Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to the Fourth Quarter 2018 Industrias Bachoco Earnings Conference Call. My name is Hilda, and I will be your operator for today. [Operator Instructions].

Please note that this conference is being recorded. I will now turn the call over to Ms. Maria Jaquez. Ms. Jaquez, you may begin.

[Maria Jaquez, executive]

Thank you. Good morning, everyone, and welcome to Bachoco's Fourth Quarter and Full Year 2018 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 the future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our annual report, 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 2018 with comparative figures of the same period of 2017 in Mexican pesos.

As a reference, the exchange rate as of December 31, 2018, was 19.67 pesos per U.S. dollar.

Here with me are our CEO, Mr. Rodolfo Ramos; our CFO, Mr. Daniel Salazar; and our Strategic Planning Officer, Jose Juan Carreno.

Now, I will give the call to Mr. Ramos.

[Rodolfo Ramos, executive]

Thank you, Maria, and good morning, everyone. As we mentioned in our press release issued yesterday, most of the conditions prevailing in the third quarter of '18 continued into the fourth quarter of '18, in both Mexico and the U.S., even when we saw an improvement in those conditions as well as seasonal effects. Those conditions mainly were: In Mexico, oversupply in our main product lines due to the uncertainty in macroeconomic conditions.

We also perceived a softer demand, mainly in our traditional markets. In the U.S., we saw an oversupply of meat proteins, which put pressure on commodity poultry prices. In Mexico, total sales increased more than 5% compared to the fourth quarter of '17. However, we still observe a cautioned consumer mainly in our traditional channels. This condition affected our volume growth year-over-year, mainly in our balance with business lines. We should make clear, however, that our pet food line continued growing.

In the U.S., oversupply condition of animal proteins remained for the fourth quarter of '18, leading to lower prices and a net sales increase of 4.8% versus the fourth quarter of '17.

On the positive side, our Albertville operation allowed us to capture some benefit of those market conditions. Regarding raw material cost, we observed a stable grain and soybean meal prices in dollar terms, which helped our U.S. operations. However, volatility in exchange rate resulted in a depreciation of the Mexican peso of around 4.5% in the quarter, which offset the benefit of our lower raw material cost in our Mexico operation.

Our total SG&A increased 3.2% in the quarter, mainly due to our Mexican operations as those expenses were affected by increases in fuel prices. The aforementioned condition led us to an EBITDA margin for the quarter of 5.9% versus 7.8% of the same period of 2017.

As a result, with a very good first half of the year and a challenging second semester, we reached an increase in total sales of 5.2% for the full year of 2018 when compared to the full year of '17, with an EBITDA margin of 8.3% versus 11.1% margin of 2017.

Despite the challenging conditions that the overall industry is facing, our financial structure remain solid, and it allow us to continue growing and to be closer to our customers, which we consider as a key to overcome downturn cycle effect.

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 that Rodolfo mentioned before, our company's fourth quarter '18 net sales increased 2.6% in the quarter when compared with the fourth quarter of 1917 -- 2017. The increases are result of better prices in our main business line, partially offset by lower volume sold mainly in our other business lines. This year showed an increase in total sales of 5.2% for the full year when compared to the full year of 2017.

In the quarter, sales of our U.S. operations represented 29% of total sales, a slight decrease from the 31.3% we reported in the equivalent quarter of 2017. This was mainly a result of lower chicken commodity prices in that geography.

Cost of sales for the fourth quarter were MXN 13,272.2 million and MXN 51,421.9 million for the year. This represents an increase of 3.9% for the quarter and 8.2% for the year. The increase for the quarter was due to a higher cost of raw materials in our Mexico operation, partially affected by a depreciation of the Mexican peso versus the U.S. dollar of about 4.5% in the quarter. For the year, part of the increase is due to the increase in our Albertville operation for the full year.

Gross profit for the quarter was MXN 2,148.8 million with a gross margin of 13.9% compared to 15% gross margin for the fourth quarter in 2017.

For the full year of 2018, we reached a gross profit of MXN 9,630.2 million, with a margin of 15.8%. This amount is 8.7% lower than the gross profit reached in the full year of 2017.

Total SG&A for the fourth quarter of 2018 was MXN 1,566.3 million and MXN 5,940 million for the full year, representing an increase of 3.2% and 9.5%, respectively, when compared to the same period of the previous year. Part of this increase is due to the higher fuel prices in Mexico, which mainly affected the second half of 2018.

For the fourth quarter of 2018, we reported an operating income of MXN 588.5 million, with an operating margin of 3.8%. The operating income for the full year of 2018 was MXN 3,806.9 million, with an operating margin of 6.2%, which is lower when compared with the 9.1% reached in the full year of '17.

