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 M. Dias Branco conference call earnings result for the fourth quarter of 2018 and the year of 2018. Today, with us we have Mr. Geraldo Luciano Mattos, Jr., Vice President of Investments and Controllership; and Fabio Cefaly, New Business and Investor Relations Director. We would like to inform that this event is being recorded. [Operator Instructions] Today's live webcast may be accessed through the Internet address at www.mdiasbranco.com.br/ir.
We would like to clarify that forward-looking statements made during this conference call regarding the business prospects of M. Dias Branco financial and operational results are assumptions of the company as well as available information. 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 the 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 statements.
Now I'll turn the floor to Mr. Geraldo, that will start the presentation.
Good morning to everyone. Welcome to M. Dias Branco conference call regarding the earnings result of the fourth quarter and the year of 2018. This is our 66th anniversary of Fortaleza brand where our brands with -- that have annual yearly earnings above BRL 500 million. We would like to recognize our employees that have worked hard, that although this was a complex economic context, worked very hard and they have given value to our shareholders and are pursing the satisfaction of our customers.
In 2018, we received the award, Premio Empresa Mais, given by O Estado de Sao Paulo as the best company in the food category; number two, the Transparency Trophy granted by ANEFAC; and Vitarella, our greatest brand in sales, was selected as the 60 most valuable brands in a survey together with [indiscernible] Kantar Vermeer. Throughout the year, with discipline and focus, we followed our strategy plan. We had an important investment and we would like to highlight the acquisition of Piraque. We have established initiative that increased our efficiency to make progress in the studies to complement our portfolio in our food category.
We would like to highlight some realizations. We executed a growth plan that is more accelerated in categories and the regions of high potential of growth. And at the -- in May, after the end of the acquisition process of Piraque, we started a process of integration, convinced of the potential of synergies of both companies.
So we have evolved 14% in 2017 to 15.3% between May and December 2018. We have the first round of connection with startups with Germinar project that ended in very important investment opportunities. We made progress in environmental, social and corporate governance. We concluded our first inventory of greenhouse effect. We carried out the nutritional map for all our portfolio product. We started our works for the creation of a governor committee amongst other that will be detailed in our annual report.
Our net revenue totaled BRL 6 billion, 11.3% higher than 2017. We increased our market share in cookies and pasta. We registered BRL 933 million of EBITDA, 3.5% lower than 2017 and we closed the year with net debt/EBITDA of 6.6%. The growth we've had readjusted -- we have minimized the negative effects of 30.3% of the cost of wheat regarding profitability, the high up the cost of wheat and nonrecurrent expenses. And the independent committee, with the integration of Piraque, impacted negatively the EBITDA margin, which went from 17.8% to 2017 to 15.5%.
And in addition to the acquisition of Piraque, we invested BRL 301 million in CapEx. We would like to highlight the projects of expansion and overhaul of our plants and distribution centers as well as the evolution of our service system of operation and the management of our corporators. Regarding the fourth quarter of '18, our net revenue grew 17.8% when we compare it to the same period last year and 3.5% when not considering the results of Piraque. And there was a high of 44.4% in the cost of wheat in comparison to the fourth quarter of '17 and a registered BRL 30.5 million in nonrecurring expenses. And we are making an effort focused on the execution of our strategy and growth and the realization of the investments that brought in and modernized our infrastructure. At the same time, we would like to pay attention to the challenges. Now I would like to give the floor to F?bio.
Thank you very much, Geraldo, and good morning to everyone.
Please could you see the presentation. 2 -- the presentation is organized in 2 parts. In the first, we have some highlights of 2018 and the second will be the fourth quarter of the year.
We will start with Slide #5, regarding the main points of the 5. We would like to highlight the innovation of traditional subcategories and portfolio like crackers and cookies for synergies of Piraque and for the launching of specific products that we launched like Adorita Tropical margarine that does not need refrigeration.
Now we go to Slide #6, regarding the acquisition of Piraque. Piraque is the leading brand in the state of Rio de Janeiro of items of high added value and was the seventh brand with over BRL 500 million of annual earnings. The integration is ongoing and we see the first signals that capture signals -- that capture synergies once the EBITDA margin has positively evolved from 14% to 2017 to 15.3% between May and December, and this is the period where we assumed the company.
Now we go to Slide #7. We maintained our investments in marketing and we prioritized these actions that encourage sellout. We carried out campaigns, Buy 1 Get 1 free and we invested our point-of-sales and also our -- and digital investments.
Now exports. Between 2016 and 2018, sales went from BRL 28 million to BRL 46 million, and we exported to more countries, from 18 countries in 2016 to 37 countries in 2018.
