Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Hilda, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2022 Industrias Bachoco Earnings Conference Call. [Operator Instructions] Thank you for your attention. I will now turn the call over to Maria Jaquez. Maria, you may begin.

[Maria Jaquez, executive]

Thank you. Good morning, and welcome to Bachoco's Third Quarter 2022 Conference Call. We released our financials today before the market opens. If you need a copy of the release, please visit our website or request it from our Investor Relations department.

This earnings call contains certain information that could be either forward-looking statements regarding anticipated events and performance. The statements reflect management's current beliefs based on information currently available and are not guarantees for 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 obligation to publicly update or revise any forward-looking statements, whether as a result of your information, future events or otherwise. Lastly, unless otherwise indicated, the amounts mentioned in this conference call will be figures of 2022 with comparative figures for the same period of 2021 in Mexican pesos.

As a reference, the exchange rate as of March 31, 2022, was MXN 18.89 per -- MXN 19.89 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. The first quarter of the year was full of challenges and uncertainties, particularly related to corn and soybean meal markets, which has a negative impact in our cost of sales increasing it by 27% versus the same period of 2021.

In that regard, we kept working on the things that we can control, which allows us to compete better under those conditions. During the quarter, we were very focused on operational efficiencies, sales mix improvement, increasing our market share and the integration of RYC Alimentos.

In terms of operational efficiencies, while we are constantly looking for opportunities in our Mexican operation, it is worth to highlight the results of our U.S. team. In 2021, we shared with you the negative operating impact of labor shortages in this geography. In this regard, our team worked very diligently on attracting and retaining talent. This has been key for us to bring back our facilities to competitive levels. While we consider that there is still room for improvement, we are certain that we are heading towards the right direction.

In terms of the first quarter of '22 net sales, not only we observed good pricing levels, both in the United States and in Mexico, but also we integrated RYC Alimentos to our mix. RYC is a company dedicated to multiprotein processing and marketing with the production centers in the state of Puebla, Mexico as well as approximately 21 stores located across Puebla, Oaxaca, Veracruz and Tlaxcala. With this acquisition, not only we are adding to our portfolio products of higher value, but also entering in the segment of properly owned stores. We are looking forward to capture the identified synergies as a result of the actions implemented mentioned above, our total sales increased 25.9% when compared to the first quarter of 2021, which was not enough to offset the 27.1% increase in cost of sales.

At the end, that pressured our EBITDA margin, which was 14.4% in the first quarter of '22 compared to the 15.1% reported in the first quarter of '21. As least a bit early in our press release, we remain committed to our growth strategy. In that end, we reported a CapEx of MXN 915.2 million for the quarter, which compared to the MXN 555.7 million for the same period of 2021. We are certain that our financial and operating discipline will allow us to continue supporting our growth plans while facing the uncertainties and volatilities of the market in which we compete. That, at this point, are difficult to predict. 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 2022 net sales totaled MXN 24,367 million, MXN 5,009.4 million or 25.9% higher than the MXN 19,357.6 million reported in the first quarter of 2021.

Total cost of sales for the quarter was MXN 19,240.5 million, representing an increase of 27.1% when compared to the same period of 2021. The mentioned combination resulted in a gross profit of the quarter of MXN 5,126.5 million with a gross margin of 21%. This compares to a gross profit of MXN 4,218 million and 21.8% margin reported in the same period of 2021.

The total SG&A for the quarter was MXN 1,999.1 million, representing 8.2% of total sales, which compares to the MXN 1,637.3 million and 8.5% of total sales achieved in the first quarter of '21. Operating margin in the first quarter of '22 was 12.9% compared with a 13.2% risk in the same period of 2021. Our EBITDA margin was 14.4% for the quarter, an increase when compared with the 15.1% in the first quarter of '21. For the quarter, we had a net financial expenses of MXN 235.7 million compared to the net financial income of MXN 319.6 million for the same period of 2021. This was a result of the revaluation of the Mexican peso versus the U.S. dollar at the end of the first quarter '22.