EBITDA margin for the quarter was 5.9%, lower than the 7.8% EBITDA margin for the fourth quarter of '17. For the full year, EBITDA margin was 8.3%, lower when compared with the 11.1% reached in 2017.

In the fourth quarter of 2018, we reported a net financial income of MXN 389 million and a net financial income for MXN 793.8 million for the full year of '18. The positive effect for the quarter was partly due to a net interest margin and partial -- and partly due to our FX valuation.

Our total taxes were MXN 182 million for the quarter and MXN 1,155.1 million for the year. Those were higher than equivalent period of 2017, as we recognized a positive effect in deferred tax as a result of the physical change approved in the U.S. at the end of 2017.

All the above led us to a net income of MXN 795.5 million for the quarter, with net margin of 5.9%. For the full year of 2018, the net income totaled MXN 3,445.6 million, with a net margin of 5.6%, which is lower than the net income and margin of the same period of 2017. The net income per share was MXN 1.32 pesos for the quarter and MXN 5.72 pesos for the full year.

Going into our balance sheet, we kept a healthy financial structure with an increasing total assets of 4.2% when compared to 2017. Our net cash was MXN 13,414.3 million at the end of the year, 11.9% higher than our net cash at the end of 2017. Our CapEx was MXN 1,996.3 million, which is lower when compared with 2017 when we registered part of our Albertville and La Perla acquisitions.

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

[Rodolfo Ramos, executive]

Thank you, Daniel. We know that our business is cyclical. And after consecutive years of good result, we consider to be in the low part of the cycle. Therefore, even when the conditions are improving, we expect to face a challenging 2019, at least in the first semester of the year. Further, we will have a difficult comparisons since we achieved good results in the first part of 2018. In the U.S., chicken commodity prices seem to be slowly going up. However, oversupply of main protein is expected to remain, at least for the first half of the year. So we remain conservative in this geography. We expect conditions in Mexico to improve throughout the year, as volatility and uncertainty seems to be decreasing, and the country trends to return to its normalized economic growth.

In the Mexican poultry industry, we expect a normalized growth in 2019. We expect to continue with our CapEx above maintenance levels as part of our organic growth strategy. As a result, we are confident that we will continue growing our total sales in the mid-single digit level and return to our normalized EBITDA margin range in 2019.

And we are confident of that, since we have a very valuable and experienced team supported by a robust information system that will help us to focus on those things we can control.

We will work in keeping and capturing efficiencies along all our processes and value chain, attending our customers as best as we can, keeping our solid financial structure. We consider those things will allow us to improve results and to capture growth opportunities that may arise. Of course, as always, we will continue managing and mitigating effects of things out of our control, depending on the market condition in our industries.

With that, we will now take your questions.

[Operator]

[Operator Instructions] We have a question from Luis Miranda from Santander.

[Luis Miranda, analyst]

Just wanted to understand a little better, how you are seeing the beginning of the year. And I know this is, as you mentioned, uncertainty is relatively high. And also, we have had gas supply problems and the blockage in [ Michoacan ], but trying to understand if -- how are you seeing the start in terms of -- if there's potential upside of price increases in Mexico poultry. And also, if you could see some benefit from a relatively stronger hedge -- sorry, currency in your cost in the short term.

[Rodolfo Ramos, executive]

Daniel, do you want to answer?

[Daniel Salazar, executive]

Yes, I will, Rodolfo. And thank you, Luis. What we would like to share with you is, of course, we are very cautious on what is going on in the variables that we cannot control, for instance, the increase in the oil derivatives in all the energy prices. But what we are doing in this regard is to try to optimize our sales in order to have a better interest in all our supply chain, as well as demonstrating what are really important to preserve. So distribution center. We are trying to understand what is better for us if we continue doing what we are doing right now in terms of supply chain or getting in better agreements with our customers, mostly with the customers which have a distribution center, so we can use their capabilities in order to be more efficient and to reduce the total costs. In terms of the market, we expect some pressures. As we have mentioned, we are in the downside of the cycle. But even so, we think we can have some opportunities to catch to be closer to our customer and to be very efficient in our whole processes. And in terms of G&A, we are trying to reduce our expenses to be more efficient in all the processes, not only in the back office but also in the sell side and in the supply chain.

[Luis Miranda, analyst]

Okay. And just one more. In terms of pricing, do you see any opportunity for price increases in the first quarter? Or oversupply remains a constraint?

[Daniel Salazar, executive]

Well, we have seen a little recovery in the prices, so -- even that it's very smooth, we think we can have a better performance than the previous quarter. Of course, when you compare with the previous year, it's a very difficult comparison because we have exceptional first quarter last year. But even -- so this quarter, we think this is more normalizing gradually.

