in Brazil. We exported BRL 35 million to 25 countries, which is 22% higher than the amount recorded in 2016.
As for the development of our employees and evolution of corporate governance, we've implemented a succession plan for the members of the board of officers and developed our Corporate Governance Index of M. Dias Branco, which we call iMDB, that consolidates the best market practices and directs in a more effective way our efforts towards the development of governance and an internal control environment.
As for the results of 2017, at the same time in which our lines of cookies and crackers, margarine and shortening had a growth in volume and average price. The results of pasta, wheat flour and bran were strongly impacted by a scenery or scenario of prices that would be dropped as a consequence of the drop in the wheat price, which is the main raw material and the decrease in prices of [ the baking ] product, such as rice for pasta and corn for bran. Given this context, we adjusted our prices and launched sales and marketing campaigns that allowed to recover the growth of volume of wheat flour and bran and expansion of market share in the pasta line.
As for profitability, we closed the year with EBITDA margin of 17.8%, higher than last year's margin. While in the fourth quarter 2017, the margin was lower than that recorded at the same period of 2016 as a result of the drop in the average price of items sold, increasing expenses with distribution and storage. Later on, Fábio will explain the details about that.
With regard to investment in 2017, we invested [ BRL 301 million ] in CapEx, 16.4% above the values of last year especially in production and distribution projects, which increased and modernized our infrastructure. As an example, installation of a new deodorizer at the margarine and shortening units in Fortaleza has allowed to double the production capacity of that unit. Our net income from operations totaled BRL 871 million in the year 2017. We paid BRL 176 million in dividends and settled the swap agreement we had given our strategy to purchase wheat and oil on a cash -- [ take and pay ] cash rate. We then, therefore, closed the year with a cash [ and cash equivalents ] of BRL 926 million, and a net cash of BRL 596 million.
Before turning the floor over to Fábio, I would like to conclude by saying that we remain confident in our strategy making necessary investments to reach our long-term goal, and at the same time, we remain alert to act on and adapt to the short-term challenges.
I now turn the floor over to Fábio to give more details about the results of the quarter and of the year. Thank you.
Thank you, Geraldo, and good morning, everyone. I ask you now to please look at the presentation so that you can see accompany on the slides, my comments.
So let's start with Slide #3. The year of 2017 was marked by important achievements in our growth strategy, geographic diversification and strategy of optimization of product portfolio. Before we go into the details of the results, I would like to present some of the achievements and progresses we made during last year.
Let's move onto Slide #4. While the total net revenue grew by 1.6% between 2017 and 2016, the overall region South, Southeast, North and Midwest has grown more and increased their share in the results.
Let's go to Slide #5. In the same period, our product lines with higher added value increased their share in total sales, such as the lines of cookies and crackers, and other products, which consolidate to snacks, cakes and cake mixes.
Slide #6, talks about the new products introduced in the market. A highlight is the Adria Plus Life range, which marked the entrance of M. Dias Branco in the market of whole grain cookies and crackers. The cookies Treloso Mega, Triwafer and cookies under Isabela brand with new flavors for cakes with Finna brand.
Slide #7, in the year, we also increased marketing investments and modernize packaging of our -- some of our main brand, such as Vitarella and Adria shown on the slide.
Slide #8, that talks about investments. In the year, we have invested BRL 307 million in CapEx mainly in production, distribution and information technology. Our service level has gone from 73% to 85% between December 2016 and December 2017. We doubled the production capacity of margarine and shortening, and we are building a new wheat mill in the city of Bento Goncalves in the state of Rio Grande do Sul.
To conclude this first part, I ask you to please move on to Slide #9. We were one of the companies that won the Transparency Trophy in 2017. The relative consumption of water decreased when compared to 2016. We've implemented a succession plan for the executive officers of the company and developed in-house index of corporate governance based on important market references.
Please move on to Slide #11, that talks about the net revenue in the year. When compared to 2016, our total net revenue grew by 1.6%. In the chart reading from left to right, we noted the positive effect of net revenue by the growth of volumes and an unfavorable effect due to the drop of the average price. When you look by line of product, we'll see that cookies and crackers [ and ] margarine and shortening had an increase in volumes and average price, well, pasta had a slight drop in volume and drop in the average price, and wheat flour and bran had a drop in average price.
Slide #12 shows the development of revenues in the fourth quarter. As in the previous slide, we noted that the average price especially pasta, wheat bran and flour had represented the main and favorable effect for the drop of 2.6% in the revenue and compared to the fourth quarter of 2016.
Let's now look at the result by line of product. Please move on to Slide #13 for the results of the cookies and crackers line that accounted for 53% of sales in 2017 in the 2 charts on the left or tables, first about the results in the year. We see a growth in revenue, volume, average price and market share volume and value. For the fourth quarter except for the drop in 1% in volume, the other lines grew. These results are due to the right commercial and marketing campaigns made throughout the year. In addition to of course, the new products that were launched in the market, especially those with higher added value.
