Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Richard, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2021 Industrias Bachoco Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Andrea Guererro, Investor Relations. You may begin.

[Andrea Guererro, executive]

Good morning, and welcome to Bachoco Second Quarter 2021 Conference Call. We released our financials yesterday after the 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 2021 with comparative figures for the same period of 2020 in Mexican pesos. As a reference, the exchange rate as of June 30, 2021, was MXN 19.95 per U.S. dollar.

Here with me are our CEO, Mr. Rodolfo Ramos; and our Investor Relations, Maria Jaquez. Now I will give the call to Mr. Ramos.

[Rodolfo Ramos, executive]

Thank you, Andrea, and good morning, everyone. During the second quarter, we observed an increase of close to 40% in corn and soybean meal prices when compared to 2020. In this regard, our focus on efficiencies to our production processes has allowed us to partially offset the negative impact on input costs. On the other hand, once you remove from the worst impact of COVID-19, economic expectations are positive both in Mexico and in the United States.

According to [ Banxico ], Mexico is expected to grow around 5.8% in 2021. While the economic projects and all the federal reserve expected for the U.S. and economic growth of 7%. This positive forecast is in combination with a good balance between supply and demand in the market in which we compete, has allowed us to successfully transfer the increases in raw material costs to our sales price. Particularly in our chicken segment, we observed good levels on demand in the main commercial channels in which we compete and all of our production was absorbed by our markets. We didn't see either oversupply condition or high inventories in the industry in general.

Regarding the U.S., good dynamics in the economic have incented by consumption of the point that we kept observing good deals of commodity prices during all the quarters and expectations remain strong.

Regarding our other segments, both volumes sold and revenue remained strong for the quarter. Our biggest challenge remains in the pork business line since currently, most of our net needs come from third-party companies, which is currently putting some pressure on margins for this category.

As a result of the conditions above, our total sales and cost of sales increased 27% and 16%, respectively, when compared to the second quarter of 2020. We observed and we reported an EBITDA of MXN 2,437.4 million with a margin of 11.7% and earnings per share of MXN 2.46 for the quarter.

If we look at the first half of 2021, we reached a net sales of MXN 40,218.6 million, which is 25% higher than the 6 -- first months of 2020, achieving an EBITDA margin of 13.3% higher compared to the EBITDA margin for the same period of 2020. The company remained in a healthy financial condition as we reached a net cash level of MXN 19,490.6 million, which allow us to continue the support of our growth plan as we reported a CapEx of MXN 1,375 million for the second quarter of '21.

Now Maria will join us for the discussion of the financial results.

[Maria Jaquez, executive]

Thank you, and good morning, everyone. As a result of the conditions mentioned before, our company's second quarter of '21 net sales totaled MXN 20,860.9 million. MXN 4,429 million or 27% higher than the MXN 16,431.9 million reported in the second quarter of 2020. This increase was mainly a result of higher prices across our main business lines, a better sales mix and the reflection of the effects of higher raw material costs.

Total cost of sales for the quarter was MXN 16,901.1 million, representing an increase of 16% when compared to the same period of 2020. The mentioned combination resulted in the gross profit for the quarter of MXN 3,959.8 million with a gross margin of 19% higher when compared to the MXN 1,857.4 million and 11.3% reported in the same period of 2020. For the first half of the year, we reached a gross profit of MXN 8,177.9 million with a margin of 20.3%. This amount is higher than the gross profit of MXN 4,038.5 million and 12.6% margin reached in the first half of 2020.

Total SG&A for the second quarter was MXN 1,729.2 million, representing 8.3% of our total sales, which compares to the MXN 1,567 million and 9.5% of total sales achieved in the second quarter of 2020.

Operating income for the second quarter of 2021 totaled MXN 2,088.8 million and operating margin of 10%. This is higher than the 0.5% margin reached in the second quarter of 2020. On the other hand, operating margin for the first half of '21 was 11.6% compared to the 2.1% reached in the same period of 2020. Our EBITDA margin was 11.7% for the quarter, an increase when compared with the 2.7% for the second quarter of 2020. While for the first half of the year of 2021 and 2020, margins were 13.3% and 4.3%, respectively.

For the quarter, we had a net financial expense of MXN 97 million for the quarter and the net financial income for the -- of MXN 222.6 million for the first half of the year compared to the net financial expenses of MXN 122.3 million and a net finance income of MXN 2,304.2 million for the same period of 2020. Our total taxes were MXN 548.7 million for the quarter compared to the favorable MXN 11.2 million recognized in the same quarter of 2020. For the first half of 2021, our total taxes were MXN 1,352.6 million higher than the income taxes for the same period of 2020.