[Operator]

The next question comes from Carlos Hermosillo from Actinver.

[Carlos Hermosillo Bernal, analyst]

Congrats on the sequential improvements. My first question has already answered, but my second one is about the Mexican market. I will like to know if this is, I would say, right, because I have been tracking some prices in Mexico, and I have seen that prices have declined during January, almost 12%. I would like to know if this is according to your operation.

[Rodolfo Ramos, executive]

The prices have been stable from the last December and January, more or less, has been the same -- at the same level of prices. What we saw in December, was a very good demand of the product, but we couldn't increase the product prices as the December of 2017. So January, we are seeing a normal January, has all the seasonal -- is not because of the seasonal time. So we are seeing good demand or normal demand of the product with normalized prices too.

[Operator]

The next question comes from Pedro Leduc from Newfoundland Capital.

[Pedro Leduc, analyst]

Daniel, just quick one, please. First, we saw the quarter closing with a lot better margins than 3Q [indiscernible]. And if you can comment maybe how the intra-quarter behavior was, let's say, if it ended like November, December was already much better than the average that we saw it [ 6th]. If it's indeed a gradual improvement. That's the first question. And then second, by now, if you have any visibility on the production costs for 2019, the variable ones, right, grains. If it's going to increase per kilogram produced or decrease, at least from what you have already hedged your visibility on. Just for us to understand that if you need to do extra pricing or not to keep margins are improving. And then the third question is around the United States. I know you -- just want to make sure that it's still behaving below the consolidated operations in terms of margins. And in your prepared remarks, you mentioned that you're seeing some signs of improvement. I'm just trying to understand what these are, what you're seeing, et cetera.

[Rodolfo Ramos, executive]

Pedro, the first question is about the -- in the fourth quarter, for 3 years in a row, December has been lower than the November results. So right now, it's -- we can say that it's the normal behavior in terms of pricing because December is a very good month in demand. And we increase the volume in that month more than 10% of the previous month. But in terms of pricing, it's more challenging because there's a lot of supply. And for the third year in a row, that has been the performance.

So the second question is about the cost. The only -- we are seeing stable prices in corn and soybean, which is our main ingredient in terms of cost. But the other thing that we are having increases is in fuel prices, energy prices. Last year, we had a very high increase in that issue. So, right now, we are working trying to mitigate that increase in fuel, gasoline, diesel and energy. We had increases over the year about 15% of increase in those things and the impact in our SG&A.

So we are expecting that situation is going to continue during the year. And in the U.S., I think we are -- I think we want to have a good year in terms of the margin because with the acquisition of Albertville, right now we are net buyers of fresh meat. So we are going to take advantage of the market conditions right now. So we are expecting a normalized year taking in account the difficult conditions that the industry is facing in that country.

[Pedro Leduc, analyst]

Okay, okay. And the U.S., the fourth quarter was still below Mexico then for you.

[Rodolfo Ramos, executive]

Yes, yes.

[Pedro Leduc, analyst]

And in 1Q we're seeing some signs of light, no?

[Rodolfo Ramos, executive]

Yes.

[Pedro Leduc, analyst]

And just -- sorry?

[Unknown Executive]

Daniel, you want to say something?

[Rodolfo Ramos, executive]

Daniel, you want to say something, Daniel?

[Daniel Salazar, executive]

No, only on the original comment, something about the cost. The last week, appreciation that you have seen in the Mexican peso, of course, it will give us a space of benefit, and I think this is something that also will help us to grow. Of course, we are in that shape of disadvantage where we hope that...

[Technical Difficulty]

[Operator]

The next question comes from Miguel Tortolero from GBM.

[Miguel Angel Tortolero, analyst]

Regarding your cash position, you reached over MXN 18 million in cash. I understand that there is not much that you can share, but I just would like to understand a bit more what you're looking for in terms of M&A. And what the characteristics you're searching in terms of geography, business line, size, et cetera? And the second one is regarding the other segment just to -- if you could elaborate a bit more what you're seeing in this segment just to understand what is driving the double-digit drop in volume.

