M Dias Branco SA Industria e Comercio de Alimentos

BOVESPA:MDIA3

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. Welcome to the conference call of M. Dias Branco for the earnings in Q1 2019. We have with us Mr. Geraldo Luciano Mattos, Jr., Vice President of Investments and Controller; and Mr. Fábio Cefaly, New Business and Investor Relations Director. We inform that this event will be recorded. [Operator Instructions] The audio is being presented simultaneously through the Internet at www.mdiasbranco.com.br/ir. We would like to clarify that any declarations that may be made during this conference call concerning the business perspectives of M. Dias Branco, also assumptions and -- are all based on the company's beliefs and based on information currently available. They involve risks, uncertainties because 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 results really in things that are different from the current statements. Now we would like to pass the floor to Mr. Geraldo, who will begin the presentation. Sir, you have the floor.

[Geraldo Mattos, executive]

Good morning. Welcome to the conference call of M. Dias Branco for the earnings of Q1 2019. We closed the quarter with a growth of 8.2% in net revenue, including the sales of Piraquê, due to an increase of 16.6% in average price and a drop of 7.3% in volumes. EBITDA and net profit dropped in comparison with the values of Q1 '18, respectively, 38.9% and 59.3%, mainly due to the price of wheat, 36.9% higher and a lower dilution of fixed costs. The drop in volumes, especially in cookies, has been -- happened because of the lower demand in comparison with Q1 '18 and also the high level of inventory of the client. Next, Fábio will share also more details. Although part of the drop in volumes is due to market conditions, we recognize that these results are worse than our expectations above all, based on the potential of growth and profitability for M. Dias Branco. With this context, we would like to talk about some initiatives in progress and others that have begun. For example, reduction in the number of employees through dismissal and a voluntary dismissal program as of April 2019 with 400 [ made ] dismissals until now; in-depth review of contracts and outsourcing; investments in the distribution chain with highlights to new distribution centers and expansion of shipping areas; linearization of volumes sold during the months through negotiation of volumes in -- with our clients; and commercial initiatives and marketing campaigns with focus on the regions and subcategories with highest potential; improve -- continuous improvement in the modeling -- in the price model; also launches of new products, capture synergies with the integration of Piraquê. So front lines were working hard and focused on the execution of the strategies for growth and profitability at the same time, as we take care of the challenges ahead of us.

Before passing the floor, we'd like to communicate that we concluded the recruiting to hire a new Commercial Vice President, and due to the decision of Mr. Marcos Dias Branco to be Member of the Council, Mr. Rômulo Dantas, our new Commercial Vice President with a lot of experience in companies the size of ours, will begin working on May 20. Now let's see the other highlights. Thank you. Mr. Fábio?

[Fábio de Campos Machado, executive]

Thank you, Geraldo. I would like us to access the presentation. Let's begin on Slide 3. We remind you that the results of Piraquê were included in the consolidated information of M. Dias Branco as of May 17, 2018. Thus, some information will be presented together with Piraquê and others without the numbers of Piraquê.

Please, let's go on to Slide #5. Between Q1 '19 and Q1 '18, our total net revenue grew 8.2% considering the results of Piraquê in Q1 '19. As observed on the graph, at the same time, as we had a drop in volumes in all the product lines with the exception of pasta, the average price had a positive impact on the revenue of the quarter. This effect was a result of increases we made during 2018, price increases and the portfolio of Piraquê, which sells higher value-added products and higher average prices.

Now Slide #6. Going on to Slide #6, we see the net revenue without Piraquê. We see a drop of 3.7% in net revenue between Q1 '19 and '18. The drop in volumes in all the product lines was partially compensated by the positive effect of the higher average prices.

Still on volume, let's go to Slide #7. The drop in volumes in Q1 '19 versus Q1 '18 happened especially due to the price increases we had in 2018, the drop in the cookies market and adjustments that we made in Q1 '19 in our commercial operations in order to interrupt the strong variances in volumes sold from 1 month to another as can be seen during 2018. On this last topic, please, let's refer to Slide #8. The graph shows the monthly volumes sold in all our lines without Piraquê. We notice in 2018 a strong variation of volumes from one month to another when compared to 2017 due to 3 price increases that we made in 2018 and the truck drivers’ strike in May. These factors provoked -- these products made clients anticipate or delay their purchases. These dynamics also resulted in retailers beginning 2019 with high inventory levels, which also explains the drop of 21% in volumes sold by M. Dias Branco between January 2019 and 2018 -- Q1 2018. To level off the sales month by month, we made initiatives in sales. During Q1 '19, we negotiated with our main clients monthly volumes that were more leveled and also purchases for more than a month thus gaining efficiency. This transition had a positive impact improving our production efficiency and distribution efficiency, but resulted in a drop in total volumes in the quarter in Q1 '18 -- in comparison with Q1 '18, especially in the month of March that can be seen on the graph. In the second quarter, we see a gradual improvement with a more linear growth. Now please refer to Slide #9. We show the same reasoning, but now only for cookies, biscuits and also without the volumes of Piraquê. The conclusions are the same, but with higher variation in the consolidated sales in all the product lines. In cookies, we see in April, a growing trend in volumes with lower variations from one month to another. Now Slide #10 on market share. In the comparison between Q1 '19 and Q1 '18, we see a growth in market share in volume and value in pasta and cookies, especially due to the consolidation of Piraquê results.

