Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to the Fourth Quarter 2017 Industrias Bachoco Earnings Conference Call. My name is Sylvia, 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 Guadalupe Jáquez Martínez. Guadalupe, you may begin.

[Maria Guadalupe Jáquez Martínez, executive]

Thank you, Sylvia. Good morning, and welcome to Bachoco's fourth quarter 2017 conference call. We released our financials yesterday after market closed. 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. The 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, Form 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 statement, 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 2017 with comparative figures of the same period of 2016 in Mexican pesos. As a reference, the exchange rate as of December 31, 2017, was MXN 19.66 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. 2017 was a year that has started with a high volatility on the Mexican peso exchange rate, uncertainties regarding NAFTA and, by the end of the year, we were challenged by natural disasters in Mexico and in the United States. The inflation rate in Mexico was 6.77%, a relatively high value.

The GDP is expected to grow around 2%. In 2017 and on the average, the Mexican peso depreciated slightly versus the U.S. dollar. At the end, we finished 2017 with satisfactory results and we reached a historically high net sales, EBITDA and earnings per share, amongst other parameters.

Regarding Mexican poultry industry, we estimate the industry grew around 3% for the year. That we consider to be a normalized growth. Overall, we observed good [orders] from the demand side, resulting in balanced supply and demand conditions during most part of the year.

Particularly in the fourth quarter of '17 in Mexico, we believe natural events like the earthquakes that occurred in early September affected the economic -- economical dynamic in important regions of Mexico, causing a temporary lower demand, resulting in oversupply condition and prices lower-than-expected during most part of the quarter. Those conditions changed at the end of the quarter, as we observed a strong demand even when we don't see a full recovery in prices.

We believe total imports of chicken remain at the levels of 12% to 13% of our total consumption. In particular, statistics shows no growth in imports from United States. Our table egg industry, after another supply [ long ] period, in second semester of 2017, we observed a better balance between supply and demand, leading to prices recovered from the same period of 2016. Regarding the U.S. poultry, according to the USDA, it is expected at 2.2% production growth year-over-year, slightly higher rate than normal. However, prices were up at very similar levels than those of 2017.

Focusing in our company, we increased our total sales for both the quarter and the year-end when compared to the equivalent figures of 2016. For full year 2017, we reached a total sales of MXN 58,000 million, which is the highest numbers in Bachoco's history. This was a result of higher volumes sold and prices increases across most of our main product line as we continue improving our sales mix in both our Mexican and U.S. operations.

Those conditions allow us to reach an EBITDA of MXN 1,074.3 million with an EBITDA margin of 7.1% for the quarter -- for the fourth quarter of 2017. For the full year, we reached an EBITDA of MXN 6,319 million, the highest we have achieved historically, with an EBITDA margin of 10.9%, which is the upper side of our normalized range, and earnings per share of MXN 8.07, also the highest value historically for the company.

We continue working on the integration of our recent acquisitions: Albertville Quality Foods and La Perla. In order to capitalize the synergies with other big quality foods, our U.S. operations now represents nearly 30% of our total revenue.

On the other hand, with La Perla, we increased our pet food capacity. With that, now pet food represents more than 10% of our total balance sheet sale. Our balance sheet continues strong, with a net cash of MXN 12,000 million, which will enable us to continue supporting our growth plans.

Now 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 condition Rodolfo mentioned before, our company fourth quarter and 2017 net sales increased 5.9% in the quarter as compared with 2016. This increase is mainly a result of more volumes sold during the quarter. This led us to an increase in sales of 11.6% for 2017 as compared with 2016. Sales of our U.S. operation represented 31.7% of total sales, an increase from the 27.7% it represented in the equivalent quarter of 2016, mainly as a result of the consolidation of Albertville Quality Foods. The cost of sales in the fourth quarter was MXN 12,808.8 million and MXN 47,536.5 million for the year-end. This presents an increase of 7.8% for the quarter and 11.5% for the year. The increase is mainly attributed to a higher volume sold, higher inflation rate in Mexico and a mix effect due to higher percentage of food or processed products in the -- our U.S. operations, resulted from the Albertville integration.

