Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. My name is Hilda, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2020 Industrias Bachoco Earnings Conference Call. [Operator Instructions] I will now turn the call over to Maria Jaquez. Maria, you may begin.

[Maria Jaquez, executive]

Thank you, Hilda. Good morning, and welcome to Bachoco's Second Quarter 2020 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 guarantees 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 law, Industrias Bachoco undertakes no obligation 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 2020 with comparative figures for the same period of 2019 in Mexican pesos. As a reference, the exchange rate as of June 30, 2020, was MXN 22.96 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. Like we stated yesterday in our press release, during the second quarter of 2020, we faced unprecedented challenges in our operations in Mexico and in United States due to COVID-19 pandemic, making this an atypical quarter and mostly likely an atypical year.

We observed 2 main effects related to confinement measures both in Mexico and in United States. On one hand, we saw a contraction in our food service channel as a result of the restaurants and hotels being closed or partially closed. On the other hand, we observed a contraction in the demand across our business line, mainly driven by the economic growth slowdown. Bachoco estimates that the contraction in Mexico's GDP for the second quarter was about 15%. The aforementioned conditions in combination with our poultry industry growing at a normalized rate created an oversupply conditions, which put pressure on prices for most of the quarter.

Regarding our cost of sales, prices of our main raw materials in dollar terms were at the low levels for most part of the quarter. However, 22% depreciation of the Mexican peso offset that benefit in our Mexican operation. This effect also had an impact in the consolidation of our U.S. operation results.

Regarding our SG&A and other expenses, we reported an increase mainly driven by COVID-related expenses, which includes expenses made to provide our team members with proper equipment to guarantee their safety at work, but also expenses related to our social responsibility, strategy, among others. In the case of our social responsibility strategy, between the months of April and May, we donated more than 260,000 kilos through 71 government institutions. This contributed to the nourishment of more than 1 million people. We also delivered chicken soup for people outside main hospitals in Mexico City, Morelos, Puebla and Nuevo Leon. With this initiative, we were able to deliver more than 80,000 chicken soup plates for those who are struggling the most.

Also at the end of the quarter, we announced that we completed the process with Mexican authorities related to the agreement to invest in Sonora Agropecuaria, SASA, a swine processor and distributor.

With this agreement, Bachoco will acquire 54.8% of SASA capital stock. The agreement also includes the investment of around MXN 2,000 million in CapEx in a 4-year time frame. This strategy not only will let us integrate forward our existing live swine business, but also will allow us to participate in the export market of this segment.

At the end of the day and under a very uncertain landscape, we managed to deliver positive operating results for both the quarter and the first half of the year. Also our balance sheet remained strong. As we reached a net cash level of MXN 15,222.9 million, which will enable us not only to continue supporting our growth plan -- plans, but also to continue helping our communities under this tough time.

At this point, I will turn the call over to Daniel 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 second quarter of 2020 net sales totaled MXN 16,431.9 million, MXN 452.2 million or 2.7% lower than the MXN 16,884.1 million reported in the second quarter of '19.

This decrease was mainly a result of lower volume sold in our main business lines and lower prices in our poultry segment. Regarding the first half of 2020, we reported net sales of MXN 32,170.3 million, which is 3.1% higher than the net sales for the same period of 2019.

In the quarter, sales of our U.S. operations represented 31% of total sales, which is higher than the 25.7% we reported in the same quarter 2019. It was mainly a result of the depreciation of Mexican peso quarter-over-quarter.

Cost of sales in the second quarter was EUR 14,574.5 million and MXN 88,131.8 million (sic) [ MXN 28,131.8 million ] in the first half of this year. This represents an increase of 10.7% of the quarter and 9.5% for the year. Even when we had a positive effect due to lower volumes sold in the quarter, this was offset by higher unit costs, mainly driven by depreciation of the Mexican peso, which not only had a negative impact in our main raw materials cost in peso terms but also had a negative impact in the consolidation of our U.S. operation as in peso term.

Gross profit for the quarter was MXN 1,857.4 million with a gross margin of 11.3%, a decrease of 50.1% over the gross profit reported in the second quarter of 2019.

For the first half of the year, we reached a gross profit of MXN 4,038.5 million with a margin of 12.6%. This amount is 26.9% lower than the gross profit reached in the first half of 2019.

Total SG&A for the second quarter of 2020 was MXN 1,567 million or 9.5% of total sales compared to the MXN 1,550.8 million and 9.2% total sales of the second quarter of '19.

