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Edited Transcript of MDIA3.SA earnings conference call or presentation 12-Aug-19 2:00pm GMT

Q2 2019 M Dias Branco SA Industria e Comercio de Alimentos Earnings Call

Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of M Dias Branco SA Industria e Comercio de Alimentos earnings conference call or presentation Monday, August 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fábio Cefaly de Campos Machado

M. Dias Branco S.A. Indústria e Comércio de Alimentos - New Business & IR Officer

* Geraldo Luciano Mattos

M. Dias Branco S.A. Indústria e Comércio de Alimentos - VP - Investments & Controllership, IR Officer and Member of Statutory Executive Board

* Rômulo Ruberti Calmon Dantas

M. Dias Branco S.A. Indústria e Comércio de Alimentos - Commercial VP and Member of Executive Board

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Conference Call Participants

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* Isabella Simonato

BofA Merrill Lynch, Research Division - VP

* Lucas Ferreira

JP Morgan Chase & Co, Research Division - Analyst

* Luciana de Carvalho

BB-Banco de Investimento S.A., Research Division - Senior Analyst

* Thiago Callegari L. Duarte

Banco BTG Pactual S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. Welcome for the conference call of M. Dias Branco for the results of Q2 2019. We have with us Mr. Geraldo Luciano Mattos, Jr., Vice President of Investment and Controllership; Mr. Rômulo Dantas, Commercial Vice President; and Mr. Fábio Cefaly, New Business and Investor Relations Director. We inform that this event is being recorded. (Operator Instructions) The audio is also being conveyed through the Internet at the address www.mdiasbranco.com.br/ir.

We would like to clarify that any declarations made during this conference call concerning the business perspectives of M. Dias Branco, projections, operational goals, financial goals are based on assumptions and beliefs of the company as well as on information currently available. They involve risks, uncertainties and assumptions. They refer 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 may also affect the future results of M. Dias Branco leading to results that will differ materially from those considered.

Now I'd like to pass the floor to Mr. Geraldo who will begin the presentation. Sir, you have the floor.

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Geraldo Luciano Mattos, M. Dias Branco S.A. Indústria e Comércio de Alimentos - VP - Investments & Controllership, IR Officer and Member of Statutory Executive Board [2]

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Good morning. Welcome to the conference call of M. Dias Branco for the results of Q2 '19 and year-to-date. In the comparison with Q2 '18, our net revenue grew 4% and also an increase in average price and a decrease in volumes.

We see here the operational activities. We see the percentage greater. Concerning Q1 '19, revenue grew 7.1% (sic) [17.1%] with a growth in all the lines and products. And we saw here 76.8% and availability, 10.25% higher.

Lower volumes in relation to last year, we see signs of recovery and we are making new efforts. On the other hand, in relation to Q1 '19, we see that the initiatives of the company, as mentioned in the previous conference, are having a gradual effect for growth and profitability. During Q2 '19, we see this. So the activities are increasing gradually with expansion in volume.

We have a segmentation by channel and support. We are now opening distributors in areas where we have low penetration. We're making a transition to regional structures. This has the potential to also reduce operational costs. We like to say we will detail later, we are having preoperational expenses. We are restructuring the number of employees. We are going from 18,000 to 17,000 employees.

And now our commercial structure. We have a director dedicated to the regions Midwest and also another [person].

Now going on to EBITDA. The -- in relation to last year, we see 24% higher, and we had a drop in volumes. We also have some extraordinary expenses as can be seen with the integration of Piraquê, BRL 49.9 million in taxes. In comparison with Q1 '19, the growth in volumes helped us with EBITDA.

Concerning investments, BRL 73 million were invested during Q2 '19. And to finalize, we are awaiting growth.

Thank you. Now (inaudible) with the results of the quarter.

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Unidentified Company Representative, [3]

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Thank you, Geraldo. Good morning.

Now please follow us in the presentation. We will begin with Slide #3. We remind you that the results of Piraquê are being included in the consolidated numbers as of May 2019. Some information will be presented with the results of Piraquê and others without the results of Piraquê.

Now Slide #5. Between Q2 '18, Q2 '19, we had a growth of 4%, more 4% net revenue due to more added value from Piraquê. Also, the growth of 15.3% in margarines and shortening. And we see the good results in domestic rise. Apart from market conditions and lower volumes in cookies and crackers, we made efforts to normalize the inventory of our clients. We had high inventories.