Now we go to Slide 9. We also evolved in sustainability matter. We carried out the first inventory of greenhouse effect gases and we absorbed a drop of 8.5% water consumption for produced. To conclude this part of the highlight, we go to Slide 10. The organizational climate survey carried out in 2018 showed a relevant evolution regarding the results obtained in 2013.
Now we go into our results. Let's go to Slide #12. Including the Piraque results, our total net revenue grew 11.3%. We would like to highlight the average of the -- the average price increase in all product lines and we also diminishment of volumes in wheat and margarines and shortenings. The net revenue of M. Dias Branco grew 3.4% with the results of Piraque. The 14 -- the growth of 15.8% of the net revenue of the fourth quarter of 2018 vis-?-vis fourth quarter of 2017, due to the consolidation of results of Piraque and the average price of all the products.
Now going to Slide #15. Without the results of Piraque, the net revenue of the fourth quarter of 2018 increased 3.5% vis-?-vis the fourth quarter of 2017. Our product line, as a whole, the average price increased 16% vis-?-vis a downturn of 10.7% in the volumes.
Now we go to Slide 16, about market share. In cookies, we observed a more expressive share value due to the price increase and the consolidation of the results of Piraque. Now in pastas, we had a better performance in terms of volume.
Now let's go to Slide #17. Our production capacity increased 6.7% during the quarter and 8.6% throughout the year. The drop of utilization level should be the lowest utilization level of the Piraque units in holidays given in December.
Now let's go to Slide 18. We would like to highlight the 98.7% of verticalization of shortening, a result of investments carried out in the productive unit of margarines and shortenings, and part of the Piraque production is geared towards the productive units of M. Dias Branco and Lencois Paulista and Bento Gonsalves. The breakout of the verticalization of wheat is due to the purchase of wheat due to third parties in the productive units of Piraque.
Slide 18, we observed a decrease of CPV as a percentage of the net revenue due to the high of the price of wheat, 30.3% in the year and 44.4% [ at the core ], always comparing it with the same periods of the past year.
Now we go to Slide 20. When we compare 2018 vis-?-vis 2017, we observe a drop of operational expenses as a percentage of net revenue. The strict management of expenses and gains of efficiency offset the nonrecurring expenses with the integration of Piraque.
Now Slide 21. We have the view of expenses in the fourth quarter of 2018. We observed the same trend, a drop of expenses as a percentage of the net revenue.
Now we go to Slide 22, both in the quarters and the year, we observed a downturn of the EBITDA margin, mainly due to the high of the cost of wheat.
Now we go to Slide 23 regarding the net income in addition to the factors explained of EBITDA. The downturn was because of the increase of financial expenses. This is also a -- this we needed money to pay Piraque and we needed resources for working capital. And important is to highlight the nonrecurring effects that were favorable regarding the update of tax credits that were BRL 50 million, mainly due to the processes that were the IPI over the packages regarding the period of January 1993 and December 1998 PIS COFINS over imports.
Slide 24. Our investment in expansion and maintenance totaled BRL 301.1 million.
Now we go to Slide 25. We generated BRL 779.9 million in cash due to the operational activities. We ended the year with BRL 451 million in cash, value inferior of 2017 because of the payment of BRL 1.3 billion for Piraque.
26. We ended the year in a position of net debt per EBITDA of 0.6.
Now we go to Slide 27. To conclude this part, we can observe the evolution of MDIA3 vis-?-vis Ibovespa in the index of corporate governance. Now we will go to the Q&A session.
[Operator Instructions] Our first question from Danniela Eiger, Bank of America.
My first question is regarding the costs. We saw that they were responsible for the margin, but when you see the price of wheat in Argentina, we see that there is no major effect. How do you see the dynamic of costs for 2019 and how are you seeing prices, the mark to transfer the prices or how do -- and how are you going to -- what are you going to do regarding your margins for them to be better?
This is F?bio. Let's talk about the cost of the wheat. Today, we work with a perspective of improvement and this means a reduction of the price of wheat, but more for the second semester. I believe that today, when we compare it to 2, 3 weeks ago, we are even more positive from a gradual reduction of the price of wheat. And we will have to monitor the possible positive evolution and we will have to see our prices. Today, we are not working with an increase during the second quarter. In this moment, we are not working with an increase or a drop of price. We have to observe in the upcoming weeks and months if the apotheosis of the gradual reduction of the wheat will take place so that we can make a decision regarding the price. So the expectation is to see an improvement at the end of the second quarter and better results during the second semester.
Next question. Luciana Carvalho, Banco do Brasil.
I would like to ask about volume. You had a recovery in margarine in the fourth quarter. I would like your opinion regarding the upcoming quarters. Do you believe that you will have recovery in the other categories?