Gross margin (sic) [ profit ] for the quarter was MXN 2,230.4 million, with a gross margin of 14.8%. For the full year, we reached a gross profit of MXN 10,520 million, with a margin of 18.1%. This amount is 12.1% higher than the gross profit reached in 2016.

Total SG&A for the fourth quarter of 2017 was MXN 1,510.2 million, and -- that was fourth quarter, MXN 15.8 million for the year, representing 10% and 9.3% of total sales, respectively.

We will continue working to keep our expenses at the same level as a percentage of total sales. Operating income for the fourth quarter of 2017 totaled MXN 765.6 million, with an operating margin of 5.1%. This operating income for the year was MXN 5,186.3 million, with an operating margin of 8.9%.

The EBITDA margin for the fourth quarter was 7.1% for the total year of 2017, EBITDA margin was 10.9% versus 11.1% reached in 2016. The net financial income for the quarter was MXN 527.3 million and MXN 747.5 million in 2017. This compared with MXN 327 million [ on same quarter ] and MXN 97 million for the same period of 2016.

Our total taxes were positive MXN 182.6 million for the quarter. For 2017, our income taxes were MXN 1,084.7 million. In fourth quarter '17, we recognized a positive effect in our U.S. operations in deferred taxes as a result of the fiscal changes approved at the end of the year in the U.S. All of the above led us to a net income of MXN 1,475.6 million for the quarter, with a net margin of 9.8%. This income is 53% higher than the net income reached in the same quarter of 2016.

For the full year in 2017, net income totaled MXN 4,849.1 million, with a net margin of 8.4% and 22.7% over the net income of 2016. Net income for 2017 is the highest amount reached historically by the company. Net income per share was MXN 2.46 pesos for the quarter and MXN 8.07 pesos for the full year. This is also another record high.

Going into our balance sheet. We keep a healthy financial structure with an increasing total assets of 14.4% when compared to the year-end of 2016. Our net cash was MXN 11,979.7 million at the end of the year. These figures account for both of our recent acquisitions, La Perla and Albertville Quality Foods.

Our CapEx was MXN 3,479.3 million, more than MXN 1,000 million above the previous year. We include here the property, plants and equipments for our last 2 acquisitions. The remaining was used to support our organic growth and maintain our facilities to high levels of productivity.

Well, this is all, thank you. And I would turn the call back to Rodolfo for final comments.

[Rodolfo Ramos, executive]

Thank you, Daniel. Looking into 2018, we are entering 2018 with a balanced supply and demand conditions in Mexico, with the poultry industry growing at normalized rates. In the United States, we are seeing an industry growing above normalized level, but relatively stable prices. Regarding raw materials, we expect prices to remain stable in U.S. dollar terms at least for the first part of the year. We expect uncertainty in Mexico, mainly associated with NAFTA negotiations and the political environment in Mexico as we will have a president election at the middle of the year.

Even under conditions above, we will continue with our growing plans in Mexico and in United States, focus in our efficiency initiatives and mainly serving and attending to our customers in Mexico and United States, ensuring we are their best option.

While keeping an eye on the Mexican's macroeconomy scenario, we will continue working to finish the complete integrations of our 2 recent acquisitions into our normal operation and begin to capitalize the synergies for them. We know results mentioned above are results of our employees' efforts and hard work. We, of course, will work in keeping them on-board and motivated. We will continue focusing on those things we can control and managing the other ones as best as we can, depending on the market condition in our industries.

With that, we will now take your questions.

[Operator]

[Operator Instructions] And our first question comes from Pedro from JPMorgan.

[Pedro Leduc, analyst]

If I may start with one on the fourth quarter itself. We saw Mexico margins were flat. And if we could try to understand if it was really just price driven, as data suggest, and your volumes still kept up, and then it was really just the natural disaster effect if it's already cleaned up for potentially more healthy pricing environment in the beginning of '18.

[Rodolfo Ramos, executive]

Well, on the question for Mexico -- Mexican operations, we faced an important oversupply conditions in the chicken industry, leading to lower-than-expected prices. And we think that this behavior was caused, for the previous quarter, effects of the natural disaster that we saw forth, basically.

