Risk Factors - M. Dias Branco

a. Issuer-related risks

Suspension, cancellation or failure to obtain new federal and state tax incentives owned by the Company may adversely affect its results

Since the end of the 1980s, the Company has been awarded with state fiscal incentives, and as of December 31, 2022, eight (8) of its plants were awarded with incentives granted by the states of Ceará (3 plants), Pernambuco, Bahia, Paraíba, Rio Grande do Norte and Rio de Janeiro. Since the 1990s, the Company has been awarded with federal tax incentives, and presently, 8 (eight) if its plants, all based in the Northeast of Brazil, hold incentives granted by the Superintendence for the Northeast Development (“Superintendência de Desenvolvimento do Nordeste – SUDENE”). These incentives consist of the transfer of resources as a government contribution for the company’s investments in the construction, installation and modernization of new industrial units in the region. The granting of incentives, especially federal ones, takes place only after the company proves the investments planned in projects approved under the law.

Even in the case of tax incentives granted as a result of compliance with certain conditions and for a period of time preciously set – which, under Brazilian law, can not be unilaterally extinguished by the granting governments before end of the concession period – the Company may be subject to suspension of the right to receive the incentives, or until its cancellation, if it fails to meet certain requirements that must be complied with during its term of enjoyment, such as: (i) do not distribute to its shareholders the amount of the tax incentive received; (ii) keeping its operations within fiscal regularity, especially in respect to the payment of taxes on due time; and (iii) submission, on yearly basis, of certain documents and reports to the competent authorities, evidencing the investments made and the fulfillment of the further conditions. Failure to comply with such obligations or misinterpretation of the enforcement of tax rules may result in the suspension or cancellation of such tax incentives, and may even require the Company to refund the amount of the incentives received, plus charges, which may have an adverse effect on the Organization.

Considering the current scenario of bills aiming at broad tax reform in the country, the company cannot assure that it will continue to obtain new investment subsidies after the expiration of the current ones, and, if it does, it cannot assure that such incentives will be granted under the same conditions as those currently held. If tax incentives are changed or expire and renewal is not possible, or new tax incentives are not created after the expiration of those in effect, its cash generation may suffer an adverse effect.

The growth strategy through acquisitions may cause an adverse effect on the Company

Part of the Company’s future growth strategy may involve the acquisition of companies or other assets, should opportunities emerge in the markets in which the Organization operates or in new markets. Any acquisition of other companies or assets may involve risks such as:

Operational difficulties for integrating new employees, information systems, products and the customer base into their business. As a result of any acquisition, additional demands may arise from its senior management, information systems and other areas of the Company;
The acquired companies may present obligations and contingencies not identified in the audit or due diligence process carried out at the time of acquisition or for which the Company may not obtain contractual indemnification from the seller;
Any delay in the integration process may cause an unexpected increase in its operational expenses;
The cultural difference between companies may cause mass layoffs or dissatisfaction of the remaining employees, impacting the schedule or cost of integration;
The issuance of shares or bonds as a source of funding for new acquisitions may dilute the stake of its shareholders in its share capital or subject the Company to restrictions or obligations that may affect its ability to implement other elements of its strategy;
The acquisition process may be competitive and may raise the value of the intended transaction or, also, make the materialization of the potential acquisition unfeasible;
The result of the acquisition of other businesses may also adversely affect the Company’s ability to pay dividends to its shareholders.
Due to market conditions, the Company may not be able to divest businesses that no longer add value to the organization’s strategic agenda; and
Complexities in the setting of the acquisition price or difficulties in obtaining authorizations from public antitrust authorities in a timely manner may lead the Company to withdraw from the acquisition or may result in the acquisition of less attractive companies.

Inadequate product pricing may adversely affect the Company’s results and market share

The growth in the Company’s market share and financial result may be adversely affected as prices are adjusted due to the increase in the cost of commodities and inputs. The Company adjusts product prices based on several variables, including demand, the competitive environment, changes in the cost of key commodities, exchange rate fluctuations, among other factors.

