Industrias Bachoco SAB de CV

BMV:BACHOCOB

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name is Sylvia, and I'll be operator for today's call. At this time, I would like to welcome everyone to the Fourth Quarter 2021 Industrias Bachoco Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Andrea Guerrero. Andrea, you may begin.

[Andrea Guerrero, executive]

Thank you, Sylvia. Good morning, and welcome to Bachoco's Fourth Quarter 2021 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. 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 or 20-F, which could make our current results differ materially from the forward-looking statements discussed in this call.

Except as required by applicable law, Industrias Bachoco undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, unless otherwise indicated, the amounts mentioned in this conference will be figures of 2020 with comparative figures for the same period of 2020 in Mexican pesos.

As a reference, the exchange rate as of December 31, 2021, was MXN 20.51 per U.S. dollar. Here with me are our CEO, Mr. Rodolfo Ramos; our CFO, Mr. Daniel Salazar; 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.

In 2021, in terms of economic growth, there were improvements globally. In Mexico, according to Banxico, Mexican economy is expected to grow by around 5% versus 2020 when it had showed a contraction of 8.20% against previous year.

Inflation, on the other hand, according to [ INEGI ] was 7.36%, the highest value of the last 5 years. Regarding our industry and our company, we observed balanced supply and demand conditions both in Mexico and the United States, which allow us for most of the markets in which we compete, to reach in 2021 our pre-pandemic levels.

Having a widespread footprint with participation in all the main channels in Mexico, allow us to capitalize those conditions while improving our sales mix, reaching double-digit sales growth for the full year. In terms of cost, high raw material prices in U.S. dollars represented one of the main challenges to overcome. In 2021, had a negative impact across our business line.

On the average for the year, we observed grain around 40% higher than 2020 levels, while soybean meal increased around 28% versus the average of 2020 as well. On the other hand, particularly in the United States, labor shortages also impacted the results of this operation during the year. Regarding our other segments, balance sheet maintained its volume levels fairly flat year-over-year with some pressure in margins as a result of the behavior that commodity prices that were already mentioned.

SASA, on the other hand, we presented most of the increase in volume for the segment. In this regard, we keep working on the integration of this operation mainly towards being self-sufficient in terms of lifetime supply. Especially in these challenging times, we remain focused on being very efficient with our SG&A [Audio Gap] paid was 8.9%, which is lower than the 9.3% reported the last year. As a result of the afore-mentioned conditions, we reached an EBITDA of MXN 7,359.9 million compared to the MXN 6,036.7 million for the same period of 2020, with margins of 9% and 8.8%, respectively.

We continue with a very solid financial structure. In 2021, we generated a net cash of MXN 80,783.1 million and reported a CapEx deployment of MXN 3,500 million, amount 27.2% higher than 2020. In this regard, we keep our commitment with our investors of growing while adding value to the company. As a result, we announced in January of 2022, the acquisition of RYC Alimentos, which is a multi-protein company based in Poland with a business model that promises some interesting synergies not only with our core business, but also with SASA. This integration is in line with our diversification strategy.

At this point, I will turn the call over to Daniel for a discussion of the financial results.

[Daniel Salazar, executive]

Thank you, Rodolfo, and good morning, everyone.

As a result of the conditions Rodolfo just mentioned, our company's fourth quarter '21 net sales were higher 15.9% for the quarter and 18.8% for the full year versus the respective period of 2020. For 2021, sales for our U.S. operations represented 24.8% of total sales, which is lower than the 28.3% reported in 2020. This was mainly a result of growth in Mexico.

Cost of sales for the third quarter was MXN 18,488.2 million and MXN 68,147.9 million for the full year. This represents an increase of 27.8% for the quarter and 18.1% for the year. This increase was due to higher cost of raw materials, both in dollars and Mexican peso terms. Gross profit for the quarter was MXN 2,763.3 million with a gross margin of 17% for 2021. We reached our gross profit of MXN 2,551.2 million with margin of 16.6%. This amount is 22.3% higher than the gross profit reached in 2020. Total SG&A for the fourth quarter of 2021 was MXN 2,145.5 million or 10.1% of total sales compared with the MXN 1,666.9 million and 9.1% for the total sales of the fourth quarter of '20.

For the year, SG&A totaled MXN 7,202.9 million or 8.9% of total sales compared to the MXN 6,420.4 million and 9.3% of total sales 2020. On the other hand, we have other expenses of MXN 108.3 million for the fourth quarter of '21 compared to other expenses of MXN 51.3 million of the same period of 2020. For the full year, we reported other expenses of MXN 352.6 million versus MXN 362.5 million reported in the 2020.

Operating income for the fourth quarter of '21 totaled MXN 509.5 million and operating margin of 2.4%, which is lower than the MXN 2,147.9 million and the 11.7% margin reached in the fourth quarter of 2020, which is a very typical year. This operating income for the full year '21 was MXN 5,895.7 million with an operating margin of 7.2%. Higher than the amount of MXN 4,301.5 million reached in 2020 with margin of 6.3%.