Our total taxes were MXN 778.4 million for the quarter, slightly lower than the MXN 803.9 million recognized in the same quarter of 2021. All the above led us to a net income of MXN 2,128 million for the quarter, resulting in an 8.7% net margin. compared to the MXN 2,074.6 million and 10.7% margin reported in the first quarter of '21. The net income per share was MXN 3.60 the first quarter of 2022 compared to the MXN 3.51 for the same period of 2021.

Our CapEx was MXN 915.2 million, an increase when compared to the MXN 555.7 million in the first quarter of '21. Part of this increase is related to the integration of RYC Alimentos asset. In our 2022 Annual Shareholders' Meeting, we had last Monday, the company announced the buying of cash dividends in the amount of MXN 1.64 per share or MXN 19.68 per ADR. That's all, and thank you, and I will now return the call back for final remarks, Rodolfo.

[Rodolfo Ramos, executive]

Thank you, Daniel. As we enter in the second quarter, uncertain conditions of the commodities market remain. So far, we have been able to offset part of that negative impact to our hedge strategy, operating efficiencies, sales mix and pricing, both in the Mexican and in the U.S. market.

However, we are aware that the benefits related to our hedging strategy at some point will be reduced. In that regard, our operating and financial discipline will be key not only to better face uncertainties of our industry, but to be able to grow with profitability under a volatile landscape.

With that, we will now take your questions.

[Operator]

[Operator Instructions] We have a question from Luis Willard from GBM.

[Luis Willard Alonso, analyst]

So, Rodolfo, I mean the current circumstances, inflation, commodities, et cetera, as you mentioned in your remarks, have certainly made it difficult for short-term investors to really see the business long-term prospects. And it was nice to see -- to hear you ramp up CapEx this quarter to continue growing the business. So can you share with us how do you see Bachoco's growth potential and profitability for the long term? And has anything changed that view?

[Rodolfo Ramos, executive]

Well, it's very complicated to predict what is going to happen in the future because the volatility that we have been seeing in the commodity markets has been huge. So it's very difficult to predict how it's going to be those commodities. But in terms of the market, I've been seeing a stability in terms of the balance between demand and offer.

So that can give us some color about the pricing. The problem is to predict the cost. So I can tell you that the pricing is going to be strong. But I really don't know how it's going to be the raw materials, mainly grains and soybeans in the near future.

[Luis Willard Alonso, analyst]

Correct. So I mean, yes, the short term is complicated, but thinking long term do you see your EBITDA margins and especially the growth of the industry and yourselves to faster than that we're seeing, maybe faster even than GDP growth?

[Rodolfo Ramos, executive]

We are expecting in the long term to maintain our EBITDA very close to what we had in the past. All those increases in the cost in the midterms, we are going to be able to translate the cost -- that cost to the pricing. So in that regard, we are seeing a normalized EBITDA.

[Operator]

Our next question comes from Juan Ponce from Bradesco BBI.

[Juan Ponce, analyst]

We have seen you actively pass down the pressure, the cost pressure. I mean, this very challenging environment which led to really strong top line growth. Do you see any demand being impacted in the near future? Or what should we expect from the plan to control inflation? And how could it impact Bachoco.

[Rodolfo Ramos, executive]

Well, obviously, with higher prices, the demand can be reduced. But the advantage is with chicken. Chicken is at the moment, the cheapest protein. So we are expecting to maintain the demand on this protein in the near future. And even we are seeing it mainly in the United States, a very tight supply of meat because of the hatchability of the breeders and that's causing a reduction in the availability to find baby chicks. So the market is going to be tight. The supply is going to be tight. So we are not expecting a problem with the balance between offer and demand, which can tell us that we can have normalized results in terms of the margins.

[Operator]

Our next question comes from Ulises Argote from JPMorgan.

[Ulises Argote Bolio, analyst]

A couple here from my side. So I think the first one, there was on the news flow a couple of days ago, this outbreak of bird flu, I think, in the state of Coahuila. So anything relevant there that we should have in mind in terms of precisely that kind of supply output that you were commenting growth?

[Rodolfo Ramos, executive]

Well, right now, we have just knowledge of this outbreak and the state of Coahuila. And we have some farms around there. But right now, we tied our bio-security measures in order to prevent any problem in that area. Right now, we are just sampling all of our farms in order to be aware if there are any problem.

