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 Q4 2019. We have with us Mr. Gustavo Lopes Theodozio, Vice President of Investments and Controllership and Investor Relations Officer; Mr. Fábio Cefaly, New Business and Investor Relations Director; and Mr. Rômulo Dantas, Vice President of Sales.
We would like to inform that this event will be recorded. [Operator Instructions] The audio is also being aired through the Internet at www.mdiasbranco.com.br/ri.
We would like to clarify that any declarations that may be made during this conference call concerning the business perspectives of M. Dias Branco's projections, operational and financial goals are based on beliefs and assumptions of the company's Board as well as on information currently available. They involve risks and uncertainties. They refer 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 mentioned in these calls. Now we'd like to pass the floor to Mr. Gustavo, who will begin the presentation. Sir, you may proceed.
Good morning. Welcome to the conference call of M. Dias Branco. We will talk about the results of Q4 2019. It's a great honor, great satisfaction to be with you here sharing our results. And in December last year, we have a wonderful company, with entrepreneurship and a great possibility of growth. So we have the results of the first 9 months of 2019. We had the impact of the high prices of commodities. And also, we also had high inventories at clients, especially during the first months of the year.
In this period, we revisited our strategy, and we took measures to be able to grow volumes again and improve profitability. We will go into detail in the Q&A session, and I would like to talk also about measures we implemented. First, the pricing of new products. With the help of a consultancy company, we made changes, and this allowed us to improve the -- and have growth in volume and also we reduced the discounts, also, the go-to-market. So we made an effort. We saw opportunities of accelerated growth and we decreased discounts for some clients. So we have a growth strategy based on 3 pillars. The first, we call it, core business. We are selling more and better. Thus, we are investing in the brands and products. So we have a national brand. The second, we are working on new measures. We are evaluating new categories to be launched, and we hope they will be a success. So we have a third area of growth. These measures will help us to make the products more attractive. In 2019, we sold -- we exported to 35 countries. So we are focusing also on productivity. And in June 2019, we made a great effort and we increased productivity. Last Friday, we had a meeting with our administration council. So apart from contributing for the profitability of the company, we also increased productivity, thus, working for the long term.
Now I'd like to pass the floor to Fábio, and he will -- we can say that we are experiencing a new growth cycle. M. Dias Branco reports an increase of 89.5% in net income and 7.2% in net revenue. So we continue. Thank you. And now I would like Fábio to talk about details of the results, and then we will go on to the Q&A session.
Thank you, Gustavo. Good morning. Please access the presentation to follow with the explanation. Slide #3, here, we present some of the highlights of Q4 2019. First, our volumes grew 10.8%. We had an EBITDA of BRL 290 million with 52.3% growth. The production -- utilization rates went up, and this is good for us. It went from 66.5% to 74.3%. The verticalization of wheat flour reached 81.2% as a result of the new flour mill in Bento Gonçalves. We invested BRL 101 million in production and in distribution and technology. We reduced by 22.3%, solid waste generation.
Now Slide #5. Between Q4 '18, Q4 '19, net revenue grew 7.2%, 10.8% growth in volumes in crackers and pasta, which represents 75% of the revenue and have the greatest margins. We had a growth in volumes with an increase in average price due to the initiatives already mentioned by Mr. Gustavo. Here, we have a reduction in the price of wheat.
Now Slide #6. In the comparison between the years, our net revenue grew 9.3%. We grew in all the lines of products, double-digit growth in pasta and also flour.
Slide #7. We see that in the annual comparison, net revenue grew 1.3%, with a drop in volumes and increase in average price, different from Q4 '19 in the first 9 months of the year. Due to adjustments made to adjust variances between sell-in, sell-out, we had a drop in volumes. This had an impact on results.
Slide 8. In line with our strategy to protect the north and northeast regions and accelerate the growth in other regions, on the left in the graph, we see how much south, southeast represented than north and northeast.
Slide 10. Let us take a look at volumes. As seen in the graph, after 3 quarters of drops in the comparison of 1 year in relation to the other, we had 10.8% growth in volumes in Q3. In nominal terms, this means an increase of 48,000 tonnes sold.
