Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to the First Quarter 2021 Industrias Bachoco Earnings Conference Call. My name is Richard, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Ms. Maria Jaquez, Investor Relations. You may begin.

[Maria Jaquez, executive]

Thank you. Good morning, and welcome to Bachoco's First Quarter 2021 Conference Call. We released our financials yesterday after market close. If you need a copy of the release, please visit our website or request it from our Investor Relations department. This morning's call contains certain information that could be considered forward-looking statements regarding anticipated future events and performance. These statements reflect management's current beliefs based on information currently available and are not certainties of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our annual report or 20-F, which could make our current results differ materially from the forward-looking statements discussed in this call.

Except as required by applicable laws, Industrias Bachoco undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, unless otherwise indicated, the amounts mentioned in this conference will be figures of 2021 with comparative figures of the quarter same period of 2020 in Mexican peso. As a reference, the exchange rate as of March 31, 2021, was a MXN 20.42 per U.S. dollar.

Here with me are our CEO, Mr. Rodolfo Ramos; and our CFO, Mr. Daniel Salazar. Now I will give the call to Mr. Ramos.

[Rodolfo Ramos, executive]

Thank you, Maria, and good morning, everyone. Despite remaining challenging condition in the market, we managed to close the quarter with a very good results in terms of profitability. For that, I would like to thank the Bachoco team for the effort and commitment in making this possible. In terms of the industry, both in Mexico and the U.S. are being challenged by significant increase in corn and soybean meal prices, which are already impacting our cost of sales. In this regard, we are working very hard on absorbing part of those increases with efficiencies in our production processes and by being cautious with our hedge strategy.

On the other hand, volumes up in both geographies experienced a difficult comparison versus the first quarter of the last year when the industry was showing important growth rates. As a reference, according to the USDA, broiler production for the first quarter has experienced a decrease of 3% versus the same period of 2020 in the United States. About our operations in Mexico, a better balance between supply and demand in combination with an improved sales mix allow us to transfer the increasing cost to our sales price. This has also been shown in the behavior of the main commodity prices in the United States. We continue with the process of integrating SASA to our operation, its integration in June of 2020. Our volumes sold and revenues in this segment has shown a consistent sequential growth. In addition, we are focused on increasing our live swine capacity in order to be less dependent on the outside market in this business line.

As a result of the conditions above, our total sales and cost of sales increased 23% and 11.7%, respectively, when compared to the first quarter of 2020. We reported an EBITDA of MXN 2,913.4 million with a margin of 15.1% and earnings per share of MXN 3.50 for the quarter. The company remained in a healthy financial condition as we reached a net cash level of MXN 17,208.1 million, which allow us to continue to support our growth plan as we reported a CapEx of MXN 555.7 million for the first quarter of '21.

Along with our annual report, this week we also released the second edition of our ESG report, which is available for you on our corporate website. We that -- we reinforce our commitment and focus on our people, business, community and planet. We are aware that there is an endless room for improvement in this regard. However, we truly believe in the value of our action achieved and the actions to come. Now Daniel will join us for a discussion of the financial results.

[Daniel Salazar, executive]

Thank you, Rodolfo, and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company's first quarter of '21 net sales totaled MXN 19,357.6 million, MXN 3,619.2 million or 23% higher than the MXN 15,738.4 million reported in the last -- in the first quarter of the last year. This increase was mainly a result of higher prices across our main business lines as a result of our sales mix in -- the reflection of the effects of higher raw material costs. Total cost of sales for the quarter was MXN 15,139.6 million, representing an increase of 11.7% when compared to the same period of 2020. Almost 17% of the increase was a result of higher unit cost result before direct increase in grain and soybean meal prices. That increase was partially offset by lower volumes sold quarter-over-quarter. The mentioned combination resulted in a gross profit for the quarter of MXN 4,218 million with a gross margin of 21.8%, higher when compared with MXN 2,181.1 million and 13.9% reported in the same period of 2020.