The Company’s investments amounted to R$ 280.2 million in 2022, with 34.6% growth versus 2021, broken down into expansion and maintenance investments. Highlights for investments in adjustment of machinery to reduce weight and flow pack.

In 2022, M. Dias Branco reached net revenue of R$ 10.1 billion, 29.6% higher than the previous year, as a result of the increase in average price and volumes by 28.5% and 0.9%, respectively. In addition, throughout the year, the Company focused its efforts on initiatives and measures to increase volumes and sequential increase in average prices, among which are the launch of new products and growth in brands with high added value, such as Piraquê brand, in addition to the result of the acquisitions of Jasmine (Sep/22) and Latinex (Nov/21), which have strengthened the snacks and healthy portfolio, with items with average prices higher than the average of M. Dias Branco.

Violations, interruptions or failures of information technology systems may harm the Company’s operations

The Company’s information systems may be vulnerable to interruptions in operation due to internal events, such as: hardware and software obsolescence, inconsistency or ineffectiveness of the disaster recovery plan or deficiencies in the segregation of duties and access profile controls. Likewise, events external to the Company’s environment, such as natural disasters, failures in the telecommunication network, computer viruses, hacker attacks, or other operational and security issues, may cause interruptions in the operation of the Organization’s computer systems.

The entire Company’s infrastructure is backed up by good Cybersecurity practices, defined by a renowned consultancy and implemented by a new team dedicated to this purpose in 2022.

The Company is subject to administrative sanctions due to non-compliance with the General Data Protection Law (LGPD) and may be negatively affected by the imposition of fines and other forms of sanctions

If the Company does not comply with the provisions of the General Data Protection Law, companies belonging to the same economic group may be subject to the sanctions provided for in article 52 of the LGPD, namely:

warning, indicating the deadline for adopting corrective measures;
simple fine of up to two percent (2%) of the revenue of the Company, group or conglomerate in Brazil in its last fiscal year, excluding taxes, limited, in aggregate, to fifty million Brazilian reais (R$ 50,000,000.00) per violation;
daily fine, limited to the amount described above;
making the infraction public after its occurrence has been duly ascertained and confirmed;
blocking of the personal data to which the infraction refers until its correction;
deletion of the personal data to which the infraction refers;
partial suspension of the operation of the database to which the infraction refers for a maximum period of six (6) months, extendable for an equal period, until the processing activity is normalized;
suspension from exercising the activity of processing personal data to which the infraction refers for a maximum period of six (6) months, extendable for an equal period;
partial or total prohibition of exercising activities related to data processing.

Furthermore, in the event of non-compliance with LGPD, the Company may be held liable for property, pain and suffering, individual or collective damages, and may even be held jointly and severally liable with other processing agents, as a result of damages caused to the Holders of Personal Data.

Therefore, failure to protect personal data processed by the Company or its subsidiaries, as well as the lack of compliance with the applicable legislation, may result in adverse effects for the Organization.

Thus, in the event of a security incident with personal data that causes relevant damage to Data Holders involved, the Company and its subsidiaries may be required to communicate the event to the National Data Protection Authority and to the Holders, as well as disclosing the event in the press, which may negatively expose the economic group and cause an adverse effect on the Company’s reputation, business, operating results and financial condition.

Unfavorable decisions in judicial or administrative proceedings may cause adverse effects to the Company.

The Company is a party to judicial and administrative proceedings, and may obtain unfavorable results. Its provisioning for such contingencies may not be sufficient to satisfy the total amount that the Company may be required to pay, since such provisioning encompass estimated amounts related to the lawsuits with probable loss. Unfavorable decisions in judicial or administrative proceedings may cause adverse effects to the Company.