The EBITDA margin for the quarter was 4.1%, which is lower than the 13.4% EBITDA margin of the fourth quarter of 2020. For the full year '21, the EBITDA margin was 9% higher than the 8.8% risk in the same period of 2020. In the fourth quarter of 2021, we had net financial income of MXN 149.6 million, which is -- which compares to the net financial expenses of MXN 1,154.6 million for the same period of 2020.

Those figures compared to a net financial income of MXN 831.9 million and MXN 882.2 million for the 2021 and 2020, respectively. For full year of 2021, we had income taxes of MXN 1,782.2 million, higher than the MXN 1,211.6 million in 2020. This was a result of higher operating income in 2021. All the above led us to a net income of MXN 610.2 million for the quarter with margin of 2.9% for the full year of 2021. Net income totaled MXN 4,945.3 million with a time margin of 6.1%. This amounted 24.5% higher than the pesos reached in 2020.

Net earnings per share were MXN 1.08 for the quarter, while for the full year '21, we reached a net income per share of MXN 8.45 compared to a net income per share of MXN 1.66 and MXN 6.56 for the same period of 2020, respectively. Going into our balance sheet. Total assets increased 12.8% when compared to the year-end of 2020. Our net cash position was MXN 18,783.1 million at the end of the quarter, higher than our net cash level of MXN 16,530.3 million for the beginning of the year.

Our CapEx was MXN 3,500 million, which is MXN 27.2 million higher than the amount invested in 2020. Capital expenditure in 2021 was oriented to projects that will enable us to support our organic growth and maintain our facilities in a high level of productivity.

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

[Rodolfo Ramos, executive]

Thank you, Daniel. In terms of pricing, we are entering the first quarter of '22 in good shape for both Mexico and in the United States. We consider that as long as there is a balance between supply and demand, we can trust conditions could remain. However, we foresee a difficult comparison versus the first quarter of '21 as raw material prices remain high, which will pressure our cost of sales and tighten our margins.

Regarding labor in the United States, we are starting to see improvements and we are confident that the efforts made by our team in order to keep talent will offset some demanding challenge in cost. Having this landscape ahead, we keep working on being very close to our customers to fulfill their volume needs as efficient as possible, while adding rigs to our business portfolio.

With that, we will now take your questions.

[Operator]

[Operator Instructions]

And the first question comes from Fernando Olvera from Bank of America.

[Fernando Olvera Espinosa de los Monteros, analyst]

I have 3 if I may. The first is one regarding the U.S. Can you comment what explains the decline in volumes in the U.S.? And how do you expect them to behave in 2022? And the other 2 questions are related to RYC Alimentos. Can you share what has been the growth of the business in the last 5 years? And if you have any initial thoughts about the potential growth of the business in the next 5 years? And the other one is regarding the stores that the business had. So initially, what are you -- what are you planning to do with these stores? Are you going to sell them? Or you will explore to grow this division?

[Rodolfo Ramos, executive]

Daniel, please?

[Daniel Salazar, executive]

Okay. Probably answering the first question in terms of our volume in the U.S., we, of course, had a contraction for several reasons. One important one is the lack of labor that we -- that limited our production capacity, but also some changes in our mix that end up in a production probably middle-single digit for the year. But we are now in a very better shape, and we are recovering our capacity so we are growing and recovering that volume. And our expectation for the next year is to grow out this middle-single digit.

The second question about the RYC Alimentos growth. Historically, this business has -- has grown in around 5% on a yearly basis, on a compounded growth rate. And our expectation is to at least maintain this level of growth and with the synergies that we have identified, we expect to increase this growth rate. So this is too soon to have a number in mind because we are now in the integration process, but at least we can say that we will maintain this growth phase.

And Rodolfo, I don't know if you want to share a little bit about the stores and the retail business line that the RYC Alimentos has?

[Rodolfo Ramos, executive]

RYC Alimentos is -- there's a lot of synergies with our core business and SASA. 2022 is going to be -- we are going to expand the operation around 5%. But our expectation is for 2023 because right now the project of expansion of our live operation is underway. So we are going to see the first -- the sales of this production in 2023. So the acquisition may make a lot of sales in terms of value-added products, the risk brand, the risk products participate in [indiscernible] makes a very good combination with SASA and other projects. So we are very pleased with this acquisition in terms of the development of the other plan, the synergies with SASA. So 2022, we think it will be around 5%. We expect to grow overall and that's the number. I think double digit for 2023.

[Operator]

Our next question comes from Emiliano Hernandez from GBM.

[Emiliano Hernández Marvan, analyst]

I have 2, if I may. The first 1 is related to chicken prices in Mexico. Obviously, the comparison base next year is going to be very tough. You mentioned a good start of the year. Do you think with your pricing power ability you will be able to maintain or even be above such levels? And then just a quick one. Could you give us more color on the 29% increase in SG&A. What are the main pressures you're seeing there? And should we continue to see them in the coming quarters?

[Rodolfo Ramos, executive]

Thank you. Go ahead, Daniel.