Total G&A for the quarter was MXN 1,687.3 million, representing an 8.5% for our total sales, which compares to the MXN 1,572.7 million and 12% of total sales achieved in the first quarter of the last year. Operating margin in the first quarter of the last year was 13.2% compared to 3.8% reached in the same period of 2020. Our EBITDA margin was 15.1% for the quarter, an increase when compared with the 6% in the first quarter of '20. For the quarter, we had a net financial income of MXN 319.6 million compared to the net financial income of MXN 2,426.5 million for the same period of 2020. This was a result of an important FX valuation effect observed in the 2020 as a result of the strong depreciation of the Mexican peso in that quarter.

Our total taxes were MXN 803.9 million for the quarter, lower than the MXN 816.3 million recognized in the same quarter of 2020. This decrease was due to lower profit before taxes. All of the above led us to a positive net income of MXN 2,074.6 million for the quarter, resulting in a 10.7% net margin compared to the MXN 2,170.2 million and 13.8% margin reported in the first quarter of '21. The net income per share was MXN 3.5 for the quarter.

Going into our balance sheet, we kept a healthy financial structure with a net cash level of MXN 17,208.1 million when compared with a net cash of MXN 16m503.3 million we had in the end of the year 2020. Our CapEx was MXN 555.7 million, an increase of MXN 263 million when compared to the same period of 2020. In our 2021 annual shareholders meeting we had last week, the company announced the paying of cash dividend in the amount of MXN 1.42 per share or MXN 17.04 per ADR.

Well, that's it. Thank you. And I will now turn the call back to Rodolfo for final comments.

[Rodolfo Ramos, executive]

Thanks, Daniel. We are entering the second quarter of 2021 under very different conditions when compared to the same period of 2020. While we think that this year the balance between supply and demand is better than last year, raw material prices remain to be the challenge to beat. That is why it's the key not to lose focus on operational efficiencies and improvements in sales mix across our processes. Particularly regarding the COVID-19, we think it is difficult to forecast the duration of its effect as those are linked to the effectiveness of responsive actions that we and others are facing, including the impact of vaccination programs, coverage and immunity achieved, the severity and duration of the outbreak and the actions by national and international government authorities to contain the pandemic and minimize its impact. We consider that the lessons learned in 2020 made us stronger and prove that our team has what is needed to face any challenges that make come.

With that, we will now take your questions.

[Operator]

[Operator Instructions] And our first question on line comes from Emiliano Hernández from GBM.

[Emiliano Hernández Marvan, analyst]

Congrats on the results. Very impressive. Two questions on my side, if I may. My first question is, how should we think about the second half of the year considering the pressure you might see in the cost side, given the level of grain prices? And then the second one is, how have you seen volumes in April? Just to understand the supply and demand balance and the potential trend in prices.

[Rodolfo Ramos, executive]

Well, in terms of pricing, we have a very good increase year-over-year. But with the raw materials, as you mentioned, the cost is going to keep increasing as well. So it's -- what we need to see is if we can translate that cost. It's going to be a very tough challenge to keep moving in that direction because we need to see and to maintain the balance between the supply and demand.

And in the other hand, we need to look very closely our markets and to see if the economic growth, particular in Mexico, go back to the normal situation. That -- if we don't have that recovery in the salaries or the power of the salary, it's going to be very difficult to maintain or translate that price increases according to the cost of the raw material. So for that reason, we need to be very, very close to our markets, and we need to be very -- to see very caution our growth.

I think for the second half, we can have a recovery in the volume. But if the economic situation of the country allow us to do it with that. And in that, I think that recover can be just gradually, not in a big step. So I'm saying that it's -- our strategy is focused on efficiencies because we need to improve our efficiencies in order to absorb part of the cost. It's not going to be -- I need a thing to translate that increasing cost to the price. So it's -- we need to be very, very close to that -- to the market, to the customers, to see what is the best option in that moment.

[Operator]

[Operator Instructions] Our question on the line comes from Héctor Maya from Santander.