For the first half of 2020, SG&A totaled MXN 3,139.7 million or 9.8% of total sales compared to MXN 3,025.22 million and 9.7% of total sales for the first quarter of '19.

On the other hand, we have other expenses of MXN 207.5 million for second quarter of 2020 compared to MXN 5 million in the same period 2019.

In this line, we recorded COVID-related expenses not applicable to SG&A. Operating income for second quarter of 2020 totaled MXN 82.8 million and operating margin of 0.5%, lower than the MXN 2,163.8 million and a 12.8% margin reached in the second quarter of 2019.

The operating income for the first semester of 2020 was MXN 686.8 million and operating margin of 1 -- 2.1% lower than the MXN 2,498.9 million and the 8% margin reached in the same period of 2019.

The EBITDA margin for the second quarter was 2.7%, which is lower than the 14.7% EBITDA margin of second quarter of '19.

For the first half of the year, the EBITDA margin was 4.3%, lower than the 10.1% reach in the same period of 2019.

In the second quarter of 2020, we had a net financial loss of MXN 122.3 million and a net financial income of MXN 2,304.2 million in the first half of 2020. Those figures compared to a net income -- financial income of MXN 91.6 million and MXN 167.6 million for the second quarter of '19 and first half of '19, respectively.

For the second quarter of 2020, we have favorable taxes of MXN 11.2 million due to our reported loss before taxes. For the first half of 2020, our total taxes were MXN 849.1 million, which is 10% higher than the MXN 772.1 million reported in the same period 2019.

All the above led us to a net loss of MXN 28.2 million for the quarter with a negative margin of 0.2%. For the first half of 2020, the net income totaled MXN 2,141.9 million with a net margin of 6.7%. The net loss per share was MXN 0.06 per for the quarter. And for the first half of 2020, we reached a net income per share of MXN 3.55 compared to a net income per share of MXN 2.65 and MXN 3.15 for the same period of '19, respectively.

Going into our balance sheet. We integrated the figures of our recent business agreement with Sonora Agropecuaria. After the consolidation, total assets increased 4.8% when compared to the year-end of '19. Our net cash was MXN 15,422.9 million at the end the quarter, higher than our cash level of MXN 14,454.3 million at the beginning of the year.

Our CapEx was MXN 992.4 million. We have maintained our plans of spending around MXN 100 million by the end of 2020. Those projects will be to support our organic growth and maintain our facilities at high level of productivity.

Thank you, and I will turn the call back to Rodolfo for final comments.

[Rodolfo Ramos, executive]

Thank you, Daniel. During the quarter, we observed a poultry industry making efforts to compete with the current levels of demand. As a result, we are entering the third quarter with a better trend, particularly in prices. However, under this volatile and uncertain conditions, it becomes key to be very close to our markets in order to adapt to the demand as quickly as possible.

With what we are seeing right now and as some sectors are starting to reopen, we expected for the second half of the year to behave better than the first half. However, it is difficult to predict. We will continue to focus on those things we can control so we can be in good chance to face any challenges that may come.

We will also be focused on quickly integrating the SASA operation in order to capture the synergies that we were identified. Last but not least, we will reinforce our commitment with our communities as we work on the second phase of our social responsibility strategy.

With that, we will now take your questions.

[Operator]

[Operator Instructions] We have a question from Miguel Tortolero from GBM.

[Miguel Angel Tortolero, analyst]

Considering the -- your comments on -- of the conditions of oversupply following a weak demand during the second quarter and the comments, Rodolfo, you just made about the start of the third quarter. Could you give greater color of what has been the evolution of this supply-demand balance, both from the supply and from the side perspective by the end of the quarter and starting this quarter? And the second one would be on EBITDA. I mean, it's been a tough first half in terms of profitability. But considering the expectations of potential higher prices for the second half, apparently greater visibility in terms of FX now, could you give us some color of how your full year expectations have changed? What would your base scenario be in terms of EBITDA for the second half?

[Rodolfo Ramos, executive]

Sure. As you know, the second quarter normally is the best quarter of the year. The seasonality of the industry is that second quarter is normally the best. This year, it's the opposite. This is the worst second quarter ever. So -- and the thing is because seasonality is the base line, normally the industry set more chicks and farms in order to increase the supply for this quarter. That's a normal situation every year.

So in this year, with the pandemic's effect, then the -- most of the hotels and restaurants shutdown and the lockdown of some -- in some states of Mexico, we had a very, very low demand. So that's the kind of perfect storm, higher supply, lower demand. And on the other hand, the other important thing was the peso devaluation, which increased our cost of sales.