[Pedro Leduc, analyst]

Yes, correct. And then, have you seen this normalize? In other words, have the inventory oversupply been cleaned up in the way that first quarter, we should see again more healthy price?

[Rodolfo Ramos, executive]

Yes. Yes, we think so, we think so. Yes, we have seen now, at the beginning of the year, a more normalized behavior in the supply and demand balance.

[Daniel Salazar, executive]

Even the last part of December was a very normalized demand of the product.

[Rodolfo Ramos, executive]

Yes, we saw a slight recovery in prices at the end the [ latter ] months.

[Pedro Leduc, analyst]

Good. All right, and then for the year ahead, still, you mentioned you expect stable raw material costs in U.S. dollars. Did you mean that in the U.S., Mexico or both? And then, also how we should, within your longer-term margin range, 9% to 11%, let's say, where do you think we'll see this 2018 play out?

[Rodolfo Ramos, executive]

First, the price of our raw material, it's a parallel situation in the United States and Mexico cost of raw materials. We use the same source, which is the Chicago Board of Trade. So we expect stable prices in both countries. And the second question, I want to ask Daniel to answer it.

[Daniel Salazar, executive]

What was your second question, Pedro, sorry about it.

[Pedro Leduc, analyst]

Yes, no, no. Just given this apparently more benign outlook for raw materials and then we see prices recovering, it's fair to assume that you have 18 under the normalized margin range, perhaps [indiscernible]

[Daniel Salazar, executive]

Yes. Yes, absolutely. We expect a very regular year very similar to the ones that we have finished. And with that, we think we can maintain our current level of profitability. You're right.

[Pedro Leduc, analyst]

And did this fourth quarter have any M&A related integration expenses that were one-offs on your SG&A or not?

[Daniel Salazar, executive]

Not significant amounts. We actually include in our acquisition payment as we disclosed, basically all the integration expenses.

[Operator]

Our next question comes from Miguel from Bancomer.

[Miguel Ulloa Suárez, analyst]

Just a quick one regarding the oversupply conditions in the fourth quarter. Could you give us a sense of how demand -- how volumes move in the case of the industry and the case of Bachoco in Mexico, please?

[Rodolfo Ramos, executive]

In general, the industry grew 3% all over the year. But in the last quarter, the demand was affected. The supply was, in normal condition, was a normal supply. But the natural disasters can affect the South East and Mexico City, disturbed the supply chain. So the demand was affected because of that disruption in the supply chain. But at the end of the period, we saw a very strong demand [ then ] absorbed part of that oversupply caused by these disasters. At the end of the year, we finished the year with a normalized supply-demand balance.

[Daniel Salazar, executive]

Yes, in other words, the demand was there. The problem is that we cannot reach the demand because the lack of -- or there are a lot of obstacles that we suffer in the supply chain. But at the end of the year, as Rodolfo mentioned, we were in more normalized situation.

[Miguel Ulloa Suárez, analyst]

And just a quick one regarding expenses. You mentioned in your press release, one-timers. I don't know if it has to do with the integration or something else in the operating expenses.

[Rodolfo Ramos, executive]

Yes, yes, that includes our expenses, basically due to the Albertville Quality Foods integration. But that's all.

[Miguel Ulloa Suárez, analyst]

Okay. But that was in the third quarter, not in the fourth?

[Rodolfo Ramos, executive]

Yes, that's right.

[Miguel Ulloa Suárez, analyst]

Okay. The last one would be regarding the deferred taxes. Could you give us a sense of the cash taxes that were paid in the quarter?

[Rodolfo Ramos, executive]

The cash?

[Miguel Ulloa Suárez, analyst]

Yes, please.

[Rodolfo Ramos, executive]

Well, basically, we don't pay a significant amount of taxes in the period because in Mexican operation, we used to pay our tax in -- 2 times a year. So our important payments are in July and in January. For that reason, in the last quarter, we didn't pay any significant amount of taxes. So basically, in our P&L, we recognize our liabilities but not in cash. And in the case of the U.S. operation, we -- as we mentioned it before, we recognize the positive impact because the adjustment that we need to recognize due to the reduction in tax rate in the United States due to the tax reform; and does effect -- total effect, above MXN 20 million, approximately.

