Before taking an investment decision, the potential shareholders must consider carefully all information available on this website, especially the risks mentioned above. The business, financial situation and operational results of M. Dias Branco could be adverse and materially affected by any of these risks, and for this reason, affect negatively the securities issued by the Company. The risks described above are those know by M. Dias Branco and that the Company believes that may affect its business in a significant way. Additional risks unknown by M. Dias Branco or classified as insignificants can also affect its business.
a. Risks related to the Company
The Company’s growth strategy through acquisitions involves certain risks that may have a relevant adverse effect to the Company.
Part of the Company’s future growth strategy may involve the acquisition of companies or other assets, if arise interesting opportunities in the markets the Company operates or in new markets. Any acquisition of other companies or assets may involve the following risks:
- Operational difficulties to integrate to its business new employees, information systems, products and customer basis. As a result of any acquisition, it may emerge additional demands to the Company’s high management, its information systems and other fields of work;
- The acquired companies may later present liabilities and contingencies that was not identified during the audit and due diligence process realized before the acquisition, or for which the Company cannot receive a contract indemnity from the seller.
- Any delay in the integration process may cause an unexpected increase on the operational expenses
- A stock or debt issue as source of new acquisitions funding may dilute its shareholders participation on the capital stock or subject the Company to restrictions and liabilities that might impact its ability to put into practice other elements of its strategy;
- The acquisition process can be competitive and may rise the value of the intended transaction or even incapacitate the potential acquisition;
- The acquisition results of other businesses may also adversely affect the Company’s capacity to pay dividends to its shareholders; and
- Complexities in the acquisition pricing or difficulties in obtaining permits from antitrust public authorities on given time, might lead the Company to give up the acquisition or result in a purchase of a less attractive company.
If any of these factors arise during the implementation of its acquisition strategy, the Company may suffer a relevant adverse effect.
Unfavorable decisions on lawsuits or in administrative processes may cause relevant adverse effects to the Company.
The Company is involved in lawsuits and administrative processes related to tax, civil and labor issues and may obtain unfavorable results in some of these processes. The Company is taking measures that aim to suspend the enforcement of certain tax credits to avoid fiscal executions against itself and the demand of guarantees in these processes. If the Company is not successful on theses measures, it is possible that it would realize disbursements or to concede guarantees in court. Furthermore, the provisions for these contingences might not be sufficient to satisfy the total amount that the Company is required to pay. Unfavorable decisions in relation to these processes may have a relevant adverse effect to the Company.
The suspension, cancelation or the failure to achieve new federal and statel tax incentives that the Company owns may affect its results in an adverse way.
Since late 1980’s, the Company holds state tax incentives. On December 31st, 2014, it had 7 (seven) of its plants contemplated by incentives conceded by the states of Ceará (2 industrial plants), Pernambuco (2 industrial plants), Bahia, Paraíba and Rio Grande do Norte. Since late 1990’s, the Company holds federal tax incentives, having 8 (eight) of its industrial units, all based on Brazilian Northeast, with incentives conceded by the Superintendence for the Northeast Development – SUDENE (“Superintendência do Desenvolvimento do Nordeste – SUDENE”). These incentives consist on the transfer of resources from the respective governments in counterpart to the investments made by the Company for the construction, installation and modernization of its new industrial plants on the respective states or regions. The incentives are granted only after the evidence that the Company concluded and started to operate on the industrial units which received the investments that were previously foreseen and approved by the government, in accordance to the government laws that concede tax incentives for investments execution.
Even when dealing with tax incentives conceded in function of the fulfillment of certain conditions and by a determined term – which, according to the Brazilian law cannot be unilaterally eliminated by the government grantors before the concession term – the Company may suffer its suspension, or even cancelation, if some requirements are not being respected during its term, as: (i) to apply the tax incentives resources on the implementation/modernization of the investment core activity; (ii) to do not distribute to shareholders the value received from tax incentives; (iii) to maintain its operations under the fiscal regularity, specially paying its taxes without delays; and (iv) to present, annually, certain documents and reports to the authorities. The non-fulfillment of these obligations might result in the suspension or cancellation of the tax incentives, may even require the Company to refund, plus charges, the values received from the incentives, what might have an a relevant adverse effect to the Company.
The Company cannot assure that it will continue to obtain new tax incentives when the terms of the currents expire, and if it achieves, it cannot assure that the new incentives will follow the same conditions of the current ones. If new tax incentives are not effectively obtained, the Company’s cash generation might suffer a relevant adverse effect.
There are projects on the Brazilian Congress that aims a broad tax reform in Brazil. On these projects there are proposals to extinguish the state tax incentives, preserving the current ones until its final term. If such projects will turn into changes in the Brazilian Constitution or fiscal laws, there will have no opportunities to obtain new state tax incentives, at least with the same form of those currently enjoyed by the Company. Regarding this assumption, the Company’s cash generation might also suffer a relevant adverse effect.
Losses not covered by insurance policies contracted by the Company that exceed the contracted indemnity limits, may cause adverse effects to the Company‘s businesses.