For more information on such proceedings, the amounts involved, as well as the amounts provisioned, see in this Reference Form items 4.3 – Non-confidential and relevant judicial, administrative or arbitration proceedings to 4.7 – Other relevant contingencies.

Losses not covered by the insurance policies contracted or that exceed the indemnity limits contracted, may cause adverse effects on the Company’s business

The Company contracts several insurance policies with major Brazilian insurance companies, leaders in the markets it operates, covering part of its assets against potential existing risks. In this sense, the Organization holds insurance policies covering damages encompassing industrial plants and other facilities occupied by it, international transportation of inputs, among others.

It can not be ensured that the coverages contracted by it are enough to guarantee all potential losses and damages resulting from incidents that may occur in the normal course of its daily activities. Thus, in the event of non-compliance with the insurance conditions or the occurrence of any events not covered, as well as exceeding the maximum limits of indemnity provided for in the insurance policies contracted, the Company may incur significant additional costs not planned for the recovery or renovation of its assets, which may adversely impact its operating results. In addition, the Company may not assure that it will be able to maintain insurance policies at reasonable commercial rates or in acceptable terms in the future, which may also generate a significant loss in the Company’s results. Furthermore, the Company may be legally liable for the payment of indemnities to third parties related to claims that are not covered in the contracted insurance policies.

The Company may raise funds in the future by means of the issuance of shares or bonds or securities convertible into shares, which may result in dilution of the investor’s stake in shares issued by it

The Company may need additional funds and may choose to obtain them through public or private placement of debt securities, shares or other securities convertible into shares, particularly in the event that public or private financing is not available. If shareholders so decide, the additional funds to be obtained by means of an increase in share capital may result in dilution of the investor’s stake in the Company’s shares.

The Company may not pay dividends to the holders of its shares

Pursuant to its bylaws, the Company must pay its shareholders at least 25.0% of its adjusted annual net income, in compliance with Brazilian Corporate Law, as a mandatory dividend. However, net income may be capitalized, used to offset losses or otherwise retained, as set forth in the Brazilian Corporate Law, and may not be made available for the payment of dividends. Accordingly, the Company may not pay dividends to its shareholders in any fiscal year if the management decide that such payment is inadvisable in view of its financial condition and such decision is approved by the shareholders’ meeting. In addition, the Company may change its dividend payment policy at any time, subject to legal limits. If any of these events occur, the holders of its shares may not receive dividends.

b. Risks related to its shareholders, especially controlling shareholders

c. Risks related to its subsidiaries and affiliates

d. Risks related to its Management

e. Risks related to its suppliers

The price of the raw materials and packaging used by the Company is volatile and a sudden or unexpected oscillation in such prices may have an adverse effect on its business

The main raw materials used in the Company’s production process are wheat, wheat flour, vegetable oil, shortening and sugar that contributed for 64.6% of its cost of goods sold in fiscal year ended December 31, 2022. Such raw materials and/or their components are commodities and, as such, their prices are denominated in US Dollars or defined in Brazilian Reais in view of the international prices in US Dollars. The prices of these inputs vary according to their prices in the international commodities market, which is affected by the variation in global supply and demand. Historically, the quotation of such commodities in the international market has suffered fluctuations due to a number of factors. The increase in the average cost of wheat and oil, which respectively increased costs of goods sold by 35.1% and net revenue by 29.4%.

Packaging is also an important component of its production process, and in fiscal year ended on December 31, 2022, it accounted for approximately 8.3% of its costs of goods sold. The price of packaging is influenced, directly or indirectly, by several factors, including international oil prices, which are denominated in US Dollars. Historically, the price of packaging has suffered fluctuations due to a number of factors.