All the above led us to a positive net income of MXN 1,443.2 million for the quarter resulted in a 6.9% margin compared to a negative net income of MXN 28.2 million and negative 0.2% margin reported in the second quarter of '20. For the first half of 2021, net income totaled MXN 3,517.8 million with a net margin of 8.7%, which is higher than the MXN 2,141.9 million for the net income and 6.7% margin for the first half of the '20.

Going into our balance sheet, we kept a healthy financial structure with a net cash level of MXN 19,490.6 million when compared to the net cash of the MXN 15,530.3 million we had at the end of the year 2020. Lastly, our CapEx was MXN 1,307.5 million, an increase of 31.7% when compared to the same period of 2020.

With that, I will turn now the call to Rodolfo for final comments.

[Rodolfo Ramos, executive]

Thanks, Maria. Even though the second half of the year is seasonally our toughest, so far, we are entering with a good balance between supply and demand. Despite that, the comparison with the same period of 2020 will be difficult, particularly considering that the corn and soybean meal prices are still high year-over-year. So far, we have been able to transfer some of those increases to our sales price, and we think we can keep doing it to some extent. However, we are entering a period where the seasonal demand is soft. So that might represent some challenges in terms of our price increases.

In terms of what we can control, we will continue to be focused on efficiencies, improvements in our sales mix and our organic growth strategy in order to keep delivering positive results to our shareholders.

With that, we will now take your questions.

[Operator]

[Operator Instructions] And our first question comes from Mr. Fernando Olvera from Bank of America.

[Fernando Olvera Espinosa de los Monteros, analyst]

I have 2, if I may, both related to Bachoco business in Mexico. Can you comment how does the balance between supply and demand perform month-by-month during the quarter? And how can this sustain pricing in the remaining of the year? And also, as you mentioned that you were witnessing also a good supply and demand during July, if I understand correctly. And my second question is related to your EBITDA margin. We saw the first half a very solid margin. So how do you expect the margin to end up at the end of the year given the increase in grain cost?

[Rodolfo Ramos, executive]

Well, thank you, Fernando, for your questions. Well, starting with the second one, I expect the EBITDA margin for the second quarter will be more normalized even in the lower part of the normalized EBITDA margin. And that is because of the cost of the raw materials. In the near future, we don't see a price reduction in the corn and soybean meal prices. So that is going to put some pressure on the margins.

And in terms of supply and demand here in Mexico for the rest of the year, well, we have been very disciplined in terms of cover just the requirements of our customers. We are very, very close to our customers to meet their needs and with a very, very disciplined tracking of their consumption and our production our -- and our supply. We are just -- keep very, very close to the -- to our customers and to the market in general to see what is the effect and for the demand side, trying to reach that demand very closely. And because we have our projection for almost 13 weeks because of the period of [ barring ] the birds in the farms, the incubation period, things like that. We know that the second half is going to be tough because of the demand, because of the seasonality. But with our discipline in our production, I think we can just maintain that -- try to maintain that balance between supply and demand.

[Fernando Olvera Espinosa de los Monteros, analyst]

Balance, I mean, how do you see pricing? I mean, do you think that pricing could remain relatively positive to help you mitigate grain pressure?

[Rodolfo Ramos, executive]

Well, it's going to be tough to predict about prices in the future because the thing is that the third quarter normally is the weakest in terms of demand. But with the discipline that I mentioned, we are thinking that we are going to maintain that the same level. I'm not sure if we are going to absorb the raw material prices at 100%. But for sure, some of those increases, right now, we are just passing those increases to the sales price. And on the other hand, our efficiencies has been good. We have been very, very close to our productivity, following all the results and all the levels, farms, processing, our supply chain is working very, very well. So we can deliver good results and absorb part of those cost increases to our efficiencies and trespassing some of those increases to the sales price.

[Operator]

Our next question on line comes from Mr. Emiliano Hernández from GBM.

[Emiliano Hernández Marvan, analyst]

Congrats on the results, very impressive. Just a quick one on capital allocation. You have now reached a very impressive MXN 19 billion in net cash. What are the main priorities on deployment there? Could we see maybe a transformative acquisition in the short term or maybe an external dividend would make sense?

[Maria Jaquez, executive]

So like we have mentioned in the past, we think that with the results that we're now seeing, we think that we have the firepower to move either way to go after a transformational acquisition or a series of acquisitions, which we think at this point seems more feasible. Currently, we are looking at opportunities outside. But at this point, it's very soon really in the process for us to share something with you particularly, but we want to give you the message that we are actively looking, that we are participating in some process in order to make a better use of this cash. Like you know, the priorities are in Mexico in -- to grow in other proteins. And outside Mexico, the priority is in chicken.

