Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2020-Q4

[Operator]

Good morning. My name is Karen. I will be your conference operator for today. At this time, I would like to welcome everyone to the Fourth Quarter 2020 Industrias Bachoco earnings Conference Call. [Operator Instructions] Thank you for your attention. I will now turn the call over to Andrea Guererro. Andrea, you may begin.

[Andrea Guererro, executive]

Good morning, and welcome to Bachoco's Fourth Quarter 2020 Conference Call. We released our financials yesterday after the 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. 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 for 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 competitive figures for the same period of 2019 in Mexican pesos.

As a reference, the exchange rate as of December 31, 2020, was MXN 19.95 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, Andrea, and good morning, everyone. 2020 has been a challenging year in every shape and form that, I would like to express my sincere gratitude to all team members of Bachoco industry, not only because of their commitment in producing and delivering high-quality products, but also by doing it safely in accordance with the protocols established by the respective authorities.

It is because of their great performance that we were able to bring proteins products to the table of our consumers every day when they need it the most and under conditions that require from us to quickly adapt to the new reality, while making adjustments in our facilities in order to avoid significant disruption due to the health risk and the things we have been doing it right.

As a result of this volatile environment, carefully reading the changes in demand was key. This better understanding of our customers' need to allow us to enter the fourth quarter of '20 with a better balance between supply and demand, which ended up in strong sales for that period.

The condition mentioned above allow us to reach a net sales of MXN 18,328.6 million for the fourth quarter of '20, which is 21.1% higher when compared with the same period of 2019. From that increase, 16.6% was due to the higher net sales in poultry and 4.5% due to higher sales in orders.

For the full year of 2020, our sales total MXN 68,791.3 million, which is 11.6% higher than the total sales reported in the same period of 2019.

This result to integrated with the sales of our recent business arrangement, SASA, for the second half of this 2020.

Regarding our cost of sales during the fourth quarter of '20, we started to observe some of the negative impacts of the increase of the raw materials prices in dollars and in peso terms. However, efficiency in our productive process allow us to partially offset those effects. At the end, our cost of sale was higher 9.9% for the quarter and 11.9% for the full year.

Especially in this challenging time, we remained focused and being very efficient in our SG&A deployment. For the fourth quarter of '20, we reported an expense of 8.8% over sales. This rate is lower when compared to the 10.4% reported in the fourth quarter of '19. For the full year of 2020, our SG&A rate was 9.3% versus the 9.9% of the same period of 2019.

With that, we reached an EBITDA of MXN 2,451.3 million for the fourth quarter of 2020, higher than the MXN 511.1 million of the fourth quarter of '19, with an EBITDA margin of 13.4% and 3.4%, respectively.

And for the full year of 2020, we reported an EBITDA of MXN 5,646.4 million and MXN 526.3 million for the same period of 2019 with various [indiscernible] margins year-over-year, 8.2% and 8.5%, respectively. Despite the challenges and uncertainties that 2020 brought, Bachoco kept its commitment with its stakeholders as we continued investing both in Mexico and in the United States.

We reported a CapEx of MXN 2,305.9 million for 2020, which is 11.4% higher than the CapEx of 2019. Again, none of this would have been possible without the commitment of our team.

With that, I will turn the call over to Daniel for a discussion of the financial results. Thank you.

[Daniel Salazar, executive]

Thank you, Rodolfo, and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company's fourth quarter 2020 net sales were higher 21.1% for the quarter and 11.6% for the full year versus the respective periods of 2019.

For 2020 sales of our U.S. operations represented 28.3% of total sales, which is higher than the 27.5% reported in 2019. This was mainly a result of the depreciation of the Mexican peso year-over-year.

Cost of sales in the quarter was MXN 14,472.3 million, and MXN 57,711.7 million in the full year of 2020. This represents an increase of 9.9% and 11.9%, respectively. Increases for the quarter were mainly driven by higher raw material costs in U.S. dollar terms with the negative effect of the depreciation of the Mexican peso year-over-year.

For the full year, the main negative impact was related to FX. As a reference, the Mexican peso depreciation was around 7% for the quarter and 11% for the full year when compared to the same period of 2019.

Gross profit for the quarter was MXN 3,856.3 million, with a gross margin of 21%, an increase of 96.3% over the gross profit reported in the fourth quarter of 2020.

For 2020, we reached a gross profit of MXN 11,079.6 million with a margin of 16.1%. This amount is 9.7% higher than the gross profit reached in 2019.