A sudden or unexpected variation in the prices of such commodities and packaging arising from changes caused by variations in the exchange rate between Brazilian Real and US Dollar, and/or changes in the dynamics of supply and demand of these products due to the concentration in few suppliers or lack of replacement products, among other factors, may directly impact the price of its raw materials and packaging. In the event of an increase in the price of these inputs, it may not be possible to pass on in full, immediately, the adjustment in the prices of the Company’s products, which may reduce its margins and adversely affect the Organization.

f. Risks related to its customers

Changes in consumer preferences may affect the demand for the Company’s products

If the Company is unable to successfully anticipate, identify or react to changes, demands and preferences of consumers, there may be a reduction in demand and prices of its products, entailing a material adverse effect on its business, financial condition, results from operations and the market price of its shares.

A study by Nielsen reports that consumption of foods with a health appeal grew 17.9% in 2022, with emphasis on whole grain and lactose-free products, in addition to launching 1,229 products in the segment. This growth was seen mainly in the Northeast region (+25.4%), in the granola market (+18% in amounts) and in Cash & Carry.

In 2022, the Company acquired Jasmine, headquartered in Paraná, a leading company in several segments with a healthy appeal, adding to its portfolio over 140 products such as whole grain, organic, gluten-free, lactose-free and sugar-free products. Jasmine is a leader in granolas, healthy cookies and gluten-free breads in Brazil.

The Company is subject to customer and consumer complaints and products recall, which may negatively affect its image, as well as having a material impact on its costs, business and results

In the event that the Company is involved in any civil liability proceedings related to its products or has a recall of its products, this may negatively impact its profitability for a certain period, depending on: (i) the volume of the product in the market; (ii) the reaction of competitors; and the reaction of its consumers, even entailing material costs of recall, information in the media and with lawyers, as well as possible indemnity payments. Even if the Company is not liable in a lawsuit, the negative publicity that may be generated in relation to the quality of its products may adversely affect its reputation, as well as its corporate image and its brands, entailing an adverse effect on its business and results.

g. Risks related to the sectors of the economy in which the issuer operates

The volatility of Brazilian Real against US Dollar may have an adverse effect on the Company and its shares

The Brazilian currency has depreciated several times against the US Dollar over the last decades. During this period, the Federal Government implemented several economic plans and used various exchange rate policies, including sudden or periodic devaluations (during which the frequency of adjustments has varied from daily to monthly), exchange controls, black exchange markets and the floating exchange rate market. From time to time, there was significant volatility in the value of Brazilian Real against US Dollar and other currencies.

Such devaluations of Brazilian Real against US Dollar may create inflationary pressures in Brazil, through the increase in prices of imported products or whose price is linked to US Dollar, among which are wheat, vegetable oils, sugar and packaging, which represent the Company’s main raw materials and inputs, and may lead to the adoption of recessive policies by the Federal Government. On the other hand, the appreciation of Brazilian Real against US Dollar can lead to a deterioration of the country’s current accounts and the balance of payments, as well as a slowdown of export-based growth, thus adversely affecting the Company’s business.

As a strategy to prevent and reduce the effects of exchange rate fluctuations on its results, the Company has sought to avoid or minimize the mismatch between assets and liabilities denominated in foreign currency by assessing the hiring of foreign exchange hedging operations, usually swap transactions.

In this sense, as of December 31, 2022, the Company had three swap transaction agreements in force to hedge working capital financing in foreign currency with maturity until December 22, 2025, whereby on long position it receives, on average, US dollar plus interest rate of 2.66% p.a. and on short position it pays, on average, CDI plus interest rate of 1.25% p.a. with reference (notional) value in Brazilian reais of R$ 716,970 and fair value payable of R$ 50,111.

Additionally, as a strategy to prevent and reduce the effects of exchange rate fluctuations in the results, the Company started contracting forward transactions (“Non Deliverable Forward – NDF”), based on future cash flow forecasts based on budget forecasts and interim forecasts.

As of December 31, 2022, the Company had eighteen forward transaction agreements with maturities up to February 2023, with reference (notional) value and fair value. These financial instruments were designated as cash flow hedges.

