Estratégia e Vantagens Competitivas

Estratégia e Vantagens Competitivas

Strategy

M. Dias Branco seeks to implement the following strategies:

• Expand its market leadership.

M. Dias Branco is committed to expanding and strengthening its leading position in the markets where it operates, while also increasing its profitability. In order to accomplish these goals, it plans to: (i) further strengthen its brands through investments in media marketing and institutional point-of-sale initiatives; (ii) expand and diversify its already substantial client base, through geographical expansion and organic growth, especially in areas where it does not have a relevant market share, as well as through acquisitions in Brazil and abroad; (iii) increase sales to the non-residential food service and processing markets, including restaurants, hotels, bars, hospitals, clubs, pastry shops and bakeries; and (iv) strengthen the small retailer sales framework in order to further expand the fragmentation of its client base and sell new products through their identification with the Company’s existing market leaders, including compensating the sales force through incentives to sell higher value-added and recently-launched products.

• Improve operational efficiency and cost controls.

The Company is committed to improving the efficiency of its processes and further developing its verticalization strategy to increase margins. To this end, it intends to increase its productivity by: (i) optimizing the use of its infrastructure; (ii) increasing the flexibility of the production chain; (iii) maintaining fully up-to-date production facilities, with high-end technology and state-of-the-art operations; (iv) increasing wheat flour and shortening supply to the industrial units, in order to meet 100% of its needs; and (v) increasing the efficiency of its domestic distribution network. M. Dias Branco will also continue to implement stricter and more modern cost controls in order to increase profitability, including strengthening programs to reduce energy consumption and raw material inventory periods through the more intensive use of purchasing and production tools.

• Develop and launch new products, as well as products complementing existing lines.

M. Dias Branco will continue to focus on the development, production and marketing of higher value-added products, such as new product lines or complementary product lines targeted at those market segments in which it already operates. The Company is always looking for opportunities to inter in new categories in the food industry that present synergies with the categories it already operates.

• Grow organically and through acquisitions.

Regarding organic growth, the Company intends to: (i) expand production capacity with the necessary investments to meet demand from its customers for its products; (ii) use its current structures to rapidly install new equipment, without incurring substantial costs; and (iii) use available land in most of its plants to rapidly expand its infrastructure. Given its cracker, cookie and pasta leadership throughout Brazil, the Company believes it can play an important role in consolidating these markets. It is therefore constantly alert to any opportunities for expansion through new acquisitions focused on its current and related product lines. It will therefore accelerate the implementation of its business strategies by acquiring companies that offer: (i) strong brands in the Company’s operational regions; (ii) a solid customer base; (iii) an extensive distribution network or the possibility of developing such a network; (iv) a presence in regions where the Company is not active or where it has a limited presence; and (v) the opportunity to benefit from operational and distribution synergies.

• Maintain the current dividend policy.

Whenever possible and without jeopardizing its operations and strategies, the Company will maintain the dividend policy of recent years, whereby payments have been considerably higher than the mandatory minimum required by the applicable rules.

Competitive Advantages
  • Leader in the Brazilian pasta and cookies & crackers market with a relevant national position at the wheat flour market.

Since 2003, the Company is in the leadership position of the crackers and cookies and pasta markets in Brazil, both in volume (measured in tons) and sales value, based on the market share survey conducted by Nielsen. The Company has shown a consistent growth in this leadership in Brazil in terms of market share in sales volume, from 13.5% to 32.5% in crackers and cookies, and from 17.8% to 32.4% in pasta, according to data released by Nielsen for the two-month period ended December 2003 and December 2017, respectively. It is worth noting that until 2016, Nielsen’s market share data took into account retailers, and from 2017 onwards, such data started to factor in retail retailers plus cash & carry. The Company believes that this leadership and relevant position in its product lines are associated mainly with: (i) the strength of its brand portfolio that is recognized by its consumer public, such as Richester, Fortaleza, Vitarella, Treloso, Pilar and Estrela, leaders in the North and Northeast of Brazil and Adria, Basilar, Isabela and Zabet, leaders in the Southeast and South, in volumes sold, according to Nielsen; (ii) the high quality of its products, together with its comprehensiveness to serve the most different markets (from popular to Premium); (iii) its distribution model – which allows a wide coverage especially in small and medium retail; and (iv) nation-wide production logistics.

  • High production process integration level.

The Company produces most part of its two main raw materials for the production of its products: wheat flour and vegetable shortenings. In 2017, 92.1% and 82.6% of its in-house production of wheat flour and vegetable shortenings, respectively, were consumed in its production process. The Company believes that such level of vertical integration has no parallel amongst any of its competitors in Brazil. In addition, some of their plants have a mill in the same complex, removing transport costs of the wheat flour used in production. Its integrated production chain also provides conditions for better planning of its production, higher quality of its products (including healthiness), of the use of its main inputs, the practice of more competitive prices for its products and the better management of its production costs.

  • Strong brands portfolio with national coverage and widespread distribution.

Through its main brands, which are highly recognized by its consumers, the Company operates all over the country, both with national brands (such as Adria and Vitarella) and regional brands (such as Fortaleza, Richester, Treloso, Isabela, Pilar and Estrela), all in market leadership positions in the North, Northeast, Southeast and South regions. Its distribution allows a great penetration in the small retail, either through its direct distribution system, or through distributors and wholesalers, contributing substantially to the low dependence of the big supermarket chains. In 2017, considering the net revenue, the Company conducted 24.8% of its sales to the retail, 28.2% to wholesalers, 20.5% to the segment “Key Account / Regional Network, 17.9% Cash & Carry, and Industry, Distributors and Others with 8.6%. The Company believes that in this way it is possible to reach consumers of different profiles, even in the most distant locations of Brazil, providing the same service differentials to its customers in locations where it does not have industrial plants. In the same period, the Company made sales to approximately 63 thousand active customers, and its largest customer accounted for 10.3% of its revenue net of discounts in 2017, while the major 50 represented 36.8%.