[Héctor Manuel López, analyst]

Congratulations for the results. The first one, could you give us an update on how the service channel is doing, particularly in Mexico? And the second one, you -- I mean, you also are mentioning right now a better supply and demand balance. I just wanted to know how the propane oversupply you mentioned or you talked about at the beginning of the year progressed during the quarter? And how was the inflection point? And after these two, I have a couple of follow-ups.

[Rodolfo Ramos, executive]

Well, the first question about the [ registry ] and that channel. The performance of that market is very good. I think the pandemic affect at the beginning. But at the end -- in the next month or after the pandemic hit, outbreak here in Mexico, that channel did very well. Right now the volumes in that particular channel are better than last year, even in the pre-COVID period. So they are doing very, very well. The only channel, and it's below the prepandemic, is the foodservice, mainly dining restaurants and hotels and the touristic destinations, it's the only market that has been below the prepandemic period. But it is moving up, but they're very, very slow. I think the recovery is going to be better for the second half of the year in that particular channel. What is the second question, Héctor?

[Héctor Manuel López, analyst]

Yes. About the supply and demand balance. You mentioned now that it's better than before. And just remembering that in the beginning of the year you had said or had mentioned that you were facing an oversupply. So wanted to know when was inflection point and how could we expect this going forward?

[Rodolfo Ramos, executive]

Well, as I mentioned before, it's -- in terms of increased production at the volume, we need to be very cautious about this in order to keep that good balance. And that's going to depend of the economic and the economic recovery of the country. If the per capita income doesn't grow, it's going to be very difficult to translate that -- the price or the increase in cost to the market. So again, it's -- we need to be very, very close to those markets. And the best way to do it is increasing our efficiencies and being changed the mix, the sales mix to be in the market with their return. And it's not an easy thing to maintain that balance because it's very difficult to predict where is that inflection point.

[Héctor Manuel López, analyst]

So in terms of price increases, I mean, you wouldn't say that you are very confident that these are going to be sustainable, you prefer to have a more conservative approach, right?

[Rodolfo Ramos, executive]

Well, it's very difficult to predict that thing as -- because if the industry maintains their discipline, well, it can be. But we don't know exactly.

[Héctor Manuel López, analyst]

And the last one, your current cash balance is over 40% of your market cap. So could you remind us, please, your possible M&A priorities per region? And how soon could we expect an announcement of this nature, if any?

[Rodolfo Ramos, executive]

Héctor, as you know we are now in the process of have the authorization of the last M&A activity that we reported in the last year, the acquisition of RYC Alimentos. But besides that, we are also working in expanding our capacity in the swine business, as we already mentioned. So part of the money that we have will going to be to -- for those projects, growth projects in the swine business as well. And on the other hand, we are looking for expansion as well in the other province. We are looking not only in Mexico, but also in Latin America for a -- try to make an arrangement with producers in Latin America countries. We are now actively looking in that regard right now.

[Operator]

Our next question on line comes from [ Juan Ponte ] from Bradesco.

[Unknown Analyst]

The Mexican Congress recently passed a bill that will prohibit outsourcing and insourcing, except for what qualifies as specialized labor. What do you think could be the impact on Bachoco's operating expenses, if any?

[Daniel Salazar, executive]

Well, of course this measure will affect our business as everybody -- everyone else. But according with our calculations, this impact is not significant for our business. Of course, we're working in some activities in order to reduce the impact. For instance, we are looking to build a shared services center in order to have a specialized activity center to support all the business lines. And with that we think to reduce significantly the possible impact that we'll have with these measurement.

[Operator]

Our next question on the line comes from Ulises Argote Bolio from JPMorgan.

[Ulises Argote Bolio, analyst]

And congrats on the results. A couple of questions here on my side. First, any update you can provide us on more or less how the cost levels related to the raw materials are looking for in the second quarter? I mean how do your hedge levels look like? And what kind of pressure can we be expecting maybe sequential year versus the numbers that we saw in the first quarter? And kind of tied to this, and I know this is really tough, but any outlook in terms of the margin that you could have for the year? How does it look like for the full year versus your long-term guidance? How more or less are you budgeting around this, given the strong number that you had obviously in the first quarter already?