At this moment, the results have been negative. But it can be a big challenge in that in that area. We are not so exposed with our farms because as you know, our footprint is all the country. We have farms in every location in every geography into the country. And we have, at this moment, around 30% of our hatching egg supply is coming from the States. So at this moment, we feel very comfortable with our sourcing of hatching eggs to maintain our production in Mexico even in the States.

[Ulises Argote Bolio, analyst]

Yes, that's super helpful. And then the other one, maybe a follow-up to the previous question on that plan let's say that the government is set to announce on controlling inflation. Chicken obviously has been one of the items that has been named there on that basket of products. So anything that you can share with us in terms of that, any expectations, that would be very helpful as well.

[Rodolfo Ramos, executive]

Yes. The government is trying to establish a program to control the inflation, and they include 24 goods. Among those 24 goods is whole chicken, there's eggs, there's beef and some parts of pork. Those -- among others, there are 24 products. But those are the products that affect us.

They said there's not going to be price control, which is very important. And there is going to be some help for the distribution, including the reduction on the taxes of the gasoline and diesel. And there are some actions to improve the efficiencies in the transportation of the goods. So there are some areas that they are working in order to reduce the cost, reduce the transportation cost and the margins and the sales of the products and the retail or the traditional -- in the traditional market.

So there are some actions that next week, there's going to be a the follow-through meeting to see what actions can work. They announced and there -- so our thoughts are there in this case, they are presenting us a program to increase the domestic production of corn, which is very good. But it's not going to be -- the effect is not going to be immediately. These are long-term actions, which is very good, but the effect is not going to be immediately.

So we are going to be very close to this initiative in order to see what can we do and we are going to do our best in terms of inflation control.

[Ulises Argote Bolio, analyst]

Okay. No, that is perfect. And just maybe the final one. Any updates that you can provide or any updated time line on the on the share acquisition offer that was announced a couple of years back.

[Rodolfo Ramos, executive]

Well, Daniel?

[Daniel Salazar, executive]

No, Ulises, at this point, we don't have any additional information apart of what the announcement that we provide. Once, of course, we have additional information, we will share with all you guys.

[Operator]

Our next question comes from Alan Alanis from Santander.

[Alan Alanis, analyst]

Congratulations on the results, pretty impressive results. And a follow-up on the previous question regarding the scenarios in terms of -- I mean, there's an elephant in the room, right? We're talking about operations for a company that might not be public in a few months. So I mean the -- sort of making results and the stock is not moving. So I guess the way to frame the question is what are the scenarios and what's the timing for that potential tender offer from the majority shareholders and how does it affect or not the operations of the company in the foreseeable future?

[Daniel Salazar, executive]

We cannot answer that question, Alan, because we don't have additional information when the family will make the filing to the authorities. But what we can share with you is that the company is operating in the same way. We haven't had and we neither foresee any additional changes in the operation of the company. So we are very focused on working on given the results of -- as we usually have delivered for the company. So at this point, we don't have any additional information.

[Alan Alanis, analyst]

Got it. And that's really useful already, Daniel. So basically, if and when could this family make the filing, that filing will what's the procedure there? I mean the Board will receive a notice that the family has made a tender offer. The price has been already made public, right, almost MXN 82. Then what happens next? I mean would you call for a shareholders' meeting? How long does that take? I just want to get a sense of the whole timing of how this evolves once the catalyst is triggered by the filing of the official tender offer by this family.

[Daniel Salazar, executive]

Well, as far as I know, once the family -- once the authorities authorize the tender offer, the Board of the company will give an opinion on the price in the 10 following days once the offer is authorized. It's the only thing that I know that the company, the Board of the company should do. But as I said before, the company in this process is neutral. So this is an externality for us actually.

[Alan Alanis, analyst]

Yes. No, understood. Understood. And this is something on the shareholders, not for management to view. I mean -- but basically, just to understand better because you're closer to the whole situation to than any of us basically if and when the family files, then the Board will give an opinion if they think it's a fair or not an unfair and they'll give their reasons. But then you have to go to a shareholders meeting, right?