The Company contracts several insurance policies with large Brazilian insurers, leaders on its operating markets, with some of the Company’s assets under coverage against existing potential risks. In that sense, the Company has insurance policies with coverage for damages on its industrial plants and other buildings, cargo transports, vehicles, raw materials international transport, among others.
It is not possible to assure that the coverage contracted by the Company is appropriate and/or sufficient to guarantee all the eventual losses or damages from disasters that may occurs during the Company’s daily activities. Therefore, if occurs any event that is not covered or that exceed the maximum limits of indemnity foresee on the contracted insurance policies, the Company may have significant extra costs that were not estimated on its assets restoration, which may impact the Company’s operational results, causing adverse effects to its businesses. Besides this, the Company cannot assure that they will be able to maintain the insurances policies at reasonable commercial taxes or at acceptable conditions in the future, which may also generate a significant loss in the Company’s result. In additional, the Company may be legally responsible for indemnity payment to third parts due to disasters that are not covered by the contracted insurance policies.
Difficulties to attract and/or to retain qualified professionals for high management positions.
The loss of key members from the high management or the inability to attract new qualified professionals may adversely affect our businesses and operation‘s results.
b. Risks related to its controlling shareholder, direct or indirect, or controlling group
The management, influenced by the Company‘s controlling shareholder might take certain decisions in relation to its businesses that may conflict with the interests of Company’s minority shareholders and potential investors.
The controlling shareholder may take measures that are contrary to the interests of the Company’s investors, including corporate restructurings and dividends’ means of payments. The controlling shareholder will maintain the effective control of the Company, electing the majority of the board of directors’ members. The decision of the controlling shareholder about the Company’s course may diverge of the expected decision from its minority shareholders.
c. Risks related to its shareholders
The volatility and lack of liquidity of the Brazilian stock market may limit substantially the investors’ capacity to sell the Company’s shares by the price and at the moment that they desire.
The investment in securities traded on emerging markets like Brazil, frequently involves higher risks comparing to other markets. The Brazilian stock market is substantially smaller, less liquid, more volatile and more concentrated than the main international stock markets.
For example, the BM&FBOVESPA presented a capitalization of almost R$2.24 trillion in December, 2014. The ten more negotiated shares in terms of volume accounted about 46.3% of all shares traded at BM&FBOVESPA volume in 2014. This market characteristic may substantially limit the Company’s shareholder capacity to sell the shares by the price and at the moment they desire, and consequently, may negatively affect the price of its shares on the stock market.
The Company may realize an operation to raise funds in the future, by issuing shares or securities convertible into shares, which might result in a Company’s investor participation dilution.
The Company may need additional resources and might choose to obtain it by issuing public or private debt instruments, shares or other securities convertible into share, mainly on the hypothesis that public or private financing are not available. If shareholders so decide, the additional resources obtained by the Company’s increase of capital might result in the investor’s participation dilution.
The Company may do not pay dividends to its shareholders.
According to its Bylaws, the Company must pay to its shareholders, at least, 25.0% of its annual adjusted net profit, pursuant to the Corporate Law, as mandatory dividend. However, the net profit may be capitalized to compensate loss or retained, pursuant to the Corporate Law, which may not be available for dividends payment. Thus, the Company may not pay dividends to its shareholders in any fiscal year if the management decides that the payment is not recommended regarding the financial situation and if the decision is approved by the shareholders meeting. Furthermore, the Company may change its dividends distribution policy any moment regarding the legal limits. If any of these events occurs, the shareholders may not receive dividends.
d. Risks related to its subsidiaries and affiliates
e. Risks related to its suppliers
The price of the raw materials and packages used by the Company is volatile and an abrupt or unexpected oscillation on these prices may have an adverse effect to the Company’s businesses.
The main raw materials of the Company are: wheat, wheat flour, vegetable oils, vegetable shortening and sugar, which contributed with approximately 59.6% of its cost of goods sold during the fiscal year ended in December 31st, 2014. These raw materials and/or its components are commodities and its prices are fixed in Dollar or defined in Reais in function of the Dollar international price. Therefore, these commodities prices oscillate according to its quotation on the international commodities market, which is affected by the variation of world supply and demand of these commodities. Historically, the quotation of these commodities on the international market suffered flotations due to several factors. The Company may not have control of the factors that affects the quotation flotation of these commodities.
The packages are also important components of the company‘s production processes.It represented approximately 10.5% of its cost of goods sold during the fiscal year ended on December 31st, 2014. The package prices are directly or indirectly under influence of several factors, among them the petroleum international prices that are established based on the Dollar. Historically, the package prices suffered flotations due to several factors. The Company does not have control of the factors that affects the packages price flotation.
A sudden or unexpected variation on these commodities and packages prices in order to exchange rate changes among Real and Dollar, and/or changes in the supply or demand of these products, may impact directly its raw materials and packages prices. In case of price increase of these supplies, it may not be possible to integrally pass through, in an immediate way, this increase to its product prices, which may reduce the its net margin and affect the Company in a relevant and adverse way.
f. Risks related to its clients
The Company is subject to consumer claims and product recalls, which may negatively affect its corporate image, as well as have a relevant impact on its costs, businesses and results, resulting in an adverse effect to the Company.