So the combination of that -- of those 3 factors made the quarter. For -- at the end of the quarter, we saw a recovery on prices. That means that we observed a better balance between supply and demand at the end of the quarter. So in the month of July, we keep seeing that trend. So -- even then the prices are at a lower level than the last year, but we observed a better, better balance between supply and demand. And we are expecting that for the rest of the year -- for the second half of the year.

In terms of the EBITDA, I'm going to ask Daniel to help me with that.

[Daniel Salazar, executive]

Thanks, Rodolfo. Thank you, Miguel, for your questions. At this moment, it's very difficult to predict how will be the conditions for the second half at all. But let me tell you that even that the balance of supply and demand that Rodolfo just mentioned that we observed recently, it's difficult to predict in the case of the demand, how much and how fast will recover for the second half.

But even so, we think that probably we will maintain the same level of profitability that we delivered in the first half of the year. I mean, medium half -- medium single digit, I would say.

[Operator]

The next question comes from Alan Alanis from Santander.

[Alan Alanis, analyst]

I have 2 questions. One of them has to do with the industry and the other one has to do with the strategy of Bachoco. The one with the industry is, you were breaking even on the second quarter on the operating income level. How are your competitors doing? I mean, because you're the biggest player. And are these competitors with some sort of debt -- and we know you don't have any debt. And would you say that this second quarter you could be gaining some market share or some of your competitors in the industry might be having a harder time than yourself? That's my first question. And then I'll ask you a specific strategic question regarding Bachoco.

[Rodolfo Ramos, executive]

Sure. The first one, we really don't know what is the results of our competitors because we are the first company -- public company in report. So we have to wait to the other -- to our peers to report. So we really don't know how are they doing. But in terms of -- if I've taken account the history of the industry, Bachoco has been growing and captured some market share in this kind of situations. Because we have -- as you can see, our cash position is very strong. So normally, we use this cash to consolidate our company. So in that kind of -- in this kind of event, Bachoco normally, it has a more advantage of our competitors.

So in terms of our strategy, we have some strength like our brand. Right now, with the COVID issue and the pandemic, people is looking for help, secure products. And the branded product has an advantage. We have seen an increase in our sales of the product that we branded in the retail, for instance.

And the other advantage that we have is our distribution network. We have more than 60 distribution centers all across the country. And with those -- and we have more than 1,000 routes in delivering the product to our customers. So delivery is -- right now is very important for the consumer, too. So we are in a very good shape to capture some market share in these -- under these conditions.

[Alan Alanis, analyst]

Got it. That's very clear, very useful. Just the question about strategy has also to do with value-added products. I know that your 2 largest -- 2 of your largest competitors, I mean, JBS with Pilgrim's and Tyson have been focusing in the respective core markets, I mean, Brazil and the United States, more the United States, in much more value-added products. And it seems that this focus on more value-added products has allowed them to have -- to capture bigger margins. And that is their strategy or their hope to more stable margins. And it seems that -- where is Bachoco on that? And do you really want to go full in -- on the more value-added products now that people are looking for these products in the supermarkets for convenience of -- yes, for convenience to cook at home? Or do you think that it's better to keep the course and remain being the largest player of live chicken in Mexico with, as you say, with very, very strong distribution and a very strong balance sheet. I don't know, if this question makes sense, Rodolfo.

[Rodolfo Ramos, executive]

Yes. Yes. It's -- the -- one of our advantage is our distribution of the -- the contribution of our products or our mix of products, for instance, as you mentioned, we are very strong in the live market, public market but in the value-added products and the branded products that I refer, all those products, then the -- deliver products with healthy products, the sanitation of the product -- the people trust in our brand. And we are increasing, and we are investing some money in the facilities to deliver this value-added products, frozen products, fresh products and fully cooked products. We have -- we are running our processing plants for value-added that -- not 100% capacity because we have some idle capacity. This all the time has been our strategy to have some idle capacity to respond to the market, the variations of the -- volatility of the market. And that's a very important point. But in the other hand, the -- in the past with the Mexican fast food, it's a very important channel, too. And with some of our customers, most of our customers in that segment, we did some advertising campaigns and some co-branding in order to maintain or even increase the sales.

At this moment, I can tell you that those customers are selling more products than before the COVID issue. So they cover the market. And right now, they are selling -- even or more products.

[Alan Alanis, analyst]

Got it. Yes, that makes sense. That's consistent with what we heard particularly from the fast food to take at home. These people are desperate to eat outside of the house and even if it's take out.