[Rodolfo Ramos, executive]

Yes.

[Alan Alanis, analyst]

Okay, got it. No. Okay. Well, again, congratulations on the results and best of luck with the other process, which I think right now, everybody's mind is that's what's controlling the price of the stock in any case.

[Operator]

[Operator Instructions] The next question comes from Jay Hill from Tweedy, Browne.

[Jay Hill, analyst]

So in the context of this proposed tender offer by the controlling shareholders, I want to ask you a hypothetical question. So hypothetically, if Tyson's chicken or some other strategic buyer offered MXN 81.66 per share for 100% of Bachoco, all 600 million shares. I want to know how would you -- as the management team of Bachoco, the CEO and the CFO, advise the Board on the fairness of that hypothetical offer price?

[Rodolfo Ramos, executive]

Jay, I cannot answer a hypothetical -- I cannot give you a hypothetical answer for a hypothetical question. Actually, the company cannot have an opinion in this tender offer. So it's unfair to try to answer that question.

[Jay Hill, analyst]

Well, I mean, Bachoco -- I mean, look, book value is now basically MXN 50 billion. It's MXN 83 per share. The tender offer price of MXN 81.66 per share is now below even book value. So I want to make that point.

And then Daniel, can you tell me, so when the formal tender offer documents come, you said within 10 days, the Board is going to opine on the fairness of the offer. Is it the entire Board of all 12 members that are going to opine on the fairness? Or is it the only 4 independent directors that are non-conflicted that are going to opine on the fairness of the offer price?

[Daniel Salazar, executive]

As far as I know, the Board is the one that should share the opinion based on the directors that are completely independent. .

[Jay Hill, analyst]

So it's just the independent directors you would expect? Four independent directors will be the one opining on the fairness of the pricing.

[Daniel Salazar, executive]

That's right.

[Jay Hill, analyst]

That's right. Okay. And I guess just a final other point. I mean, if you look at all of the precedent mergers and acquisitions of companies that are similar to Bachoco and you evaluate the tender offer price and the EV to sales, price to book, EV to EBITDA, EV to normalized EBITDA, I can tell you that the price looks extremely low relative to all other similar transactions. And so I guess, as a shareholder, of Bachoco, I think you guys have put together terrific results here, but we're counting on the independent directors to fulfill their fiduciary duty of negotiating on behalf of minority shareholders with the controlling shareholder in this situation.

[Daniel Salazar, executive]

I cannot answer that, Jay. As far as I know, the only duty that this independent director is to have an opinion on the fairness of the price, but not to negotiate any tender offer with investment community. And it would not be fair to analyze.

[Jay Hill, analyst]

Yes. Would that -- would the independent directors that are going to opine, would they hire completely independent investment bank to do a proper fairness appraisal of the value?

[Daniel Salazar, executive]

Yes. I think they should do that in that way.

[Operator]

Our next question comes from Don Noone from VN Capital Management.

[Patrick Noone, analyst]

Just to follow up on that last point. Can we assume that the Board or the independent directors have already hired a financial institution to give them a fairness opinion because I guess 10 days is clearly not enough time to receive the tender offer and turn around a fairness opinion. I don't think so. Can we assume there's currently a financial institution retained by the independent directors?

[Daniel Salazar, executive]

Well, I cannot answer that question because I don't know if they have hiring someone else. But what I can say is that according with the terms of the authorities, taking for authorized a tender offer, this will take probably more for weeks once the family members filing or start the filing to the authority, so this will occur in the next month at least, I think. .

[Patrick Noone, analyst]

Okay. So the 10 days is not really a real number. It's going to take long.

[Daniel Salazar, executive]

Yes. But because the day starts once the authority authorized the tender offer. So if the family haven't started the filing, the authorities will take, as I mentioned, more than a month analyzing the documentation in order to approve the tender. So it will take place in the next month or 2 month at least.

[Operator]

[Operator Instructions] At this moment, we have no further questions. I would like to turn the call over to Mr. Ramos for closing remarks.

[Rodolfo Ramos, executive]

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

[Operator]

Thank you. This concludes today's conference call. We thank you for participating. You may now disconnect.