[Rodolfo Ramos, executive]

Thank you, Miguel. In terms of M&A, we are actively looking for some opportunities. I think in this -- because right now we are in the low part of the cycle, we are going to start seeing opportunities, mainly in United States. Here in Mexico, we can see some opportunities. And we are -- we have some other opportunities in Central and South America. And we are looking in those geographies, not out of America. And outside of the country of Mexico, we are just looking for poultry companies. Here in Mexico, we are looking for some other proteins, animal proteins. The other question about the balance sheet, because of the volatility that we have in the foreign exchange in Mexico during the year, we reflect that increases in cost in our sales price, in our balance sheet. That caused us a reduction -- an important reduction on the balance sheet. But in the other hand, we continued growing our pet food and every year it's more important, the participation of that business line in the balance sheet. For the year -- or for the quarter-by-quarter, in the fourth quarter of '18 against the '17, we increased our volume of pet food in almost 20%, 14.1%. Our balance is for swine, beef, poultry for the customers. So we are very happy with the performance of our pet food line.

[Operator]

The next question comes from Ulises Argote from JP Morgan.

[Ulises Argote Bolio, analyst]

Just one question on the volumes front. We saw decrease in the consolidated poultry volumes that you report there in your press release. Can you give us some sense on how volumes look like for Mexico in the quarter? And maybe some thoughts of what we can expect into 2019 on this sense?

[Rodolfo Ramos, executive]

Yes. In the quarter, the volume of poultry here in Mexico was a little bit lower. But in the year, we had an increase in volume of 1.8% as total volume. And our -- the industry, you can say the industry -- the projection of the industry is around 3%, so we were just almost 2% of growth. And for this quarter, we expect to remain more or less the same. And the projections for us for the whole year is to grow at least close to 3%, which is the industry trend.

[Ulises Argote Bolio, analyst]

Okay, perfect. And then just one quick follow-up on the cash deployment side of things. Can you comment on any changes that you could see through the dividend payout? Or what kind of trends we can expect for dividends in this year? And the other one, thinking on M&A, would you be willing to lever up the company in order to explore larger M&A deals? Or what's your take around those opportunities?

[Rodolfo Ramos, executive]

Well, the first about the dividends, we are going to keep our policy to -- of 20% of the net income of the previous year. And in terms of the acquisitions of the M&A, we are hoping to explore large acquisitions, but all with the responsibility to add value to our shareholders. And we can leverage 2x EBITDA, up to that amount of leverage, we can acquire a company of that value.

[Operator]

Our next question comes from Pablo Abraham from BBVA.

[Pablo Abraham, analyst]

You mentioned that higher gasoline and diesel prices negatively affected your cost structure in 2018. Could you give us a figure of what percentage of total OpEx represented the fuel expense in 2018 and in 2017? That would be my first question. The second is, where do you see more pressure in prices: within the public market, the live-chicken market, or in the retailers?

[Rodolfo Ramos, executive]

Well, the first question is the fuel expenses affected SG&A. And as a percentage, around 10% of the SG&A is fuel. So the increase is, in the total, can be 4%.

[Daniel Salazar, executive]

It was increased in the quarter.

[Rodolfo Ramos, executive]

Yes, and that's just in the quarter, that 4%. It is the net effect in our total expenses. And in the second question is about the pressure in different channels. We saw a lot of pressures in the live market, mostly in the live market, because I think there's an oversupply of that -- in that channel in the southeast of the country. Public market was more or less in line with them. High volatilities is just normal in that kind of channels. The less pressure than I think is less in the retail. But on the other hand, retail is not so large like the public market and live market. And the other market that was under pressure was the rotisserie for the ready-to-cook product in the food service and fast food -- the Mexican fast food. So we saw some pressure on that channel too.

[Operator]

And at this moment, we show no other questions. I would like to turn the call over to Mr. Rodolfo Ramos for any other remarks.

[Maria Jaquez, executive]

Hilda, I think there is another question.

[Operator]

One more question, I apologize. It comes from Mr. [ Hector Adelis ] from Rainbow Fund.

[Unknown Analyst]

Just one quick question with regards to competition. Now that there's been some further consolidation from your larger competitor in Mexico, have you seen a different -- have you seen a change in dynamics once that acquisition has finally been finalized? And could that partially be related to some of the challenges you've been having in the traditional market?

[Rodolfo Ramos, executive]

Well, the consolidation of these 2 companies, on one hand is, I think they are taking more -- strategy is more in line with the market condition. So we are seeing more production or more competition in the southeast in the live market. So the -- in the last quarter they report and they are kicking the expansion in that part of the country. And that was one of the reasons of the market conditions over there, but it's not all of this. There are some other issues with the consumption, the economic growth. So it's not just one theme. There are some other issues there that are affecting the consumption in that part of the country. Obviously, for this quarter, the economic conditions of the area are going to be very important issues in terms of the demand in that area.

[Operator]

[Operator Instructions] We show no other questions. I will like to turn the call back to you, Mr. Ramos, for any other remarks.

[Rodolfo Ramos, executive]

Okay. 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.

[Operator]

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