Total SG&A for the fourth quarter of 2020 was MXN 1,617.8 million or 8.8% of total sales compared to the MXN 1,701.7 million and 10.4% of total sales for the fourth quarter of '19.

For the year, SG&A totaled MXN 6,376.3 million or 9.3% of total sales compared MXN 6,116.6 million and 9.9% of total sales of 2019.

On the other hand, we had other expenses of MXN 128 million for the fourth quarter of last year compared to other expenses of MXN 74.4 million of the same period of 2019.

For the full year, we reported other expenses of MXN 439.2 million versus MXN 4.7 million reported in 2019. In this line, we recorded COVID-related expenses not applicable to SG&A in addition to the sale of unused assets as well as other byproducts.

Operating income for the fourth quarter of 2020 totaled MXN 2,110.15 million, and operating margin of 11.6%, which is higher than the MXN 188 million and the 1.2% margin risk in the fourth quarter of '19.

The operating income for the full year of 2020 was MXN 4,254.1 million with an operating margin of 6.2% higher than the amount of MXN 3,976.5 million reached in 2019, was slightly lower than the margin 6.4% for last year.

The EBITDA margin for the quarter was 13.4%, which is higher than the 3.4% EBITDA margin for the fourth quarter of '19. For the full year of 2020, the EBITDA margin was 8.2%, lower than the 8.5% reached in the same period of 2019.

In the fourth quarter 2020, we had net financial expenses of MXN 1,168.2 million, which is higher than the MXN 192 million for the same period of 2019. Those figures compared to the net financial income of MXN 868.6 million and MXN 381.3 million for the 2020 and 2019, respectively.

The decrease in the quarter was a result of the depreciation of the Mexican peso by the year and when compared to the previous quarter. For 2020, we have income taxes for MXN 1,480.3 million, higher than the MXN 1,125 million in 2019. This was a result of higher operating income reached in 2020.

On the above levels to a net income of MXN 720.3 million for the quarter, with a margin of 3.9%. For the full year 2020, net income totaled MXN 3,702.4 million with a net margin of 5.4%.

Net earnings per share were MXN 1.22 for the quarter, while for the full year of 2020, we reached a net income per share of MXN 6.12 compared to a net income per share of MXN 0.24 and MXN 5.83 for the same period of 2019, respectively.

Going into our balance sheet, total assets increased 4.1% when compared to the year-end of 2019. Our net cash position was MXN 16,529.9 million at the end of the quarter, higher than our net cash level of MXN 14,254.3 million at the beginning of the year.

Our CapEx was MXN 2,205.9 million, which is 11.4% higher than the amount invested in 2019. Capital expenditures in 2020 was oriented to projects that will enable us to support our organic growth and maintain our facilities at high level of productivity.

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

[Rodolfo Ramos, executive]

Thank you very much, Daniel. Now we are entering the first quarter of '21 in a good shape in terms of supply and demand, particularly in Mexico. At the same time, in the U.S., we are starting to observe some recovery in commodity prices as well. On the other hand, corn and soybean meal prices in dollar terms, will continue to put pressure in our cost of sales.

Having this landscape ahead, we are diligently working toward improving our sales mix and being very efficient in our productive processes, both in Mexico and in United States. Again, having a good reading of our customers' need and being close to them will be key to keep delivering good results. At the end of 2020, we announced an agreement to invest in RYC Alimentos, which is a meat processor and distributor of -- mainly of pork, beef and chicken, with national coverage that participate in all the distribution channels with fresh and value-added products. This process is currently under the review of the Mexican Antitrust Authorities. So far, we are focused in fulfilling the authorities requirements in order to have its approval soon.

Lastly, we reinforce our commitment with our customers and with the safety of our teams as they are the ones that drives the reaction of our business. With that, we will now take your questions.

[Operator]

[Operator Instructions] All right. Then, we do have our first question from Miguel Tortolero.

[Miguel Angel Tortolero, analyst]

Daniel and team, congratulations on the results. I have 2 questions. The first one is on 2021. I mean we saw our 2020 with mix signals, a weak start of the year, and then an outstanding recovery in the second half, which, as you mentioned, has to do with more rational supply.

So entering 2021, on one side, you have the strong chicken prices that are apparently have continued during January, around the order, you have the strong increase in grain prices that you just mentioned.

So how are you foreseeing 2021? First, in terms of prices, chicken prices and the supply-demand dynamics in Mexico? And secondly, and probably will be too early to say, but also profitability? And then I'll wait to ask the second question.