[Operator]

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

[Ulises Argote Bolio, analyst]

A couple more on my side. First, Rodolfo, you mentioned in your opening remarks a little bit on the SASA business and maybe you guys are facing some challenges there on the supply of pork and how that cost evolution has kind of ramped up. But maybe can you provide us an update of how the investment there that you are making the CapEx for that business to grow like the integration of the business, how that is going? What do you expect probably in the coming quarters from that? And then maybe if you can elaborate a bit more on the U.S. market dynamics. Obviously, we saw the more challenging trends already in the quarter. That's from the very tough comp base from last year, obviously. But what are you seeing there in terms of pricing evolution of volumes of how the industry is kind of evolving? That would be very helpful.

[Rodolfo Ramos, executive]

Yes. Well, the first question about the pork industry. For the rest of the year, the situation in the pork side is going to remain in the same direction. Right now, we approved the project to -- the CapEx project to expand our live production. Right now, 80% of the requirements of that business are coming from the third company. So right now, we have a huge [ exposure ] to the live price of the hogs. So right now, the price -- the live price is very high. So that puts a lot of pressure in our margins because we are buying our raw material for this business at a very high price. Right now, in the last month, we started to see a trend to reduce those prices. So I think the rest of the year is going to be more friendly in terms of the pricing of the live hogs. Our project -- we'll start our project, and we are in line with our expectations in terms of the schedule of the building or the expansion of our own capacity to produce our own live hogs. Our goal is to have at least the opposite, 80% coming from our operations, our own operations. So -- and saying that, we are going to expand our international markets, mainly Asia and even in the United States. Right now, we have a huge opportunity in that side of the business to export to some international markets, including United States.

In terms of our situation of the U.S. industry and volumes, right now, we are seeing a very good balance again between supply and demand. Even the inventories at this time are lower than the frozen inventories of chicken compared with the same period of the last year. So demand is there. And with the opening of all the states, we are seeing a rebound on the -- for the demand side. And even the pricing of commodities, breast meat, leg quarters at a good level. This is a small reduction, but I think because of the inventories, we are going to see a good demand and the balance between supply and demand.

The main problem there as you know is labor. Labor is putting a lot of pressure in all the processes. So we are seeing a lot of disruption at the lane of the supply chain, some in the live production, some in the processing, some in the transportation. And all the areas of the industry are affected by the shortage of labor. So we are following very closely the policies of the U.S. government in terms of the unemployment help and stimulus that the government is giving to the people in order to build the best strategy to staff our facilities. At this time, we are running at our capacities, but with a lot of effort to find labor. That's the main issue, labor.

[Operator]

Our next question on the line comes from Alonso Garcia, Private Investor.

[Alonso Garcia]

Rodolfo, I have a question. I expect management to track of performances of competitors because I consider it a healthy habit. How would you analyze and compare Bachoco's performance in comparison and with the volatility movements of competitors' performance just like, say, Tyson Foods in the U.S. market? Meaning the correlation between their performance and yours?

[Rodolfo Ramos, executive]

Well, in terms of the benchmark, we participate in [indiscernible], and we use those figures just in production. And in terms of the market, we use just the public information that exists in the market, and that's it.

[Operator]

Our next question on the line comes from Guadalupe Villar from Credit Suisse.

[Guadalupe Villar, analyst]

Congratulations on your results. Now my question is regarding the electricity demand in the sense that do you see the demand more resilient now to price increases? That will be my first question. And in terms of regions, where do you see a clear improvement in terms of consumer demand?

[Maria Jaquez, executive]

Well, in terms of the part of your first question, our pricing is very much correlated to the GDP, GDP on one hand and also it has a strong correlation with grain prices. So like Rodolfo has mentioned before, for us, it's very important to follow with the economic growth, both in Mexico and the U.S. As long as there is a growth in that side, we think that we are -- that, that gives us a chance to actually trespass the increases in raw material costs, and that is something that we have been seeing in these quarters because the -- all the elements are putting in, in that way. Like he mentioned also in his remarks, as long as this is something that is sustainable and also, there is a supply and demand imbalance in the market, we think that, that situation could be sustainable as well.

[Guadalupe Villar, analyst]

That's very clear. And in terms of the regions, do you see a clear improvement?

[Maria Jaquez, executive]

In terms of the regions, when you talk about regions, do you refer to Mexico and the U.S. or regions within Mexico?

[Guadalupe Villar, analyst]

If you are more particular within the country, that would be very helpful.