[Daniel Salazar, executive]

Okay. Well, talking about the chicken price in Mexico. As you mentioned, we actually started in a very good shape in the first quarter. Even that we have maintained a very good level of price, there is a very tough -- in coming months due to the high -- the run that we have seen in the commodity prices for the raw materials. So it's a very significant challenge for the months to come. So it's difficult to predict that we will maintain our performance. But as far as we can say, we have maintained a very good balance between supply and demand. So at this moment, we feel very comfortable what we are doing into the company. So at least the first quarter will be probably above our expectations, but the second quarter, even that seasonability -- we have a high seasonability for the second quarter. There are some challenges in the raw materials arena.

In terms of our SG&A, half of the increase in the fourth quarter that we -- is the recognition of the profits, the [indiscernible] that is the profit that we'll share with our employees according with the new rules of the Mexican law and half of the increase is coming from the increase in sales that we have in the fourth quarter. In terms of freight increases in -- also in maintenance for our distribution network in order to manage the increase in volume, basically, the -- the more significant items in the SG&A increase.

[Operator]

Our next question comes from Juan Bonte from Bradesco.

[Unknown Analyst]

My question is on how you guys are seeing the first few weeks of 2022 in terms of supply chain issues. Do you see any moderation on the labor shortages now that Omicron is somewhat winding down, particularly in the U.S., but also in Mexico, you can talk a little bit about that, that would be great.

[Rodolfo Ramos, executive]

Thank you, Juan. And here in Mexico, our turnover is under control, and we have no problems of challenges of labor here in Mexico. The problem has been in the States -- and right now, we are in a very good position, we increased our wages, and we are very competitive in the marketplace and we have been able to staff our lines. I think we now -- we are almost 90%, and we are -- every day, we are reducing that gap. So I feel comfortable with the level of labor that we have right now, and that allow us to run our processes at full capacity at this moment.

[Operator]

Our next question comes from Ulises Argote from JPMorgan.

[Ulises Argote Bolio, analyst]

I had a couple, maybe more on the M&A angle. So the first one related there to RYC Alimentos. Can you give us any sense of where margins look like for this business? And maybe if you have some changes to your long-term margin outlook, the 9% to 11% that you've always talked about, does this shift in any way with the rig business following here?

And then the second one, maybe more on the potential of further M&A, but obviously, you've had the JV there on SASA and now the acquisition of RYC over the last couple of years. So should we expect anything more in the M&A front in the short term? Or are you kind of focusing more on integrating and extracting the synergies from these 2 projects first and then moving to maybe other M&A or what's more or less kind of the mindset that you have around?

[Rodolfo Ramos, executive]

In terms of RYC Alimentos, we see a lot of synergies. Once the synergies are in place, we are going to have the same margins or better margins. But we need to capture those synergies. And I think we are going to have those synergies in place in the next quarter. The second quarter, we are going to capitalize those synergies.

And for the next question, I want to ask Daniel to help me with that.

[Daniel Salazar, executive]

Sure. Well, adding to the first question, the historical margin of the RYC Alimentos is around or have been around 5% -- 5% to 6% and with all the synergies that Rodolfo have mentioned, we expect at least to increase 1 or 2 percentage points in long term. Right now, this industry, not only RYC, but the industry has facing a very tough situation due to the prices of the meat. But anyway, we are very comfortable in that we can exceed in all the synergies that Rodolfo has mentioned.

And now talking about the other M&A opportunities, we are also -- besides the integration of RYC Alimentos, we are also looking for other opportunities outside Mexico. And I would say that the integration of RYC Alimentos will take probably less time than expected because we realized, I would say, a very good and talented management into the company. So this will allow us to concrete the integration sooner than later in order to be more focused in trying to concrete additional M&A opportunities in the short term.

[Operator]

Our next question comes from Bernando Malita from Compass Group.

[Unknown Analyst]

Just to talk a little bit about these price increases. Do you have any plans on hedging for 2022? And what are these plans? Or do you have a specific plan to neutralize these price increase in raw materials?

[Rodolfo Ramos, executive]

Well, in terms of the pricing and hedge, we have contracts with some of our customers for a long period of time. Maybe with some of them, they hold you -- with others just half a year or so. When we do that, normally, we hedge corn, soybean meal and foreign exchange. So it's a kind of cost loss agreement with some of them. Over -- all the way, we just have a very strict policy, and we don't have more than 2 or 3 months of our requirements of raw materials and stock. We said for some areas where we have a domestic crops like the Northwest, some in the Central and Northeast of the country. And those areas we can buy more than 2 or 3 months. In some time, if the price -- if the price allows us to buy the whole clock, we just covered the 12 months in advance. But it's no more than 20% of our requirements. But in terms of the rest is -- I can say that we have a hedge of maybe 18% of our requirements for those customers.

And the rest is we have no more than 2 or 3 months on inventory. What we have seen in the past, takes maybe 3 to 6 months, translate the cost increase to the price of the finished groups. So we cannot speculate to have more than that time in our inventory. And that's our policy then we have been handle all the time. And we are very strict, and we stick with that policy.

[Operator]

We have no further questions at this time. I will now turn the call back to your host for final remarks.

[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]

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