The Company produces and sells food for human consumption, which involve risks, such as contamination, perishing, adulteration, among others. If the Company may be accountable in a civil prosecution related to its products or if it realizes products recall, it may impact negatively its profitability for a period, depending on: (i) the product volume on the market; (ii) the competitors’ reaction; and (iii) the consumers’ reaction, even resulting in relevant costs with the recall, media explanations and lawyers, as well as possible indemnity payment. Even if the Company is not liable in a lawsuit, the negative publicity that may be generated in relation to the products and its quality, might have an adverse effect on its reputation among current and future consumers, as well as its corporate and brands image, which may cause an adverse effect to the Company, its businesses and results.
Changes in the consumer preferences may affect the demand for the Company’s products.
The food segment, in general, is subject to changes on consumer trends, requirements and preferences, which occurs frequently and, if the Company is not successful in anticipating, identifying or reacting to these changes, may occurs a reduction on its products demand and price, among others. It might have an adverse effect to the Company’s businesses, financial situation, operating results, and stock prices.
g. Risks related to the economy sectors that the issuer operates
The Company operates in a highly competitive segment, having as competitors from small companies to huge multinationals, including manufacturers of substitute products, which may have an adverse effect to its businesses.
The segment that the Company operates is highly competitive and faces, for many years, the competition of other solid corporations, operating on the regional, national and international markets, which facilitates the capital access to some of these companies. The Company also faces the competition of small local producers that have good acceptance in certain of these markets. The Company cannot guarantee that this competitive dynamic will not result in a decrease on sales volume and/or price reduction or even smaller margins.
The Company is also subject to competition in other product lines of the food segment, by manufacturers of substitute products of some of the Company’s products, as occurs with the rice in relation to the pasta, generating an expansion of its competitive environment.
At different levels, its current and future competitors may succeed in certain product lines or regions, as well as to have more financial resources and better marketing campaigns, so that the competition with these players may lead the Company to reduce its prices, increase its marketing expenses, lose market share, or even to do not succeed in new products launching, which any of these events might have an adverse effect to its businesses.
An increase in the retail market concentration might force a reduction in the margins practiced by the sector companies, may having an adverse effect to the Company.
The major part of the food companies’ production is distributed by the retail market. The concentration of the retail market in a few large companies, which the Company believes that is a global trend already noticed in Brazil, even in a lower intensity, increases the bargain power of these companies, which may use its market power to force a price decrease in the sector companies, including the Company. This price reduction might have an adverse effect to the Company. Furthermore, the continuity of the concentration phenomenon in the retail market may provoke a reduction on the client basis, including the Company’s one, rising its dependency on large retail groups to levels above the historial standards, which may have an adverse effect to the Company.
The Company’s competitors may misuse its brands, patents and industrial designs or the Company might be restricted to use its most known brands, which may cause an adverse effect.
The brands, design and technique used by the Company on its products manufacturing (patents under “INPI” analysis) are constantly subject of misuse or violation, by third parties, of its intellectual property rights. The products forgery and the inappropriate use of the Company’s intellectual property rights, may not only cause adverse effects on sales, but also jeopardizing the final results of the Company, impacting its revenue. Beyond that, the propagation and/or association of the Company’s products may affect its integrity, which might cause adverse effects to its results.
Additionally, although the Company has two requests for patent register, registers and register requests for several brands and industrial designs registers at the “INPI”, is not possible to assure that the competitors will not claim that the Company is violating third parties intellectual property rights. In this case, in the event that the Company is forbidden to manufacture certain product with a specific technic or to uses determined brand, it might cause an adverse effect to the Company.
h. Risks related to the sectors’ regulation that the issuer operates
The Company is subjected to a strict control and extensive environmental and health regulations, which may imply in a costs increase, causing a relevant adverse effect to its activities.
The Company activities are subjected to an extensive federal, state and municipal legislation turned to the environmental preservation. Beyond that, the Company is subjected to federal, state and municipal sanitary authorities and to the Ministry of Agriculture regulation, regarding its products manufacturing processes, as well as its hygiene, conservation, packaging, storage, distribution and transportation.
The disregard of the environmental and health authorities’ regulations and laws may results, without prejudice of the duty to repair possible damages, in the application of criminal or administrative sanctions, as a penalty at the maximum amount of R$50,000,000.00 (fifty million reais), total or partial suspension of its activities, lose or restriction of tax incentives and the cancelation or suspension of financing from official credit institutions, as well as the prohibition from contracting with the government, which any of these sanctions may have a relevant adverse effect to its activities.
Changes on the current environmental and health laws and regulations may result in the need to realize substantial investments to adequate its activities to the new legislation, which may have an adverse effect to the Company. Moreover, eventual delays or refusals from the environmental bodies, concerning the issuance or renewal of environmental licenses, as well as the eventual inability to meet the requirements established by these bodies during the environmental licensing process, may impair or even impede, depending on the case, the installation and operation of its ventures. Furthermore, the imposition of eventual pecuniary or other sanctions due to noncompliance with the environmental legislation or health regulation might also have a relevant adverse effect to its activities.
i. Risks related to foreign countries where the issuer operates