Slide #11, on EBITDA. The values and the margins on this slide represent the consolidated results of M. Dias Branco plus Piraquê. In comparison with Q1 '18, consolidated EBITDA dropped 38.9% and the margin went from 15.1% to 8.5%.

Please refer to Slide #12, explanations about the drop in EBITDA margin, what contributed. The cost of wheat, 36.9% higher in reais between Q1 '19, Q1 '18 was the main individual factor that provoked the drop in EBITDA margin. The lower -- also lower dilution of fixed expenses, also sales and management expenses due to lower volume. 13.4 volume -- BRL 13.4 million in nonrecurring expenses with Piraquê for the restructuring. Now positive factors. Smaller effect of other items apart from wheat on CPV and also a tax credit for PIS/COFINS worth BRL 18.5 million.

Now Slide 13, please, to show the strong increase in the price of wheat in U.S. currency during 2018 and also higher level in Q1 '19. Now Slide 14, on net profit. Between Q1 '19 and Q1 '18, we see a drop of 59.3% in nominal net profit and a drop of 7.2 percentage points in net margin. Apart from the factors that impacted EBITDA, we would like to highlight the depreciation of new product lines during 2018 and Q1 '19, expenses with depreciation and amortization at Piraquê, lower financial results due to financial investments that were used to pay for the acquisition of Piraquê. Slide #15. We see BRL 69.6 million invested in Q1 '19 with highlights to be two: new units in Bento Gonçalves and expansion of the capacity of the silos in Paraná and also capacity increase in packaging and storage lines in Jaboatão dos Guararapes. Slide 16, cash flow. We closed the quarter with BRL 596.2 million in cash and also equivalent cash and higher than the numbers in December 2018, especially due to BRL 205.5 million generated by operational activities. Now Slide #17 with the sustainability indicators. In Q1 '19 versus Q1 '18, we see a positive evolution in the indicators such as waste and water consumption due to initiatives in progress in Jaboatão dos Guararapes and the installation of a water reuse plant in the Special Fats and Margarines unit in Fortaleza. We see also small worsening in the indicators of energy and frequency of work accidents. Slide 18 highlights to Pirachoko chocolate-covered wafer, which was launched. These are the launches. We are now capturing synergies in the company acquired in May 2018. Also a new line of flour for domestic use called Finna for pizza, and this will give good results in many regions in Brazil where we are beginning sales. On Slide #19, we see that our shares, MDIA3, had a lower performance in the stock market between in January '18 and March '19.

Now Slide 20, verticalization. We closed Q1 with 84.2% verticalization in flour -- wheat flour. This index should increase after the beginning of the operations in Bento Gonçalves. In vegetable fats, we closed the quarter with 98.7% verticalization. This is a higher level due to recent investments we made in the Special Fats and Margarines unit in Fortaleza and the synergies that are being captured in the units in Piraquê for vegetable fats. Slide #21. So we close this conference call reinforcing some actions in progress to recover volumes and improve profitability: reduction in the number of employees; in-depth review of contracts and outsourcing; investments in the distribution channel; linearization of volumes; focus on growth in subcategories with low penetration; continuous improvement of our pricing model; and the launching of items with higher value-added. Now we would like to begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Ms. Luciana Carvalho, Banco do Brasil.

[Luciana de Carvalho, analyst]

Geraldo, Fábio, please give us more details about the volumes in the quarter, the impact due to adjustments in the operation. What can we expect in the future? The gradual recovery that you saw in April, should we -- do we believe we will recover having the levels of 2018 quarter-after-quarter. Please give us more details.

My second question has to do with price. You increased the price year-on-year with the price increases you had made in 2018. And I'd like to understand, if there's space for increasing prices?

[Fábio de Campos Machado, executive]

Luciana, Fábio, concerning the first question, concerning volumes, a relevant part of the drop was due to price increases we made, especially in the month of March and the drop observed in January was due to the fails in December and as we said, retailers had high inventory. The best forecast we have is a drop close to 2% first Q1 '19 versus Q1 '18, and the evolution of our sales looking at the main categories and regions where we are present were very similar. So nothing that would call our attention.

We understand today that the main factor for the drop in volumes was high inventory in December, which had an impact on January and adjustments we made, price adjustments in March in order to level off the revenue month after month. This market has little seasonality. Now we put a graph in the presentation. You can see that January is always a weaker month, but then there's a trend very similar to other years. 2018 now was different. So the negative point is that we lost some efficiency in distribution and production. This migrated to Q1. In March, we made an adjustment.

The second part of the question concerning price, we see that the market is operating with stable prices. The increase in prices without Piraquê, cookies and pasta between Q4 and Q1 average price went up a little. We removed some discounts. We canceled some discounts, especially in March. Our expectation for the first semester is to have stable prices, one or another adjustment may be made and price increase should happen in the second semester, but we will evaluate this during the next month.