[Operator]

Our next question comes from Ulises Argote from JPMorgan.

[Ulises Argote Bolio, analyst]

Just a couple of questions here on my side. I was wondering if you could provide maybe some details on the investments that you're going to make on the SASA business. Should we be thinking it kind of breaking similarly between the 4 years or maybe a bit more front loaded? So any details that you could share on that front would be really helpful.

And then the second one, maybe thinking on costs into the second half of the year. I know, Daniel, you already mentioned a bit more or less what's kind of the outlook for profitability to the second half. But maybe if you could elaborate a bit there on how costs are looking and maybe update on your hedging strategy.

[Rodolfo Ramos, executive]

Sure. I want to answer the first one, and the second I'm going to leave it to Daniel. In the SASA operation, our investment is going to be -- in order to produce the live swine, then we need for -- to full our processing plants. The company has 2 processing plants, 1 located in the Sonora state and the other one in Jalisco state. And right now, they are running at, let's say, 70% of the total capacity.

So the investment is going to be to put in shape those plants to run at 100% capacity. And in the past, this company used to buy the -- to acquire the live swine in the open market with some contracted producers. But the idea is to expand our live operations because, as you know, Bachoco owns some live swine operations. So we are looking to expand our capacity in order to fill both processing plants. That's the idea. And most of the product is for export, export to Japan, United States and China, mainly, and the rest of the product for the domestic market. So the combination of both markets is the ideal situation for this company. So we are going to spend more money in the -- let's say, the first 3 years. And at the end of the fourth year, it's going to be maybe 20% of our -- 18%, 20% of the total expenses. So we are going to put more money at the beginning.

[Daniel Salazar, executive]

Okay. Yes. And according with your second question, only says about the cost. According with the information we have and the visibility that we can get so far at this point of the year, we can see stable commodity prices for the rest of the year compared with the previous year. But if we consider that the most important variable that will affect our cost is the exchange rate. As Rodolfo mentioned at the beginning of the call, this was an important effect that we -- so far in our results. So it depends on the volatility of the exchange rate for the rest of the year. This will affect our cost. Even that we have, as you know, a very important part of our cash in U.S. dollar terms, the impact of the exchange rate affects directly our cost because we only have 2 months or 3 months of hedge of our raw materials. So whatever happened with the economic situation will affect the -- our cost for the coming months.

[Operator]

The next question comes from Andrea Quezada from MetLife.

[Andrea Quezada, analyst]

I would appreciate if you can provide more detail on this demand-supply imbalance, like how much demand drop in the second quarter or supply increase? How long do you expect this imbalance to last and how many quarters will take to come back to a normal market? And what measures are you taking to offset that impact?

And another question is, if you can provide a little bit of -- maybe some guidance in terms of, is your -- do you see any opportunities on M&A due to the current situation in the sector? And what kind of companies would you pursue, size?

[Rodolfo Ramos, executive]

Thank you for your question, Andrea. The first one, May -- in terms of the supply and demand, May is one of the best months of the year. And this is what normally makes the second quarter. And that's because of the demand and Mother's Day, May Day, 5th of May is Teachers' Day. And so there's a lot of holidays during May. And at the end of the month, start with graduations of the schools. And they normally consume a lot of breast meat. So this year, because of the lockdown, the shutdown of some big events, Mother's Day, the consumption just of this particular day was very, very low compared with the other years. So I can say that the reduction in that particular day was around 30% of the total consumption. So we saw a huge reduction in consumption.

Graduation, the consumption was not, because there is no graduations because of the pandemic situation.

So in the month of May than normally, we have an oversupply because of the condition of the month. Right now, we saw a lack of demand. That put a lot of pressure in prices. But in June, at the end of June and the first half of July, we saw a better balance between supply and demand because some players reduced their volumes. And even the -- normally, we reduce a little bit our volume for the third quarter because of -- we try to balance supply and demand.

So at this moment, we are seeing a much better balance between supply and demand. And you can see this effect on prices. And the second question, Daniel?

[Daniel Salazar, executive]

Thank you. The second -- well, only complimentary comment on that first question, Andrea, the demand dropped more than 10% in our case, in those months. Now talking about the M&A. Of course, with this situation, we think that we would see a more favorable environment of -- for M&A activities. And we are looking for companies -- I would say, middle-sized companies, not only in the chicken business, but also in other proteins in order to diversify our business line. And right now, we are looking for that kind of companies in Mexico geography.

[Andrea Quezada, analyst]

In Mexico and Brazil?