[Miguel Ulloa Suárez, analyst]

But that will turn out to be cash in 2018?

[Rodolfo Ramos, executive]

Not necessarily, because this amount was for the total tax liability in the balance sheet. So that means that we'll recognize this effect in the long run, not necessarily in only one year.

[Operator]

Our following question comes from [ George ] from [ JPM ].

[Unknown Analyst]

I have a question regarding volumes. If we will look at volumes in the fourth quarter, the category of others has a 14.3% growth, but revenues from others only grew 0.3%. Why is this?

[Rodolfo Ramos, executive]

Please hold on. Okay, the difference is because we -- our growth in volume was [pushed] by swine and balanced feed. And the prices for those segments are a little bit lower. So the mix is affecting -- is causing that effect.

[Unknown Analyst]

Okay. And I have another question regarding the recent acquisitions. Should we most expect more integration cuts for Albertville Quality Foods in the following quarters?

[Rodolfo Ramos, executive]

Cuts? What do you mean with that. Cost?

[Unknown Analyst]

Cost cuts. Yes.

[Rodolfo Ramos, executive]

Not necessarily. What we will expect to have is -- are better margins because the mix of the Albertville business is a little bit more profitable than our current operations in the U.S. But no more additional cost cuts.

[Operator]

Our next question comes from [ Rafael ] from Santander.

[Unknown Analyst]

Two questions. First on the CapEx, if you could tell us what level of CapEx are you expecting for this year. And the second, I apologize if it was asked before. The -- from the SG&A pressure that we saw in the quarter, how much was the one-off from the acquisitions? And how much was related to normal pressure on SG&A that we should continue, looking forward?

[Rodolfo Ramos, executive]

Well, for the CapEx, we expect to maintain our current levels of CapEx for the year that we observed in the last year. So we are expecting to have around USD 100 million to USD 120 million a year in CapEx. And regarding the SG&A, for the quarter, we expect -- in the last quarter, it's common to -- we expand our SG&A due to the increasing volumes in the quarter, but we actually expect to maintain our level of SG&A at the same level of the year. I mean, [our] 10% or below.

[Operator]

A follow question comes from Martin from Interacciones.

[Martin Lara, analyst]

Could you please provide the guidance for 2018?

[Daniel Salazar, executive]

Well, it's difficult to give you a guidance for the full year because we are at the very beginning. But as Rodolfo mentioned before, we expect a normalized level of raw material behavior, and we -- considering that, we expect to having a growth around 3% in terms of volume in the year and around 10% in sales and to maintain our current EBITDA margin.

[Martin Lara, analyst]

The -- I think it was 10.8%, right, for the year?

[Daniel Salazar, executive]

Yes.

[Martin Lara, analyst]

Okay. And I have another question. What was the contribution of ASF during the quarter -- AQF?

[Rodolfo Ramos, executive]

Well, remember that we recognized only 5 months of this operation. But I can say that the contribution, in terms of margin, it increased probably above 0.5 percentage points in the U.S. operation. And in sales, around -- it was -- this is due to a better sales mix, of course, but the increase in sales in the U.S. operation is coming from uses from other [indiscernible]. [ Please hold on. ]

[Martin Lara, analyst]

Okay. But on a consolidated basis, what was the contribution of AQF, in terms of sales and EBITDA?

[Daniel Salazar, executive]

Well, EBITDA is not significant because, as I mentioned, it probably contributes around 0.5 point in the U.S. operations. So in the total, probably it's less than 0.1%, 0.2% in terms of margin. But in terms of sales, AQF represents -- [ or ] increase around 8% in our U.S. operations -- sorry, 5% in our U.S. operations and probably less than 2% in the total sales for the quarter.

[Operator]

A following question comes from [ Piago from Annex ].