Slide #6. With the evolution of net revenue without Piraquê, we see a minus 0.5% between Q2 '18, Q2 '19. Even with the positive contribution of Piraquê, we see an -- we had an increase in the inventories and also -- now concerning revenue, Slide #7. We compare Q2 '19 with Q1 '19 with Piraquê. Total net revenue grew 17.1% with also double-digit growth in all the lines. The highest growth in cookies and crackers helped the increase in 1.2% in the average price. We had a greater volume of 21% in cookies and crackers.

Slide #8. As we said in the last conference call, we see a strong reduction in the volatility of monthly sales. So during Q2 '19, we negotiated with our main clients more regular -- to have more regular monthly purchases, thus, aiming at growth and more efficiency. In the graph, we see that the monthly volumes stabilized at a level higher, and the challenge now is to go after growth.

Now Slide #9. I will share volume in cookies and crackers. If you look at last year, we see a small drop in cookies and crackers and an expansion in pasta. The drop between Q1 '19, Q2 '19 is due to the lower volumes in Q1.

Now Slide #10. EBITDA and EBITDA margin, when we compare Q2 '19 with Q2 '18, at the same time as we had an expansion in comparison with the first semester 2019.

Now on Slide 11, we see another comparison. The main unfavorable points was the cost of wheat, really 24.4% higher. So we had a higher cost in dollars, and then we had a devaluation of the local currency. So the increase in our results was observed after Q3 '18 due to our inventory. We see a loss of margin of 5.5% due to third-party wheat and flour. We see this impact because of lower costs, BRL 32.1 million in nonrecurring expenses. We also had an extraordinary positive effect. The recognition of tax credits were BRL 49.9 million. We also -- we excluded ICMS from the calculation of PIS/Cofins taxes.

Slide #12, increase in our EBITDA. We see here, the increase of 3.3 percentage points in EBITDA margin. This is due to lower fixed expenses, for example, expenses with sales and also extraordinary positive points, recognition of BRL 49.9 million in tax credits. On the other hand, the margin had an impact by 2.1%. We had BRL 32 million with expenses in restructuring, as already mentioned.

Now Slide #13, on net profits -- net income. We see the same trend as in EBITDA. We see an expansion here. Also, we see a drop on net income. We would like to highlight depreciation of new lines during 2018; and the first semester of 2019, amortization of expenses with Piraquê; also, lower results with investments due to the purchase of Piraquê and the payment of Piraquê; and also labor, call it, expenses, referring to 2017, '18.

Now Slide 14, on investments. BRL 73 million were invested in Q2 '19, BRL 142.6 million year-to-date. Now here, we see the investments in Bento Gonçalves and Jaboatão.

Slide 15, cash flow. We closed the quarter with BRL 432.6 million, superior to the amount in 2018, especially due to the [period].

Now here, we see on Slide 16, sustainability. Here, we have the objectives of having approval of the sustainability policy of the company. We are increase -- we are decreasing solid wastes, and we are committed to optimize in all products to use eggs that are produced in sustainable conditions. Also here, we see an increase of 4.9% in energy intensity in Q2 '19 and a reduction of 12.2% in water consumption by tonne produced. And to conclude this chapter, we had the environment week with the climate changes theme.

Now Slide 17, highlights for cake, Adria brand; and Toons Cake, Isabela brand. So in biscuits and crackers, we began in Q2 '19 with BRL 42.5 million with the new products and 33% higher than the BRL 32 million we had in Q2 '18.

Now Slide #18, we see verticalization of wheat flour and vegetable shortening. Same level concerning 2018, the reduction in flour. Here we see, we also bought from third parties. In vegetable shortening, we are using now Piraquê's unit to supply the needs of the whole company in Bento Gonçalves.

Now Slide #19. Here, we see that the profitability was below the BOVESPA. Here, ongoing initiatives to regain growth and profitability, so some actions we are carrying out: implementation of a pricing model segmented by channel market and brands; reorganization of the commercial structure; implementation of a broader go-to-market model; increasing Piraquê volumes with better margins; transition to a regional operators logistic model; and staff restructuring.