Now Slide #11, relations -- the volume and discounts. As you can see, we grew volumes giving discounts. When you compare Q4 '19 with Q4 '18, volume went from 440,000 tonnes to 482,000 tonnes. While discounts, taxes and returns went from 27.3% (sic) [ 27.8% ] to 22%, a drop. The variation in this line is -- you can see the difference in discounts. This is due to measures adopted in the second half of last year, with focus on channel management, rationalization of discounts and go-to-market in more segmented way plus other actions.
Now Slide 12. To examine inventory levels and our clients. As we said in previous quarters, the levels shown in the first 6 months of 2019 were -- inventory levels were very high and this hurts us. After many adjustments in Q3 2019, we reduced inventory levels, and we created adequate conditions to grow once again.
Now Slide #13. Another issue that hurt our volumes, our results in 2018, beginning of 2019, was the volatility of volumes sold. As you can see, with the measures we took, we see that this situation has been solved. Since June 2019, our volumes grew sequentially without volatility. The drop in December is natural. So this is due to the festivities at the end of the year.
Now Slide 14. Another evolution is the increase in coverage of clients. In the second half of the year, this was included in our indicators. We put -- we had more focus. And after June, we saw a structural change. It's important to remind you that we are focused on increasing the client base and also the coverage of these clients.
Slide #15. First of all, it's good to highlight that M. Dias Branco is a market -- is leader in crackers and pasta in Brazil. We can see the drop in share is due to timing between sales in Q4. Sales to clients, as we -- the measurement still includes part of Q3. So here, we would like to add the points on volume.
Now Slide 17, EBITDA. We noticed on the graphs, a recovery of margins during 2019, with a highlight to Q4 '19, where we have a nominal growth. We will explain some of the actions that allows the positive evolution of margins especially in Q4 '19.
Slide 18. We observe an increase in verticalization of flour due to the operations in our new flour mill in the south of the country, in Bento Gonçalves, a new flour mill. Here, we see volumes sold and increase in amount produced, 19.9% between Q4 '18, Q4 '19, 24.9% also, and also the increase in the utilization rate of our plants. This means a better dilution of fixed costs and consequently a better gross margin.
Slide 20. Apart from the factors already mentioned, due to a better management of costs and expenses and increase in volumes, we see a gain of 0.4% in expenses with sales. Also, a favorable line with less non -- with less -- with nonrecurring -- less nonrecurring effects.
Now Slide 21. The drop in margins happened especially due to the higher cost of flour and less dilution of fixed expenses. It's important to highlight that favorable -- we have some favorable nonrecurring effects that attenuated these problems.
Slide 22. In this slide, we see the evolution of the ton of flour in U.S. currency. You can see that we had higher prices, have -- with a negative impact on margins, the high cost of flour and wheat in U.S. dollars.
Now Slide 23. We see on the graphs, the same trend with tiny bit recovery of margins during the year, with a highlight to the Q4 '19.
Slide 25. We had BRL 321 million here. You can see we have a new flour mill in the south of the country. A great investment there and also in automation and information technology.
Slide 27. As you can see on the left, net debt had a drop of 21.2%. We closed the year with a leverage of 0.8%, as measured by net debt over EBITDA. I'd like to say that this is the 3 consecutive year -- for 3 consecutive years, our rating is stable.
Slide 29. We had launches, the products -- new products in existing brands.
To conclude, Slide 31. Apart from the positive evolution of financial results in Q4 '19, we saw important evolutions in environmental and social issues. Water consumption, recycling of waste, reduction in solid waste and also less work accidents. We also signed the Global Pact of the United Nations. So we'd like to conclude this part. And now we will begin the Q&A session.
[Operator Instructions] The first question comes from Luciana Carvalho, Banco do Brasil.
If this -- we have seen the work you have done, and I was looking at discounts. I'd like some more details. If 22% is feasible, what is your expectation concerning discounts? What is the level you intend to reach?
Rômulo Dantas speaking. In reality, what we have is a pricing policy that addresses the needs of the market. It's not a simple price list. So we evaluate the regional customs. We evaluate each region. Some areas we want to protect more. We want to protect our brands to avoid more competition. So what we are seeing is a continuity. We always evaluate the possibility of having more volume and better margins. We do not give up market share, and we do not give up volume. So there is a strategy. So we are also making investments. The pricing policy of M. Dias Branco involves a complete evaluation of the market and a follow-up of the market, looking at cost and also looking at competition.