On the same date, the Company had signed agreements to purchase wheat and oil for future payment and delivery, in the amount of 120,154 tons (298,000 tons as of December 31, 2021), where 85,650 tons of oil were at prices to be set. Thus, considering the market value for these cases and price set for fixed agreements, they represented an amount equivalent to US$ 11,100 of wheat and US$ 96,711 of oil (US$ 76,187 of wheat and US$ 35,708 of oil as of December 31, 2021).

The Company operates in a highly competitive segment, with competitors ranging from small companies to major multinationals, including manufacturers of alternative products to its products, which may have an adverse effect on its business

The market segment in which the Company operates is highly competitive and has faced competition from other solid companies for many years, with presence in the regional, national and international markets, enabling some of these companies to have access to capital. The Organization also faces competition from small local producers that are well accepted in certain markets, as well as potential new entrants to these markets. Furthermore, due to the high number of the Company’s brands, it must pay attention to the individual and joint market positioning of the products, as there may be cannibalization between the Organization’s brands. The Company may not guarantee that this competitive dynamic will not result in a decrease in its sales volume or in the reduction of its prices and margins.

The Company is also subject to competition from other product lines in the food industry by some manufacturers of products that may be substitutes for some of its products, leading to an expansion of its competitive environment.

At different levels, its current and future competitors can be successful in certain product lines or regions, as well as may have more financial resources and better marketing campaigns, so that competition against such competitors may lead the Company to reduce prices, increase its marketing expenses, lose market share, or even not be successful in the launching of new products; any of these events may have an adverse effect on its business.

An increase in the retail market concentration may cause a reduction in the margins of the companies in the industry, and may have an adverse effect on the Company

A substantial portion of the production of companies in the food sector is distributed through the retail market. The possibility of concentration of the retail market in a few large companies increases the bargaining power of these organizations, which may use their market power to force down the prices of the companies operating in the sector. This price reduction may have an adverse effect on the Company.

In addition, the phenomenon of concentration of the retail sectors may also cause a decrease in the Company’s customer base, increasing its reliance on large retail groups above historical levels, which may have an adverse effect.

The Federal Government has exercised and continues to exercise significant influence over the Brazilian economy. This influence, as well as the Brazilian economic and political situation, may have an adverse effect on the Company and the market value of its shares

The Federal Government frequently intervenes in the country’s economy and occasionally makes significant changes to its policies, monetary, fiscal, credit and tariff rules and regulations. The measures taken by the Federal Government to control inflation, in addition to other policies, rules and regulations, often involve, among other measures, decrease in interest rates, changes in fiscal policies, currency appreciations, capital controls and limitations on imports. The Company has no control over what measures or policies the Federal Government may adopt in the future, and can not foresee them. Its business, financial condition and operational results, as well as the market price of its shares, may be adversely affected by changes in policies or regulations that involve or affect certain factors, such as:

Monetary, exchange rate and interest rate policy;
Exchange control policies and restrictions on remittances abroad;
Inflation;
Liquidity of financial and domestic capital markets;
Fiscal policy and changes in tax laws;
Expropriation of private properties;
Laws and regulations applicable to the sector, including in relation to environment and health;
Interpretation of labor and social security laws;
Rationing of electricity and water;
Public policies to combat the crisis (emergency aid); and
Other political, diplomatic, social and economic factors that may occur in or affect Brazil.

Uncertainty regarding the implementation of changes by the Federal Government in policies or regulations that may affect these or other factors in the future may contribute to economic uncertainty in Brazil and to increase the volatility of the Brazilian securities market and the securities issued abroad by Brazilian companies. Therefore, such uncertainties and other future events in the Brazilian economy may adversely affect the Company’s activities and its operational results, and may adversely affect the trading of its shares.