[Rodolfo Ramos, executive]

Well, the first part, we normally hedge the contracts that we closed for the year with some long-term customers. And we have a contract with them. And normally, we hedge the grain that we use to produce the products for those customers, and that's it. We don't speculate with that. So normally we have 2, 2.5 months in inventory throughout the farm. So we can say in 3 months we can just reflect the actual prices of the commodities, corn and soybeans. So seeing that on the cost increase, well, this -- the corn started very close to $3 per bushel. Right now, it's very close to $7. So it's more than 100%-plus increase in that regard. So soybean and corn comes for more or less 80% of the total cost of the feed, and the feed is around, or part, 55% of our total cost. So you can just figure out how it's going to be the impact in terms of cost.

At this moment, we have been able to translate off that cost to the price because of the balance that I mentioned between the supply and demand. And for that reason, our main focus right now is in the efficiencies, productivity because we need to absorb some part of that cost increase. There is some other alternatives, other strategies, and we need to look at it very close, that's the sales mix, the markets, the different markets and different regions, geographies. We have a national-wide footprint, and we participate in all the channels of the industry. So we can just -- we have some margin to move from one side to another side. And the second question I want to ask Daniel to help me do that.

[Daniel Salazar, executive]

Well, of course, it's very difficult to predict with a very challengeable situation with the raw materials increase. But if we maintain the good balance between supply and demand for the rest of the year and if we can translate these increases to the prices, I think we will have a similar year in terms of profitability compared with the previous one. Of course, with an increase -- a significant increase in revenues. I think the ranges probably will grow to digits -- to medium digits for the whole year and the profit probably will be between 8.5% to 9%, if everything runs okay. But as Rodolfo mentioned, it's very difficult to predict that the good moment will remain because the challenge of raw materials increases.

[Ulises Argote Bolio, analyst]

Agree. Perfect. And then another question that I had was -- maybe we have been focusing a bit on Mexico. So if you can share some of your thoughts and kind of expectations for the U.S. business? I know, Rodolfo, you mentioned some kind of expectations for volume decreases there in the U.S. and et cetera. But maybe if you can give us some color on how you're looking for those operations for the rest of the year? And maybe if you expect any change in the import dynamics there in -- from the U.S. and Mexico, given the strong prices in Mexico, any changes that you have been seeing there recently?

[Rodolfo Ramos, executive]

Well, the U.S. operation as the commodity prices of the chicken prices, breast meat, leg quarters and wings are having a very good level. The wings are the record highs historically. Leg quarters have been going up. And the commodity, breast meat, it's in the [indiscernible] it's in the -- at the highest level today at least for the last 12 months. It's saying that the industry right now is showing a good balance between supply and demand. Obviously there's a difference between the different segments of the market. Right now, the complexes that produce big birds are in a better shape than the small birds, for instance, because of the commodity prices.

So with that balance, with the balance between supply and demand, the industry has been able to translate the cost increase to the price. But as you know, Bachoco USA produced, our main market is the national accounts and foodservice. With those companies, we have a long-term agreement. So we are just -- we have -- in some cases, we have a hedge of the raw materials with some customers. And other customers we negotiated pricing every quarter or even every month. So we -- I think we are in a fair, good situation in a very, very difficult market. And again, there it's the same strategy, to keep focus and -- in our productivity efficiencies and all that, the things that we can do, that we can control in order to reduce the cost or to absorb that increases in cost.

[Operator]

[Operator Instructions] At this time I'm showing we have no further questions.

[Rodolfo Ramos, executive]

Okay. Thank you all for joining us this morning. If you have any further questions, please contact our Investor Relation area, who will be glad to assist you. Thank you.

[Operator]

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.