This is F?bio. To answer your question, I would like to give you the context for 2018. 2018 was a year for the 2 main products. We follow different dynamics. The cookies and crackers had a downturn, and this downturn was concentrated in the northeastern region and part of the state of S?o Paulo. So we observed this. And with Piraque, we had a gain of market share. And in pastas, we believe we had better results. We had a growth in volume.
F?bio, I don't know if it's my audio, but this is cutting. Hello?
I will start again. To -- did this improve?
Yes, now it's better.
Is it better?
It is better now. [Technical Difficulty]
Yes. Because unfortunately, it's cut, it's choppy. To answer your question, we have to see what happened in 2018.
Hello, Fabio? We are having interference in the line.
Luciana? No, it's better now. I'm going to answer again. It's important to see what happened in 2018. In our 2 main markets, cookies, crackers and pasta, that have different dynamic. The cookies and crackers had a slight downturn of 0.8% and this took place in S?o Paulo and the Northeast. And this presented a greater challenge to our performance, while in terms of pastas, the market grew. We grew more share in the market without considering the volumes of Piraque. In addition to this, in 2018, we've seen a ununiform -- nonuniform revenue levels. This is because of the truck drivers? strike, the World Cup and elections. So our performance was compromised because of these factors. Now for 2019, our expectation and what we are working on right now is to have better revenues in cookies and crackers, and Piraque, certainly -- Piraque will positively affect us. We are working with customers to have stable volumes throughout the year. So our prospects are highly constructive for 2019. But to adjust the expectation, we expect to see an improvement as of the second quarter. So the first quarter of the year still is receiving effects from 2018. December was a very good month, although the quarter wasn't very good in volume for cookies and crackers. December was a good month, but in January we've seen a recovery and we will be more constructive as of the second quarter with a more stable volume dynamic.
Just to understand, you said that December was better, both January and February presented a drop?
They were weaker months. January traditionally is a weaker month. And this is something that always happens. Now in the last part of the first quarter, there was a slight improvement and because of the negotiation that we have with our customers, we are more -- we feel more reassuring. But I believe that we will see an improvement as of the second quarter. And in -- this is a context that could be of lower cost. Thank you very much for the problems that we're having with the communication.
[Technical Difficulty]
A brief question here. F?bio, you mentioned some nonrecurring effects, restructuring effects and credits of PIS COFINS in your financial results. What we see in the entry of other operational results, I believe that there was again PIS COFINS with an EBITDA effect. Could you summarize or could you explain the gains and the expenses that you had in terms of restructuring that you believe are nonrecurring so we convert them so everything that you believe affected the EBITDA and gains and EBITDA for the fourth quarter. I think this can help us to have a better view for the upcoming quarters?
In our release, we have some charts that show the effects of the Piraque's Independent Committee. These 2 effects are not in the line of other revenues and expenses. They are with management expenses and sales expenses. And we have 2 impacts in other entries that you mentioned that would be -- and these are nonrecurring effects that will not happen again, that is the IPI overpackagings that I mentioned in my release. The impact on the EBITDA that is favorable, that is BRL 9.5 million and there is another factor that is PIS and COFINS over imports of around BRL 8 million. Now these last 2 points also presented a positive impact on the financial result because this is a monetary update. Now when we talk about both of them together, this represents almost BRL 40 million. Everything is connected to Piraque and independent restructuring. Independent committee of restructuring is now part of expenses. [Technical Difficulty]
Can you hear me?
Yes.
I have 3 questions. Number one would be the wheat market. During this quarter, we saw an erratic performance in volumes and prices and this affects the average price. Sometimes you have volumes dropping and prices going up. Could you please explain, F?bio, what is happening in terms of market and what strategy are we observing. This could help us. Question number two, perhaps piggybacking on Luciana's question on volume. Now when we see the volumes of cookies and crackers, without Piraque -- with Piraque, it grows very little, and without it, it drops significantly and when we see the sequential market share of the company comparing the third and the fourth quarter and incorporating the effect of Piraque, you gain sequential market share. I would like to see what -- I would like to know what effect is responsible for the variation of the volume in cookies and crackers. You didn't lose share. I don't know there was some type of allocation in volumes. It would be interesting to understand what happened here. And the third question would be regarding the changes, the second announcement of changes in the company's management. You communicated that the exit of Geraldo would only take place until the first semester this year and would not happen until the end of 2019. If you could please comment on why this change, and also the change of Mr. Francisco Dias Branco to the board and he exited the Commercial Vice Presidency. I would like to know why these changes. This is a company that had a strong family presence in the vice presidency. And I would like -- should be interpret this in a different way as some type of structural change?