Events and the risk perception in other countries, especially in emerging market countries, in the United States, Euro Zone and China, may adversely affect the market price of Brazilian securities, including the trading the Company’s shares, and cause a negative impact in its operational results and financial condition

The market value of securities issued by Brazilian companies is influenced, in different levels, by the economic and market conditions in other countries. The reaction of investors to events in these other countries may have an adverse effect on the market value of Brazilian companies’ securities, including the shares issued by the Company. Crises in other emerging market countries may decrease the investor interest in the securities of Brazilian companies, including the securities issued by the Company.

In the past, the occurrence of adverse economic conditions in other emerging market countries has generally resulted in the outflow of investments and, consequently, in the decline of foreign resources invested in Brazil, causing a negative impact on the price of assets traded in the country. Recent financial crises have resulted in a recessionary scenario on a global scale, with several effects that, directly or indirectly, have negatively affected the Brazilian financial and capital markets and the Brazilian economy, such as: fluctuations in the financial and capital markets, with fluctuations in asset prices, unavailability of credit, reduced spending, economic slowdown, exchange rate instability, and inflationary pressure. Additionally, financial institutions may not be willing to renew, extend or grant new credit lines at economically favorable conditions, or even be unable or unwilling to honor their commitments. Any of the aforementioned events may negatively impacts the trading of the Company’s shares, as well as hinder its access to the capital market and the financing of their operations in the future, in acceptable or absolute terms.

The Company’s competitors may misuse its trademarks, patents and industrial designs or the Company may be prevented from using its best-known brands in international and domestic markets, which may have an adverse effect on the Company

The trademarks, design and technique used in the manufacturing of the Company’s products are constantly subject to improper use and/or violation of their intellectual property rights by third parties both in the domestic and international markets. The counterfeiting of products and improper use of the intellectual property rights owned by the Company may not only cause adverse effects on sales, but may also jeopardize the Company’s final results.

For more information on the brands and patents held by the Company, see item 9.1.b – Intangible assets of the 2023 Reference Form.

h. Risks related to the regulation of the sectors in which the issuer operates

i. Risks related to foreign countries where the issuer operates

Risks of extreme events in the world may adversely affect the Company’s results

Extreme events such as pandemics, wars, natural disasters, among others, occurring in various locations around the world, may bring economic activities to a halt and cause disruption in global markets, with impacts on supply chains, commodity prices, exchange rate variations, and the price of the Company’s shares.

These events may lead to measures such as population confinement, trade restrictions, closing borders, distribution disruptions, among others, causing local or global recessions. These measures may reduce consumption and industrial production, causing shortages and an increase in the price of inputs.

Political risk, trade sanctions and military intervention in the world may have an adverse effect on the Company, causing a negative impact on its operational results

The regional political instability, decisions on trade sanctions and military intervention in certain regions around the world may cause instability in commodities prices and volatility in the exchange rate, thus affecting the price of the raw materials used by the Company in its production process and, therefore, putting pressure on its production costs. As an example, from 2012 to 2014, the Argentine Government has restricted wheat exports, restricting the grain supply in South American countries. Since the second half of 2013, Ukraine, a major wheat-producing country in the world, has experienced a political crisis that may affect its production, therefore generating price volatility in the commodity price. In 2014, tensions between Ukraine and Russia led the international community to impose sanctions on Russia as a form of retaliation, generating uncertainties as to the supply of wheat from that country. In 2017, the process of the United Kingdom leaving the European Union, known as Brexit, was started, and was completed in 2020, giving rise to political instability and doubts about the future of the European Union and its member countries, causing an adverse effect on the global and Brazilian capital markets.

In 2022, the conflict between Russia and Ukraine has caused a sharp rise in international wheat prices, given the risk of a drop in the grain supply, since the two countries together account for a significant portion of the commodity’s exports in the world. The conflict has been considered as the worst global security crisis since the Second World War and, therefore, the probable economic sanctions and the direct impacts on the volatility of commodity prices, may have an adverse effect on the Company’s business.

j. Risks related to social issues

k. Risks related to environmental issues

l. Risks related to climate issues, including physical and transition risks