So we would like to close this part, and we'd like to begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Duarte from BTG Pactual.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [2]

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I have 2 questions. The first is about volumes. In Q1, we discussed a lot during the call, the issue of monthly volatility of volumes and how this could explain the difference that seems to be important between the sell-in and the sell-out of the company when we look at market share. In this quarter, there was a compression of market share, cookies and crackers and -- especially cookies and cracker, and the sell-in had an important drop. During the presentation, you talked a lot about normalization of inventory at the clients. But we have the impression that more than this mismatch of sell-in, sell-out, there is some problem, for example, space on shelves, some other problem. So I'd like to hear from you if you could talk how you're seeing the competition. How is competition that caused this loss in market share? That is my first question. The second has to do with price. You made some pricing -- you had some price increases in cookies and crackers last year. But this year, there is less drop in prices. Now thinking of margin, do you imagine -- do you plan increasing prices in the future to recover margins in the next quarters?

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Unidentified Company Representative, [3]

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I will ask Rômulo, our Vice President of Sales, to talk about this. But then, he will answer. So I'll pass the floor to Rômulo.

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Rômulo Ruberti Calmon Dantas, M. Dias Branco S.A. Indústria e Comércio de Alimentos - Commercial VP and Member of Executive Board [4]

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Good morning. The first part, when you talk about volumes, the company, we had problems in the last quarter of last year and the first quarter of this year. This line stabilized as of Q2 '19. We -- also, in the case of pasta, we had problems, and this had an effect on the recovery. So we had a greater dependence on cookies and crackers. And you can see that we had a reduction in these categories, a reduction in cookies and crackers and a little less in the biscuits tag called (inaudible). So this had an impact on the recovery of volumes due to the economic scenario in Brazil. So the recovery of volumes and also, we have seen efforts to have lower interest rates in the country. The government is making this effort, so we have less expenses with interest. Pasta is a little different, but we had to fight with lower margins. So we are -- this was mentioned in the conference. We hired a consultancy company to work with us on prices in the different regions and in the different sales channels. So this will have an effect in the future, the work done by this consultancy. We have concentration in some channels. Now in terms of price lift, we will have -- we intend to capture some improvements in price and also growth. We hope to have better prices.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [5]

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Okay. Two follow-ups concerning volumes and market share. From what I understood from your explanation, if we look at market share of M. Dias on a regional basis, you explained very well the Northeast where you -- so if we look on a regional basis, the drop in market share is not that high. It dropped due to a drop in the market in the region that is most relevant to you. Is that correct?

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Rômulo Ruberti Calmon Dantas, M. Dias Branco S.A. Indústria e Comércio de Alimentos - Commercial VP and Member of Executive Board [6]

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Yes. We had a drop in cookies and crackers. Yes, a small loss in share. The good news is that our strategy for recovery of volumes, we have the advantage in the Midwest and Southwest, this region will help us recover. Now concerning price. The idea of price is not to increase the price, but you see space in the near future to work more intelligently, especially in average price where the market is not receptive to price increases due to the economic scenario of the country. We are doing -- we are trying to increase prices in some regions.

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Operator [7]

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Our next question comes from Lucas Ferreira, JPMorgan.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [8]

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My first question, about Piraquê. Are you capturing synergies? Can we imagine nonrecurring effects in the future? Then I will have -- next, I will have another question about the market in general.

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Fábio Cefaly de Campos Machado, M. Dias Branco S.A. Indústria e Comércio de Alimentos - New Business & IR Officer [9]

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Good morning, Lucas. Fábio. Your question about Piraquê, we have observed in the results an improvement in volumes and also an improvement in margins. If we look from Q1 to Q2 comparable periods, the units had double-digit growth in volumes. And most of the volume of Piraquê is in biscuits, cookies and crackers, which is favorable for the consolidated results. We have many initiatives in progress in industry for pasta and biscuits. Many evolutions were made for the reduction in wheat, and we begin to see some positive effects in gross margin. Even with an economic crisis in the country that hurt our results, we had a strong price increase for wheat as of May last year. This had an impact in the other lines of expenses as part of the restructuring in labor force. Most of this restructuring in manpower is in M. Dias, but there is a small part in Piraquê. We have the number showing this. 200 employees accepted to -- our package to leave the company. And the initial focus is Rio de Janeiro. They -- we see growth in other states in the Southeast, so we're seeing a recovery in the south of the country, and we see positive evolution in these areas.