I have a second question. On Slide 23, we're seeing Argentina with higher prices. How can this affect the margins? So is there a possibility to increase prices because of the higher prices of wheat due to the exchange rate?
Fábio speaking. Concerning wheat, it's important to highlight, as we can see on the graph, there was a drop in price at the end of 2019. We purchased wheat during -- on this occasion with competitive prices. For most of the first semester of 2020, we have inventory. There are also other issues from abroad. We -- now we will define price readjustments. As Rômulo saw, it's not only increasing the price with a new price list. We have a price structure. Price increases will also come from other sources, for example, managing product, managing channel. We had been doing this since Q4.
Our next question comes from Mr. Henrique from BTG Pactual.
I have 2 questions. The first on your sales channel. We saw the small retail stores being favored. You also showed better coverage of the clients. And so what were the changes in the sales strategy that led to this, to favor small clients? How is your service level and the difference between regions? Also, talk about Piraquê brand during the quarter and the growth of the industry in Q4?
Rômulo speaking. Concerning channels, we are looking for the balance and opportunities in all the channels. We have a greater concentration in some channels. What we're doing now is better usage through a better go-to-market model. Because in a company our size, we must have a diversity of channels, like in any large company, to make the business more horizontal through a pricing policy that has helped us a lot. So we want our channels to take these products to consumers, generating a good affordability. We want good availability and good price for consumers. We're always after this. In Q4, we implemented price -- a price policy for this. And even in the channels where we had higher prices, we are now recovering volume in all the channels. So it is aligned with our strategy, with our go-to-market, with a new model, a greater diversification within the channels and other areas because we looked at the opportunities by region. So together with price, distribution, we expect better results.
Fábio. Concerning Piraquê brand, in Q4 and the comparison between the 2 years, we had a recovery in volumes. There was double-digit growth in volumes, a growth -- a little higher growth in net revenue. Piraquê is a brand that is based especially in biscuits, with more added value and higher prices with a gross margin close to 45%. We're maintaining this gross margin, and we're seeing a relevant evolution in the EBITDA margin in the company. So what we saw in Q4 and since the beginning of Q3 was a consistent recovery in volumes and better profitability in Piraquê brand. So we're very enthusiastic with this brand in 2020 and with great potential to make it a national brand.
Your second question has to do with industry in Q4. In the category of biscuits, we saw a recovery, especially in the southeast, in volumes. Then year-over-year, we had a small growth. Now concerning pasta, in volume, we observed a recovery, not only in the southeast, but also in northeast, a region that represents 60% of our volume, we had a growth, a little higher growth, in value, too.
[Operator Instructions] Our next question comes from Mr. Ian Luketic, JPMorgan.
We see here the price increase. It's not clear. Did you implement price increases in Q1?
Good morning, Ian. Rômulo speaking. We had price increase for biscuits, crackers, flour, margarine and crackers. We look at the opportunities in the market. We also look at the cost, the exchange rate, because of the wheat that is imported. Wheat is imported in Brazil. So we look at all these factors. Sometimes our higher average increase in some channels and not in others. So we have a price policy, where looking at competition and looking at prices, we want to charge consumers in our margins, then we take all of this into consideration quarter-after-quarter. We send our price list to the market. And right now, we are increasing prices. In Q1, this is happening. And this should continue in Q2. It's a pricing strategy that is different from simply having a price list. So we are looking at the intelligence behind these increases, looking at our margins and also reacting to competition.
Since there are no more questions, I'd like to pass the floor to Mr. Gustavo for his final comments. Mr. Gustavo, you may continue with your final comments.
Well, I'd like to thank all for participating. The company is open to give any clarification that may be necessary. Please get in touch with us. And it's important to say that we believe that with this strategy working in the first semester, we are striving in revenue, also productivity and also expenses. So we are continuing our efforts in these areas, especially revenue, looking at also results. And we trust that we will continue with this effort. Thank you very much. We are available for any clarification concerning Q4 '19 and also full year 2019. Thank you, and we wish you a good day.
Thank you. The conference call for earnings of M. Dias Branco is concluded. Please disconnect your lines now.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]