[Rodolfo Ramos, executive]

Well, in Mexico, we have practical 3 regions, the north part of the country, the central part and the south, and we are seeing a balance in the normalized market. For instance, the Southeast of Mexico, it's more important in live chicken business, and that segment of the business has been very good in terms of the balance between supply and demand. So prices are normalized. The central part of the country, it's a combination of a traditional market and the supermarkets and the retail market. So right now, the traditional market has been in a very good shape, too. And in the north part of the country, the consumption is more to the retail, the big supermarkets and the [ deli ] and the food service. So right now, the north part of the country, it's normalized in terms of the supply and demand. Right now, we are seeing a rebound in the consumption and the food service, for instance, in Riviera Maya with the hotels start to ramp up in terms of the occupancy, and we are seeing a recovery in those consumptions.

In the United States, as I mentioned, the disruption in the supply chain has been -- maybe because of the shortage of labor, there's a lot of disruption, not just in production or processing but in transportation and the -- at the [indiscernible] of the supply chain, there's some disruptions, and we have been dealing with in this quarter, and we expect for the rest of the year, and we are going to have that challenge. So our strategy there in the U.S. operation is to maintain our working force and our processing facilities. So we are not seeing like any other big issue there.

[Operator]

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

[Héctor Maya López, analyst]

Congratulations on your results. I couldn't join -- sorry, I couldn't join in the beginning. So sorry if this was already asked. But considering the second half of the year is a more difficult comparable base and also taking a look at the current raw material price environment, where do you still see opportunity to continue implementing pricing? I mean, even in sequential terms, what channels still have room for further improvements and specifically what SKUs? And after that, I would have a follow-up.

[Rodolfo Ramos, executive]

Well, it's going to be tough to increase the prices for the second half, maybe because seasonally, the third quarter is the weakest quarter. And it's not going to be -- it's going to be tough to trespass cost increases to the price at the beginning of the year. But well, at this moment, the margins, we are expecting a more normalized EBITDA for the second half of the year, let's say, in the upper part of 1 digit. I think that we are expecting a normalized EBITDA for the second half.

And I'm taking in account just right now the volatility of the raw materials is huge. But right now, the prices have been, let's say, $5.50, $5.70 per bushel. So our cost is already impacted by those raw material costs. If the raw material cost remain on those levels, we are not going to have a cost increase for the second half. The comparison against -- versus the same period of the last year is going to reflect a cost increase because we are taking in account a different base of comparison. But if we compare the second quarter with the third quarter, the cost increase is going to be minimal in terms of raw materials because we already impacted those costs in our figures. So we are expecting a good crop for the last part of the year. So weather -- right now we are in the weather market, and so we are expecting -- we are not expecting a cost increase for the balance of the year.

[Héctor Maya López, analyst]

Got it. Very clear. And you were mentioning about the raw material prices. We saw over $7 per corn bushel by the end of April. And as you would talk -- you were saying that we are just seeing USD 5.50, USD 5.70 per bushel. So what -- are you taking advantage of this -- I mean, I know it's a higher price compared to what we were seeing last year, but it's still an opportunity when you compare to the prices that we were seeing in April. So are you taking any different approach to the new price to kind of consider inventory management for next year or something different with that strategy?

[Rodolfo Ramos, executive]

No, not at all. We don't like to speculate about this kind of things, and our policy is to have more than 2 months in advance of our raw materials. But the only difference is our domestic corn production because we normally supply our requirements in the season that when there is some harvest in Mexico, for instance, the last month, we acquire the corn for our Northwest operation coming from the local production area. And that is very efficient for us because the Northwest of the country is far away from the production areas in the United States, the Midwest. So the freight to get to that area is very high. So it makes sense to have a more than 2 months coverage in that area using that advantage, and we have a local production in Sinaloa state mainly.

The other important area -- domestic area is here in the central part of the country. We have a very nice corn and soybean production here and is where our largest plants are located. So we have a decision when we use the domestic and local corn. So it's in general terms and in the past, we are importing. We don't have more than 2 months of coverage, can be a strategical product, can be just the futures of the grain, but no more than that. The other thing that we normally do is to hedge all the long-term contracts with our customers. So either our customers went through one price for the whole year, we hedge that price or that cost to have a margin with that. So that's our strategy, and we have been very disciplined following that process.

[Héctor Maya López, analyst]

And again, congratulations on the results.

[Operator]

There are no further questions at this time. I would now like to turn the call over to our presenters for closing remarks.

[Rodolfo Ramos, executive]

Thank you very much. Okay. Thank you very much 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.

[Maria Jaquez, executive]

Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.