If you look at the information we supplied, the consolidated of M. Dias and Piraquê, you'll get an EBITDA margin of Piraquê for Q2 around 15.5% or 16% comparing with the margin of Piraquê in Q2 '18. So we're beginning to notice a positive evolution even with the prices and high wheat prices. So we're not going to capture all the synergies in 1 or 2 quarters. We're beginning this journey that we begin to see positive results in Piraquê.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [10]

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My second question. On the sales side of the business, you mentioned higher inventory in retailers at the end of the year. And the competition, what did the competition do in the many markets? Did they lower prices? The competition, the reaction of the competition, could you comment? When you look at inventories, this has an impact on the others or only in some regions? Is the competition everywhere or only in some regions?

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Rômulo Ruberti Calmon Dantas, M. Dias Branco S.A. Indústria e Comércio de Alimentos - Commercial VP and Member of Executive Board [11]

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Well, Rômulo speaking. In this scenario, competitiveness in price, the average prices of the category dropped. There was a drop in the average prices in the sector, both on our part and also competitors. We see this effect right now, and most of the companies having this problem, suffering in margin. And we see a greater difficulty in recovering volumes. We made investments in this area, so we are expecting the return on investments, making an effort now to preserve margin.

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Operator [12]

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Our next question comes from Luciana Carvalho, Bank of Brazil.

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Luciana de Carvalho, BB-Banco de Investimento S.A., Research Division - Senior Analyst [13]

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My question has to do with cost. How do you see the costs in Q2 in Brazil? It seems that there is pressure on margins due to cost. Also, your level of inventory.

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Unidentified Company Representative, [14]

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Could you repeat the question?

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Luciana de Carvalho, BB-Banco de Investimento S.A., Research Division - Senior Analyst [15]

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My question has to do with costs. Costs in the future, also in relation to Argentina. We have the impression that the pressure on margin will continue in the second semester. How do you see the scenario in terms of costs and also your level of inventory?

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Unidentified Company Representative, [16]

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Now that we understood your question, we don't see pressure on costs, especially wheat, in the second semester. We have inventory already bought. We already bought the necessary inventory, especially wheat. There's the political issue on Argentina, yes. Yes. And when we look at this, I believe that with the new government, we believe that the government will act, the price of wheat had a great impact in our country. Maybe we can import from other countries, and we don't see a great pressure on cost. We don't see higher prices, higher costs in second semester, so same levels as first semester.

The second question, investments. The ramp-up in Bento Gonçalves, also Juiz de Fora. We concluded the investments in Bento Gonçalves. So we -- so concerning Bento Gonçalves, investments already made. In Jaboatão, investments are normal. And we need some investments still in Juiz de Fora. We bought a plot of land. We will also -- we believe that Juiz de Fora, we will soon have news for you.

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Operator [17]

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

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Isabella Simonato, BofA Merrill Lynch, Research Division - VP [18]

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I have a question, the cost of wheat. When we look at the price you reported for the purchase of wheat and when we look at gross margin, we don't see a good correlation. The volume is also lower. Therefore, I'd like to understand, in the future, the drop that we saw in the price of wheat during the first semester, this will help your costs -- do you believe it will help your costs or not?

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Fábio Cefaly de Campos Machado, M. Dias Branco S.A. Indústria e Comércio de Alimentos - New Business & IR Officer [19]

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Isabella, Fábio. The first part of your question, truly, this -- we know that it's taking long for cost reductions due to lower volumes. All right. Enough. For example, there was a rise in our average price of wheat, as Geraldo said, we have inventory. We have wheat and inventory for 3, 4 months. For Q3 and Q4, we have. When we look at the markets, the price of Argentinian wheat, one of the main costs for the end of the year, the price is already lower than the price now for wheat. We will see this effect of lower wheat prices only in 2020. We have political issues in Argentina.

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Operator [20]

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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.

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Geraldo Luciano Mattos, M. Dias Branco S.A. Indústria e Comércio de Alimentos - VP - Investments & Controllership, IR Officer and Member of Statutory Executive Board [21]

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Also, we'd like to thank all of the participants in this conference call. Thank you for the questions. We hope we clarified the points that were raised, and we hope to be with you at the next quarters with better results. We're working for this. Thank you.

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Operator [22]

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Thank you. The conference call for M. Dias Branco has concluded. Please disconnect your lines, and we wish you a good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]