[Rodolfo Ramos, executive]

Well, the first one you are right, 2020 was a very difficult year with a swing. The second quarter, which normally is the best one. This -- 2020 was the worst.

And the third and normally is a bad quarter. This year was a good one. We started the year with a very good balance between supply and demand. So I can say that prices have been fair in that regards.

About the cost of the raw materials, you're right. We have a very important increase in corn and soybeans, soybean meal. And it's going to put some pressure in our cost. But what happened in the fourth quarter, and we keep that trend in the first quarter of this year, we offset part of that increase with productivity. For instance, our total cost of our feed increased in the fourth quarter around 10%, and our total cost of live production was around 6%, 6.5%.

So we could offset part of that increase with productivity. And we are going to keep that way in the -- for the first quarter of 2021. We are expecting a better than the last year's second quarter because normally, the second quarter is a good one. But who knows, it's going to depend, again, of the demand, the size of the demand.

We are expecting for the second quarter to have a more new-normal situation and expect, let's say, a normal second quarter. I don't know if I answered your question, Miguel?

[Miguel Angel Tortolero, analyst]

Good color. Also, the second one is on your pork business. In here, I would like to better understand your expectations of this business line and how capital-intensive it should be going forward. I mean with the SASA deal and now the pending raised deal, pork has clearly become a priority for capital allocation, at least in Mexico.

So I would like to better understand here, what's the potential you see in this market? And how would you say that Bachoco pictures itself within this market in, let's say, 10 years?

[Rodolfo Ramos, executive]

Well, as you know, SASA was one of the first companies to export to Asia many, many years ago. So because of the lack of supply, they were -- the growth of this company was a little bit behind of the market, the total market. So right now, we have a very important opportunity to expand that capacity because the plant have -- right now have some idle capacity. And we are going to invest in production, in live production to run at a full capacity.

And the main market is the export market, mainly Japan, United States, some countries of Asia, China, obviously. And in the domestic market, our strategy is to develop value-added products. We have a lot of opportunities, a lot of synergies that capitalize with distribution centers, with the supply chain of Bachoco. So we are very pleased with this, with the way this business is taking.

[Miguel Angel Tortolero, analyst]

Congrats, again, for the results.

[Rodolfo Ramos, executive]

Thank you very much, Miguel.

[Operator]

And we do have our next question from Hector Maya.

[Héctor Manuel López, analyst]

Yes. Hello. Can you hear me?

[Rodolfo Ramos, executive]

Yes.

[Héctor Manuel López, analyst]

So the first one is, if you could give us some color on how channel mix have changed versus the third quarter? And what is it that you are seeing in the traditional channel versus a modern channel in this first month of 2021?

And my second question, I mean, the share is below 6x EV/EBITDA for 2021, it's even close to 5x. So your cash position is close to $800 million, which is 40% of your market cap. And so have you been considering going private? I mean take some leverage to take advantage of this evaluation? And if not, why not?

[Rodolfo Ramos, executive]

I'm going to -- Daniel, can you help me with that question?

[Daniel Salazar, executive]

Yes, Rodolfo. Well, of course, at this level, it's an opportunity to look at, but we don't have any decision on that regard. Of course, we have a priority to invest our money in our growth strategy, not only in organic growth, but also in inorganic growth.

So for that reason, we are very actively looking for opportunities, not only in Mexico, as you know, but also outside Mexico.

[Rodolfo Ramos, executive]

And regards of the first question is, you are talking about chicken. The mix of chicken and the traditional and modern channel and chicken. Am I right, Hector?

[Héctor Manuel López, analyst]

Yes. Yes, of course. Yes.

[Rodolfo Ramos, executive]

Well, in the second quarter was very tough for the traditional market, and we saw an increase in the retail market because of the panic purchasing that occurred in that quarter. And with the shutdown of the food service restaurants, the dine-in, mainly the dine-in restaurants and the touristic destination, the hotels, we saw a dramatically reduction in the consumption of -- in that particular channel.

But in the fourth quarter, we saw a more balanced demand in all the channels. The live market outperforms, the public markets was very good. It's amazing, but all the grocery, [ so easily ] quick service restaurants like KFC and other customers, they recovered and even they growth against the same period of the last year.

So the recovery on that channel was very good, the institutional channel and the traditional channels. So right now, I can say that the demand of those channels are in balance.