[Unknown Analyst]

I have 2 questions. The first one is related to the U.S. tax reform. Could you provide us with -- what is your expectations on the effective tax rate after the U.S. reforms on a consolidated basis? What kind of -- what level of effective tax rate should we expect for the coming years? And the second question is regarding your net cash position that reached a record level, even considering that you have had some significant acquisitions this year. So should we expect that the company will pay down some debt or even increase the distribution of dividends? What's your expectation in terms of capital allocation?

[Rodolfo Ramos, executive]

Okay. Regarding the first question, as I mentioned before, the impact of the tax reform represented about MXN 20 million of benefits in deferred tax provision in our P&L. And in terms of effective tax rate, we moved from around 38% in our U.S. operations to 26%, 27%. That's the expected effective tax rate that we will have for the U.S. operation. And in the case of Mexico, our tax -- effective tax rate is around 28%. So in the total, we expect to have around 27% for the whole company. And regarding the -- your second question, our net cash position, we, of course, we will maintain this position for our growth strategies, not only the organic growth but also the inorganic growth. We are, as we have mentioned before, actively looking for opportunities, not only in poultry business but in the other business lines. So we expect to continue consolidating this opportunity in the future. And we, of course, we will use this [ net cash position ] for that. We are not considering, in this moment, to pay an extra dividend besides the ones that we usually do.

[Unknown Analyst]

Is there any limits of net cash that you would be -- you would consider as healthy to carry on, or you would accumulate cash indefinitely until you find an acquisition target?

[Rodolfo Ramos, executive]

Well, of course, we expect to consolidate some acquisition as soon as we can. But if not, of course, we will continue accumulating cash for our growth strategies.

[Operator]

Our following question comes from Pedro from JPMorgan.

[Pedro Leduc, analyst]

Quick remarks on the prepared food's segments in Mexico, if you can tell us about how it behaved just for the full year of '17. And for your CapEx for the next year, if there are any strategic subsegments within your operations that should see higher portion of CapEx, so prepared foods line or some other proteins or how you're directing CapEx: more volumes, more productivity, innovation, just for us to get a general sense.

[Daniel Salazar, executive]

The first thing is productivity. We are focusing to solve some bottlenecks and projects and improve our performance. And secondly, in process, mainly primary process. And a couple of years ago, we invest some CapEx to expand our value-added products capacity. So this year, we want to start looking for more opportunities to expand that operation because we already are at the -- not full capacity, but it's time to start to look out for more opportunities in that sector. During the year, we created the value-added business unit in order to have more focus in that part of the market, and we expect to have 2 digits growth rates in this year.

[Operator]

Our following question comes from [ Aldo from Campus Group ].

[Unknown Analyst]

Sorry, I thought I removed myself from the queue, my question has been answered already.

[Operator]

Our final question comes from Eduardo.

[José Eduardo Estrada, analyst]

Just a question. Have you received some feedback about the negotiation of the NAFTA? Do you think if there's something there, if there's some disruption on that, how do you think it will affect the sector? Do you -- could you [ get a sense ] to lower import from the U.S. or how do you see it?

[Rodolfo Ramos, executive]

Nobody knows what's going to happen with the NAFTA, I don't like to speculate with that. But in the worst case scenario, Mexico -- the NAFTA do not continue, Mexico imports -- is a net importer of chicken from United States. So that can be a benefit for Mexico but not for the U.S. So that's in the case of leg quarters, which is 80% of the total imports to Mexico is leg quarters. And Mexico is the #1 destination of U.S. leg quarters. So the effect is going to be very strong in the U.S. industry. On the other hand, we have to import some raw materials. Mexico is not self-sufficient in corn and soybeans, so we have to import. As a country, around 50-50 of the grain production, we have to import 50% of our requirement from U.S. I'm talking as a industry. Bachoco has a different balance, but we use more domestic grains because our operations are located in areas where we have a local production. So we depend less on importation and imported grains. So if the NAFTA finished and the Mexico established an import duty in grains, well, we are going to have an increase in cost, but for sure, we are going to cover that increasing cost with the prices of the leg quarters and the lack of supply and [indiscernible] cost in Mexico, and then it can increase the prices for sure. But those prices cover any increase in cost.

[Operator]

We have no further questions at this time.

[Rodolfo Ramos, executive]

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

[Operator]

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