Please find below some of our main brands and their hotsites (available in portuguese only):

  • Modern industrial facilities with strategically located plants.

The Company currently has 12 industrial units equipped with most modern technology for food production in the world. All plants are strategically located and near to its main operating markets (nine in the Northeast, three in the Southeast and one in the South). This production structure allows a wide flexibility to choose the best plant to serve each market that the Company meets, as well as contribute to: (i) the reduction of transport costs to its clients; (ii) the fast delivery; (iii) greater knowledge and regular supply of its local markets; and (iv) largest product portfolio. The Company has made strategic expansions over the years, through the scheduled construction of new industrial and commercial units spread in the whole country. In 2010 it was invested R$ 135.3 million destined, especially, to the capacity production extension. In 2011 were invested R$ 142.5 million, excluding the amount concerning the Pilar and Estrela acquisition, mainly allocated to meet the demand growth and the raw materials need for internal consumption (vertical integration). In 2012, the investments totaled R$ 117.2 million distributed among expansion and maintenance of its productive capacity, as well as the Moinho Santa Lúcia acquisition on May 25th, 2012 in the amount of R$ 83.5 million. In 2013, the Company invested R$ 287.9 million, these investments were allocated basically for the construction of new wheat mills and acquiring new equipment‘s. Investments totaled R$407.9 million in 2014, allocated to expansion and maintenance. The main investment items in 2014 were: (i) expenses with construction works and acquisition of machinery and equipment for installation of the toast production line at the Eusébio (CE) plant; (ii) acquisition and installation of a new waffer biscuits line at the Eusébio (CE) plant; (iii) acquisition of machinery and equipment for the expansion of the crushing structure and grain storage capacity in the Rio Grande do Norte unit; (iv) acquisition of crushing equipment for the new units in Ceará, Pernambuco and Rio Grande do Sul; (v) acquisition of new machinery for pasta production in the São Caetano do Sul (SP) unit; (vi) installation of a cake mix line at the GMA unit localized in Bahia; (vii) renewal of M. Dias Branco’s fleet and (viii) installation of a cookies and crackers line at the Bento Gonçalves (RS) unit. In 2015, investments totaled 456.9 million, highlighting the construction of new wheat mills located in the city of Eusébio (CE) and in the city of Bento Gonçalves (RS), as well as investments in automation and new toast Company‘s factory. Investments on expansion and maintenance amounted to R$ 263.9 million in 2016 . The most significant investment expenditure items in 2016 were as follows: (i) acquisition of modern long and short pasta making machinery for the Company‘s manufacturing unit in Jaboatão dos Guararapes (PE); (ii) expenditure with civil works, machinery and equipment for the Wheat Mill at the Eusébio unit (CE); (iii) construction of a new mill in Bento Gonçalves (RS); (iv) acquisition of packaging machines and equipment for biscuit lines in Jaboatão dos Guararapes (PE); (v) construction of a finished product warehouse and an industrial restaurant at the Maracanaú unit (CE); and (vi) construction of raw material and packaging storage facilities at the Eusébio unit (CE), and expansion of storage facilities at other units. In 2017, investments totaled R$ 307.1 million, and the main highlights were: installation of equipment and construction in progress of the new milling unit in the city of Bento Gonçalves (RS), expansion of the storage capacity of the distribution center at Maracanaú unit (CE), purchase and installation of deodorizer and equipment for oil bleaching at the margarine and shortening unit in Fortaleza (CE).

  • Financial solidity and strong cash flow generation to support its growth strategy.

The Company’s EBITDA reached R$ 966.4 million in 2017, with 11.0% CAGR when compared to 2010. At the end of 2017, the Company’s net debt/EBITDA ratio was 0.6 negative. The Company believes that organic expansion and acquisitions will enable it to continue its growth strategy and enables the Companyto be a major candidate for market consolidation of domestic crackers and cookies and pasta industries. The Company believes that its various competitive differentials have allowed it to manage its sales strategy and pricing policy to adjust short-term contingent oscillations in its production costs, keeping its track record of generating profits.

  • Production lines predominantly located in tax incentives regions.

The industrial units located in the Northeast of Brazil are awarded with state tax incentives and federal tax incentives, since such units were built and implemented under the terms of Investment Projects of new economic enterprises presented and approved by the respective states or, in relation to federal incentives, by the Superintendence for the Northeast Development – SUDENE (“Superintendência de Desenvolvimento do Nordeste”), within the scope of state or federal public policies to foster development. Such incentives, granted as investment subsidies, assurethe capital resources to the Company for investment in the expansion and modernization of our businesses. The incentives and tax benefits granted provided the Company with an additional cash generation in the approximate amount of R$ 261.1 million, R$ 313.1 million and R$ 321.1 million, for the years 2015, 2016 and 2017. For more information about such tax benefits, see section “7.1 Issuer Activities – Tax Incentives” of this document.

  • Experienced management team and qualified employees.

The Company’s management team has extensive and well-established experience in the sectors in which it operates, which the Company believes has contributed to the consistent growth of its market leadership, revenues and results, despite volatile and occasionally adverse economic conditions. The Company believes that the historical growth of its revenues and the successful expansion of its business is a direct result of strategies implemented by its experienced management team. In addition, the Company’s workforce comprises more than 16 thousand professionals, based in December 2017, all trained, motivated and involved in a profit sharing plan, linked with specific goals aligned with its strategic and budgetary plan.

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