[Operator]

And we do have our next question from Ulises Argote.

[Ulises Argote Bolio, analyst]

Congrats again on the results. A couple of questions here on my side. But first, I don't know if I missed this, but you comment on Miguel's question regarding the expectations for margin into this year? Do you already have some -- maybe some visibility or some sensitivities there that you could share with us?

And then the second question that I had was related to the industry dynamics in Mexico. Obviously, we've seen the stronger prices, as you have mentioned. But what kind of has been the recent evolution that you have seen in terms of your own market share?

I know you comment on your opening remarks that you're still seeing kind of an adequate supply and demand equation, but are you seeing any other players being a bit more aggressive in terms of price or in terms of putting more supply into the market?

[Daniel Salazar, executive]

Okay. In your first question, Ulises, I could say that it's very difficult to predict, at the beginning of the year, how well we can perform during the year. Even that we have a very strong beginning, remember that we are facing a very volatile market in terms of raw materials as well as a very large uncertainties in the economic -- in the Mexican economy for the rest of the year. So it's very difficult to predict.

But at least, we think we would like to have the same level of profitability than the previous year, at least. And I will leave the second question to Rodolfo.

[Rodolfo Ramos, executive]

Thank you, Daniel. The second one, well, market share this year, as you can see in our release, the growth in terms of volume, 1.9% in our chicken operation, which is at least 1.5% of that amount is in the Mexico operation.

But I think with that expansion of our production in Mexico, I'm sure that we are going to increase our market share just marginally. It's very, very small because I think the industry is going to grow around 1%, no more than 1.5%. So I can say that we maintain or increase, slightly, our market share.

[Ulises Argote Bolio, analyst]

Okay. That is perfect. And another one, if I may, maybe this one for Daniel as well. Can you remind us how much of your cash you're currently holding in dollars? And how we should think about this going forward kind of on the FX impacts related to this?

[Daniel Salazar, executive]

Well, we are now around 60% of our cash position in U.S. dollar terms, and our -- it's very easy to maintain that level for the rest of the year, at least as we face this uncertainty in the economic market and in the Mexican economy as well.

[Operator]

[Operator Instructions] We have a next question from [ Kobe Balang ].

[Unknown Analyst]

The quick question is, this is a follow-up to the second question, somebody asked about the valuation of the company is being cheap relative to how well you capitalized. And I understand that a majority of the capital, you're inclined to invest in subsequent businesses.

I was wondering, the results of the subsequent business investment, is it going to substantially improve relative to the stock repurchase program that you haven't announced anything like that in last 10 years? How do you think about the capital allocation as repurchasing the stock versus increasing the businesses over time?

[Rodolfo Ramos, executive]

Daniel?

[Daniel Salazar, executive]

Well, as I mentioned before, our priority is to use the cash for our growth strategy. So we don't have any interest right now to have a different capital allocation. Of course, it's something that we are evaluating, it depends on how the market is performing. But right now, our priorities is to continue growing organically and inorganically.

[Operator]

And we do have our next question from Pablo Abraham.

[Pablo Abraham, analyst]

Congrats for the good results. This is more like a long-term question. How do you see the corporate structure once the latest acquisition is approved? Because right now, others, it's more than 11% of total sales, and when you include RYC Alimentos, we will probably reach like 15%. Are you seeing like, I don't know, Mexican poultry, U.S. poultry, others, and I don't know, Mexican beef, Mexican pork? What are your thoughts regarding your corporate structure in the medium, long term? I mean, also, are you planning to give a bit more disclosure of on the latest acquisitions this year? Or what could we expect regarding this topic?

[Rodolfo Ramos, executive]

Well, can you help me with that question, Daniel?

[Daniel Salazar, executive]

Yes, sure. Well, for the long term, we would like to have at least 20% of other proteins. But this is only for our Mexican operation because outside Mexico, there is a lot of opportunity as we have researched in poultry. So depends on how fast our poultry consolidation in other countries could be, so the mix could change in the future. But at least we would like to have 20% or above in other proteins.

[Pablo Abraham, analyst]

Okay. Okay. Very useful.

[Daniel Salazar, executive]

I'm talking about our last acquisition. We cannot share any additional information because we are under the review of our antitrust authorities. But what I could say is that we are very actively looking for the closing of this transaction. So we hope that in the next quarter, probably we could have some news on that regard, and we could share additional information, of course.

[Operator]

And there are no further questions at this time.

[Andrea Guererro, 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]

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