This is Geraldo. I'm going to answer your third question, and then F?bio will answer the 2 first questions. Let's explain the 2 changes. Number one, regarding my remain. There was a conversation of the family with me because there are still some projects that we will conclude by the end of the year. This is a year where we intend to hone the family's governance. We are concluding a number of strategic projects. These are projects with consultancies that are allowing us to better see the future of the company and together with the family. During a meeting, they asked me to remain for a longer period of time. There's no problem. I have been for years with Dias Branco and I have no problem in giving an extra contribution. Now regarding Francisco Marcos, Francisco -- all of them are Francisco Dias Branco, Francisco Marcos that occupy the Commercial Vice Presidency. He personally wants to develop personal projects, and we believe that this is very positive for the company, not because of his exit because he contributed a lot. But this is an advance in the governance of the company. This is progress in professionalization and through a headhunters company that accredited in the world and we want to bring an executive with a lot of experience in our market. This person will be part of the statutory board. So we see this as something very positive for the company and we're making progress in the process and Marcos will participate in other family businesses, and he will deal with personal projects. We see this as something positive. He positively contributed with the company and now he wants to take on personal projects. And this is something that is very positive.
[ Flavio ], I will start with cookies and crackers. When we see the fourth quarter, it is important to mention, we've seen a nonuniform performance of the volumes throughout the months. We've seen that almost all quarters of the years, we started a quarter with a weaker month that improved and then the quarter ended positive in volumes. When we see the fourth quarter, the first month, the month of October was weak and December was a very good month in cookies and crackers and other categories. Now when we compare within this context, how we supply our customers analyzing the third and fourth quarters in cookies and crackers, and everything that I'm saying does not include Piraque, you will see that there was a downturn of the second semester of 2.4%. When we compare it to 2017, very different from the downturn of 6.6% of the fourth quarter in the context that the cookies and cracker market was weaker -- that was weaker than 2017 when we see the semester and the market share dynamic, although there is a difference of sell-in and sell-out. The scenario was clear. Of course, you're right, when you only see the sell-in of the fourth quarter vis-?-vis the positive evolution of market share, it does not make sense. Now the month of September was positive and part of the sell-out of the fourth quarter came from the sell-in in September, and October and November were weaker months and December was a good month. So what we want, and this happened in the context of 2018 because we had to increase prices 3 times, the 2 first worked out fine and then we had to -- the other one we had to use discounts. And in 2019, we're using the first quarter to make adjustments. We have a better perspective for the second quarter in terms of total volumes as in terms of having a volume dynamic that will be more uniform throughout the months. Did I answer your question regarding cookies and crackers or you have something else? Then I'll follow up, but I understood your question.
Now regarding wheat. Now we're talking about the high of the wheat. It increased a lot in prices as of May. So this was an intense high in wheat. We have to remember that the first quarter of 2018, the price of wheat was below BRL 180, BRL 190. Then it was above BRL 200 in May and it remained in this levels throughout the second September. In September, there was a strong devaluation of the BRL. So we wanted to prioritize prices and we had a significant drop in the wheat volumes. When we see wheat, it's important to separate 2 markets, the market of food service that is great part of the wheat that is sold in domestic wheat, when we sell in the retail market in packages of 1 kilo. The second market that would be domestic wheat, we had a very good performance here. We grew. We -- our performance is restricted to the northeastern region and our market share at the end of 2018 was 28%. So the performance of wheat was below expectations in terms of volume for food service and it was better for domestic wheat. Now in 2019, we have to follow up the evolution of the price of wheat. We have more constructive perspective as of the second quarter and safer for the second semester.
This is clear. If you could follow up the competitive dynamic, because when we see your gross margin and excluding Piraque that contributes with a higher gross margin, the gross margin of M. Dias without Piraque is at a historic low. And I imagine that the competition and the other players in the market, they are not going through better periods than you. And I ask you and your speech of margin recovery of wheat and the capacity of increased prices is very conservative. You are showing an improvement during the second semester or the end of the second semester. Why -- I believe that the entire industry is undergoing pressure -- the pressure on cost.
I would like to interrupt you. I believe I can't answer on behalf of the competitors, but when you see what we observe, when we analyze the market, we will need some weeks and months to be more certain of what will be the dynamic of wheat at the end of the first semester and the beginning of the second semester. Well, traditionally, there is a drop in prices during the second semester. This time, I believe, this will happen before regard -- this is because of the good news of the price of wheat in the northern hemisphere. We have to see if this drop will maintain or will be stable. If this anticipation will happen and there will be some type of reversal and we will only see this during the second semester.
As we have no further questions, I would like to give the floor to Mr. F?bio for his final remarks.
Well, we would like to thank all of you for your participation, for your questions, and we expect you during our next call that will be the results of the first quarter of 2019. Thank you very much.
The M. Dias Branco earnings result has come to an end. Please disconnect your lines now.