On Slide #14, we can see the result of the pasta lines, which represented 21% of the revenues in the year. It's important to highlight that for the pasta line, 2017 was a year of dropping prices. As a result of the drop in the wheat price, in the price of rice, which competes with pasta and a higher representative of pasta of the ordinary type and the deflation in food. Throughout the year, we adjusted our prices, won market share, but the net revenue dropped in the year and in the quarter both when compared to 2016.
Let's now move on to Slide #15, about wheat, bran and flour, which accounted for 17% of the year's revenue. Also under the influence of the wheat price, the average price of these items dropped when compared to the prices of 2016, causing a drop in the net revenue, despite the growth in volumes. It's important to highlight that the steepest drop in the price of wheat bran -- happen in the wheat bran that in addition to unfavorable effect in the drop in the wheat and grains is also susceptible to weather in corn prices.
Now moving onto Slide 16, about [ its ] production capacity. When compared to 2016, our production capacity increased in the quarter and in the full year due to the new lines of pasta and cookies and crackers and diversification of their capacity or to produce margarine and shortening. The drop in the usage level of the fourth quarter is explained by the collective vacation granted in the period with the [ go-to ] readapt to the inventory levels.
On Slide 17, verticalization. For wheat bran -- for wheat flour, the verticalization index was stable compared to last year. And for shortening, it had a strong high in the fourth quarter, due to the increase in production capacity.
Slide 18. In the year, in the quarter when compared to 2016, the drop -- the cost of products was favored by the drop in prices of the main inputs and had a negative impact given the lower dilution of fixed costs, especially in the fourth quarter.
On Slide 19, about operating expenses in the year, in the quarter, we see an increase of the representativeness of marketing sales, logistics and freight expenses when compared to last year, as a result of the drop in the average price and higher expenses with transfers and external storage, especially outside of the Northeast region.
Now moving on to Slide #20, about EBITDA. We see an increase in margin and nominal value in this comparison year-on-year and a drop in a quarter-on-quarter comparison, given the reasons that have been explained already, such as the drop in the average price and increase in distribution expenses.
Slide #21. We see -- the net income had a -- the same [ behavior of ] EBITDA when compared to last year, only with the observation that the expansion in the year was a bit higher and the drop in the quarter a bit smaller, as a result of the increase of the financial results that doesn't impact EBITDA.
Now moving on to Slide 22, about CapEx. In 2017, our investments exceeded 16.4% investments made in 2016. We invested mainly in production, distribution and information technology.
Now moving on to Slide 23, about the cash flow. We've closed the year with BRL 925.9 million on net cash, which is the balance higher than that recorded in 2016.
On Slide 24, we see that we closed the year 2017 with a net cash of BRL 596.6 million, higher than that recorded last year and equivalent to 0.6x the EBITDA.
Finally, on Slide 25, we see that between January 2017 and March 2, 2018, the shares of M. Dias Branco had a performance superior to Ibovespa and to the Corporate Governance Index.
We can now move on to the Q&A session.
We will now start the Q&A session for investors and analysts only. [Operator Instructions] Our first question comes from Vito Ferreira from BTG Pactual.
Given the current scenario, we see an important increase in wheat prices since the beginning of the year, so it's negative for the image of M Dias, so what is your price strategy throughout 2018, and do you predict lower margins for this year. As for the CapEx, we see the investments [ so there are too ] some questions about the acquisition of Piraque. Could you give us an idea of what's coming for the year?
This is Geraldo, speaking. First, about your first question. We are actually transferring prices, adjusting prices, using new price tables around 4% of price adjustments, and these adjustments will probably be more clear in the beginning of the second quarter. It's essential because as you mentioned, costs are increasing, so we need to increase our prices to try to maintain the margin levels we've been working on so far. Let's see if this is going to be possible. As for your second question about the CapEx for this year, we are [ studying ] it again. First, we are awaiting the decision of CADE regarding Piraque transaction. This is the transaction that can only be completed upon the opinion of CADE. And -- so, we are waiting to see how our investments will be like for 2018. This year, we will complete the mill, which will begin its operation shortly, but as soon as we have a decision by CADE regarding Piraque purchase, we'll communicate [ a new ] level of investment for 2018.
The next question is from [ Daniela ] from Merrill Lynch.
I have 2 questions also. The first one is a follow-up about the question on prices, this 4% increase, does that apply to all categories or any specific category. So breakdown, do you think there is room in pasta for a price increase. If you could comment a bit on the competitive scenario, and what do you think will happen this year, especially that the price of rice is still pressured by the harvest. So maybe it would be a bit harder to increase prices this year. And the second question, we've seen a [ drop ] in Argentina that has -- had a strong impact on the production of wheat, and how do you see this impacting your costs in 2018?