[Operator]

Our next question comes from Ms. Isabella Simonato, Bank of America.

[Isabella Simonato, analyst]

Geraldo, Fábio, 2 questions. The first, could you give us more details when you talk about adjustments you made operations in March. What was done and why did we have this great difference in the months? I understand that demand should still be weak with higher inventories in Q4. What happened? What caused this great variance?

Second question, elasticity of the sector seems to be very high in relation to price increases. And in line with Luciana's question, instead of price increases, are you thinking of dropping prices because of the drop in the price of wheat to recover volumes?

[Fábio de Campos Machado, executive]

Fábio, the first part of the question, the reason for this variance in volumes during the months, we had to go back to 2018. 2018 is a period when the price of wheat, price of flour went up very much. We did not make all the increases in the second semester. We made 3 price increases. When we talk about this, retailers anticipate their purchases. This really causes -- has an impact on levels. So we have 3 price increases. In March, we had the truck drivers' strike. So 4 moments that really gave us this difference between sell-in, sell-out.

In October, volumes migrated to September. There was an anticipation in purchases. We tried to have good volumes in the quarter, and this committed in the end January because this -- we did not want to have the same effect in 2019, so we held back the volumes. Also canceling some discounts to have a better level between sell-in, sell-out. In the second quarter this year, we are closer to the historical numbers of M. Dias Branco. We trust that we already made the necessary adjustment, the correct adjustment, for a good recovery of volumes. Concerning the question on price, we don't see any trend to drop prices. We have a pricing model that is more sophisticated and granular, and especially, we are going into areas where we have low penetration, the white lines. We're evaluating the market. Right now, we are not making any price drops. End of second semester, we are expecting a small price increase. We will have to see that in the next few months. The most important thing right now is that we made this adjustment to really level sell-in, sell-out in Q1.

[Operator]

Our next question comes from Mr. Thiago Duarte, BTG Pactual.

[Thiago Duarte, analyst]

Geraldo, Fábio, I would like to continue this topic concerning this graph you show. This is very interesting but it doesn't have the scale. I ask when we look at the volumes, the variance in volume in cookies, the greater volatility in volumes as of 2018, one month after Dias the total amounts in M. Dias, this volatility from one month to another is happening in biscuits, cookies or in all the categories? Since you don't have the scale, we don't know if cookies are responsible for this or all the lines? That's the first question.

The second, a follow-up on what you just said to Fábio. Do you believe that this volatility that -- with this graph that you showed us that we began to see as of last year, do you believe that this volatility is exclusively linked to the fact that last year different from other years you had 3 price increases plus the strike? Do you believe these are the factors that explain this? Because it's very curious. Suddenly, we see a relevant change in the standard of monthly sales. So I'd like to know, in your opinion, is this because last year was a different year that needed more price increases due to the inflation in cost? Or are there other factors? You made many changes in your pricing policy in the last few years, pricing model, also unifying sales teams. So what do you think is the reason for this change?

[Fábio de Campos Machado, executive]

Thiago, Fábio. I will begin with the second question. We believe, yes, that this volatility in the volumes one month after the other, the main cause was the 3 price increases and the truck drivers’ strike, and the main adjustments that we made between Q1 and Q2 in total, we decreased the discounts. We decreased discounts to avoid peaks in certain months. And for the main clients, we sold volumes for more than one month. So this combination of less discounts and deals for purchases for more than one month, this began in mid-March. We see that it's working and volumes are more stable now.

When we compare what happened in the 4, 5 first months of 2018 with the 4, 5 first months of 2019, we see today a stability or a better stability, a better leveling. This will be positive to improve our demand planning and to have more efficiency in production and distribution. So everything shows that we're on the right track, but this had a cost in Q1.

Now concerning the first part of the question, we didn't include scale. We don't give monthly numbers. The variations happened especially in cookies and pasta. That is where we had a greater variance, greater gap between min max, minimum and maximum.

[Thiago Duarte, analyst]

Yes, that helps me. If I can ask a last question. When you talk about normalization of this volatility and successful new commercial policy, everything shows that with your sell-out, hence, in Q4, we can see this too. So with the sell-out -- your sell-in, sorry, apparently below the sell-out for many months. We should be capable to see a growth in volumes in Q2. Does this make sense, what I'm saying?

[Unknown Executive]

Our expectation is to grow. We hope to grow. So with comparable basis, excluding Piraquê, we began to consolidate Piraquê on May 17, 2018. There's another important factor. In May, we had -- last year, we had the truck drivers’ strike. We lost a lot of volume built in the last 10 days of May. So May has a lower level. So we cannot forecast right now, but what we expect, we're in a better trend, a gradually better trend -- gradual and better trend.

[Operator]

[Operator Instructions] Thank you. Since there are no more questions, I'd like to pass the floor to Mr. Fábio for his final comments. Sir, you have the floor.

[Fábio de Campos Machado, executive]

I'd like to thank you all for participating and the questions, and we will meet in our next conference call. Thank you.

[Operator]

The conference call has ended. Please disconnect your lines. [Statements in English on this transcript were spoken by an interpreter present on the live call.]