[Daniel Salazar, executive]

No, only in Mexico.

[Andrea Quezada, analyst]

Okay. Okay. But it could be imported or any other products?

[Daniel Salazar, executive]

Yes.

[Andrea Quezada, analyst]

Okay. I know, obviously, this is -- it could be confidential and all that, but what is the targets or the maximum level of leverage, for example, that -- would you have in case of M&A or how much cash is the minimum cash that you will maintain at the company? Just to have an idea because you have low levels of debt and a lot of cash. So how much of that cash maybe you are willing to spend, if time permits.

[Rodolfo Ramos, executive]

This usually depends on the size of the target, of course. But at the most, we feel comfortable to have a debt no more than 2.5x EBITDA.

[Operator]

[Operator Instructions] The next question comes from Héctor Maya from Santander.

[Héctor Manuel López, analyst]

I just wanted to know, Bachoco has a relevant structure in U.S. dollars. And well, most of your costs are grains. So would you consider a more long-term hedging strategy? Or what would be the rationale to have 3-month hedges instead of something more like other food and beverage players in Mexico? They have 12 or 18 months in hedges that maybe could help to stabilize or offset the swings in margins.

And also, I would like to know how much of your needs are hedged. Normally, do you hedge 20% or 10% of your grain needs for the year? How much would that be?

[Rodolfo Ramos, executive]

Well, in terms of the hedging, normally, we hedge the full year or maybe at more than a year with the customers then we have a contract with them. So we don't speculate with the prices of the raw material, not even with the dollar. So if we have a customer that wants to have a price for the whole year, we normally hedge their raw materials and we need to produce their products. So we can hedge 100% of their volume, but if we have a price agreement with them. So it's the only way that we can just hedge more than 3 months of our consumption because we don't want to speculate. We don't know if the market is going to be higher or lower. The -- and for that reason, we have just 3 months. Normally, we have 1.5 months. If we see that there is a good opportunity, we can expand our position a little bit more. And sometimes we work with the strategies with scales and put orders to some levels, and it sounds interesting for us. So we can do it. But with all the time, we are very cautious to do this kind of strategies to hedge more than 3 months.

[Daniel Salazar, executive]

The other reason, Héctor, is because we have the possibility or the capability to translate whatever impact we have, whatever change we have in the raw material cost to the price sooner or later depends on the balance of supply and demand because we participate in the traditional markets. So if we don't have a fixed price contract, we have this possibility, and that is the reason to not speculate.

[Héctor Manuel López, analyst]

And just to clarify the last part that was mentioned. So you have the possibility or the capability to pass that higher cost prices into products but only when supply and demand balances are more normalized.

[Rodolfo Ramos, executive]

Yes.

[Héctor Manuel López, analyst]

But in the meantime, it's -- you're not entirely able to translate that prices increasing into -- the prices of your balance, right?

[Rodolfo Ramos, executive]

Normally, the prices -- you can translate the prices in a period of 4 to 6 months. So if we had a coverage of our raw materials of 3 months. It's -- at the end, it's just 1 month and is open to the risk. So at the fourth month, we can start to translate this cost increase if that's the case to the customers. It's not immediately. Because as you mentioned, we have to adjust supply and demand again. So that happens in a period of 4 to 6 months.

[Daniel Salazar, executive]

And on the other hand, this period of time led the industry as a whole to -- at just the production volume to the demand in order to balance the supply and demand. So this industry have this advantage compared with other industry because the -- due to the life cycle of the chicken products, and we have the possibility of the industry but just specifically in terms of 2 to 3 months.

[Héctor Manuel López, analyst]

Got it. With the current uncertainty, are you confident that you will be able to translate this into prices in the next 4 to 6 months?

[Rodolfo Ramos, executive]

Well, right now, the raw materials are very stable, but maybe with trend to have better prices. Corn is very stable, soybean is the same. And the only factor that is very volatile is the hedging rate, but this can impact. But there, we have a very good cash position in terms of -- in dollars. Our situation in dollars is -- our position in dollars is good.

[Daniel Salazar, executive]

So if we suffer an increase in our costs, we, of course, will have the benefit in financial income in dollar terms.

[Rodolfo Ramos, executive]

That's the reason for the net loss, the appreciation of the peso.

[Daniel Salazar, executive]

Yes, that's right.

[Operator]

[Operator Instructions] At this moment, we show no further questions. Do you have any final remarks?

[Rodolfo Ramos, executive]

Well, thank you, everyone, 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 very much.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.