[ Daniela ], this is Fábio, speaking. Well, the 4% increase is overall, it's a general increase. For pasta, we expect to increase prices and looking back compared to what we saw in 2017. The prices of these product lines were quite impacted by the drop in the wheat price, and connecting it to your second question, it is possible that, with increase in the wheat prices that already happened, we will have room to increase the prices of pasta, but we are of course observing the market region-by-region, segment-by-segment in the pasta, some items [ or ] ordinary pasta is more sensitive to prices, the more sophisticated ones [indiscernible] not so much, but we are observing that there is some room for price adjustments, of course, without compromising volumes, without damaging the volume area. As for Argentina, we believe that it may help us to have more room to increase prices.
Our next question comes from [ Raphael Thomas ] from Bradesco Bank.
We see that you plan to expand your operations to the Southeast, and at the same time there is an impact in the SG&A line, what do you foresee for 2018 in terms of SG&A, especially marketing and logistic expenses. Do you foresee any increasing revenues in the area so that we can go back to the level [indiscernible] of SG&A of the company.
[ Raphael ], this is Fábio, speaking. Our plan is to grow faster in the South and Southeast regions, because we observed that already in 2017, we saw that. We are also making investments in infrastructure to leverage growth in these 2 regions of the country, in terms of production, distribution, and the mills in Bento Goncalves as well, but so far especially in sales revenue, we are a bit higher than what we see in the Northeast. Marketing expenses are higher especially in the Southeast. And we are spending a bit more in logistics, especially in storage of finished products. This we've seen in 2017, and will probably remain for a few more months, but our plan is to bring these expenses to a more normal level, this is what we expect for 2018.
The next question comes from Luciana Carvalho from Banco do Brasil.
My question is about inventories. You've given vacation to all employees in the fourth quarter, and how are the inventory levels for the first quarter, if you could give us some comments on -- make some comments about the volumes of inventory levels. Thank you.
This is Fabia, speaking Luciana. Our expectation for the next month is to resume our levels, especially in terms of prices. As Geraldo mentioned, we'll have an average price increase of 4%, and that will be more clear in the end of the first quarter and second quarter of the year. So we expect a growth in results that's more balanced between volume and average price leverage mainly by growth outside of the Northeast region. As for inventory levels, as you mentioned, we have given vacation to our employees between November and December to adjust to inventory levels. We've started the year with inventory levels closer to what we believe -- are the ideal one and we are on the right track.
[Operator Instructions] Fernando Leitão from HOYA Corretora has a question.
When we look at the end of the year 2016 and 2017 and looking at the fourth quarter, I'd say that the figures vary a while especially in terms of profitability, EBITDA. Of course, this was justified by you, but I would like to know whether we could resume the historical profitability levels in terms of EBITDA and sales for the beginning of 2018, or when we'll be able to do that. And another question if possible, if you could answer about Piraque, I know you are in the due diligence phase, but Piraque, do you think Piraque can reach the profitability levels in EBITDA and in its segment, will it be a subsidiary of the company? Thank you.
Well, Fernando, this is Geraldo, speaking. As for your first question, we always highlight in the pasta, cookies and crackers business -- it -- sales go down in the end of the year, and then they start growing again in the first quarter of the year, and then after March in the second and third quarter is always better, no major variances, but we know there is a seasonality in that area, maybe the fourth quarter dropped more in 2017 when compared to 2016. This is probably explained by the fact that the economy is recovering, but slowly, rather slowly. We have seen the pace of recovery of the economy is not what we expected, even economists, they're talking about it have commented that it's -- things are much slower than they expected about it. In previous moments when which we had a slowdown in the economy, it resumed growth much faster in every industry then when compared to the current situation. I believe that this year, we'll go back to growth. And we expect that and we are optimistic, I believe we'll be able to maintain our growth level, that's for Piraque. I'd say that it has been a decision of the company just to comment on Piraque after CADE has issued its opinion about the transaction. We're still waiting for their approval. We'll discuss, after that we'll discuss strategy with you and all the other analysts would be invited, but talking about Piraque and our strategy about it, we can only do that after the opinion of CADE and a decision has been made on the transaction.
[Operator Instructions] Thank you. There are no further questions. So I would like to turn the floor over to Mr. Geraldo for his final remarks. Mr. Geraldo, you may continue.
I would just like to thank you once again for the opportunity you all gave us to present the performance of the company and discuss specific points of interest, answer questions, and say that on our part, we remain with the purpose of increasing transparency and a good communication with the market, Fábio and I, as well as Fábio's team, we remain available to answer any questions you may have to better understand M. Dias Branco's business. Thank you again, and wish to see you again on the next call.
Thank you. This concludes the conference call of M. Dias Branco. Please disconnect your lines now.