Grupo Bimbo SAB de CV
BMV:BIMBOA
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Grupo Bimbo SAB de CV
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Good morning, everyone, and welcome to Grupo Bimbo's First Quarter 2018 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the company's website at www.grupobimbo.com.
Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements.
I'll now turn the call over to Mr. Daniel Servitje, Chairman and Chief Executive Officer of Grupo Bimbo. Please go ahead, sir.
Good morning and thank you very much for joining us. I am here with Diego Gaxiola, our CFO; our BBU President, Fred Penny; and several members of our finance team.
We will start with introductory remarks about performance in the period, and then we'll open up the call to any questions you may have.
We entered 2018 well positioned to deliver growth and increased profitability, coming off a transformational year in 2017. This was already evident in our results this quarter with higher sales and increased profitability. Strong volume performance in key markets, primarily Mexico, as well as acquisitions completed in the last 12 months, combined with a stronger peso and efficiencies across our supply chain all contributed to margin expansion. As a result, net income increased nearly 30%, having benefited also from a lower effective tax rate.
That is not to say that we didn't face certain challenges. We experienced FX rate translation pressure on our growth rates due to a stronger peso and higher raw material costs, the latter is expected to continue for the rest of the year.
We talked about the transformational impact of our initiatives and investments last year, and I would like to share with you 2 further efforts we are undertaking to strengthen the foundations of sustainable growth. The first is that we have decided to initiate a Voluntary Separation Program in the U.S., effectively implementing a lean organization design to improve efficiency and better position the company for profitable and sustainable growth. The program, which will be offered to certain salaried associates based on their ages and years of service with BBU and/or its legacy companies, will provide eligible associates the option to separate from the company with an enhanced severance and health care benefits package with clear objectives to reinvigorate the business, reduce complexity and design the company to deliver long-term value creation.
The second initiative signals our commitment to value creation through sustainable production. We signed an agreement to receive 100 megawatts of wind energy from Invenergy, North America's largest independent renewable energy company. The agreement will deliver emissions reductions as well as social and economic benefits related to Invenergy's Santa Rita East wind farm in Texas. With this agreement, we will be able to use 75% renewable energy for all our global operations, one of the largest conversions globally in the food industry.
Let me now provide some detail on our performance by region. In Mexico, sales rose almost 11% over last year, an outstanding feat by any measure, driven by performance in the cookie, cakes, salty and confectionery categories. Organic sales growth and healthy channel performance can be also attributed to increased customer penetration within our distribution network and new product launches, such as the Rye Bimbo bread, our Pingüinos Cookies and Cream and other salty snacks.
At the operating level, adjusted EBITDA increased 17.4%, primarily reflecting lower raw material cost due to a stronger peso as well as efficiencies across our supply chain.
Moving on to North America. The 5.9% decline in sales reflected the FX rate translation effect as performance in dollar terms came in 2% higher versus the year-ago period. In the U.S., sales increased mainly on the back of some price increases, market share growth and notable performance in Sara Lee, Entenmann's and our snacks brands. This partially offset pressure coming from our non-branded, frozen and premium businesses, the latter arising from a more competitive environment. As for our strategic brands in this market, better execution and focus are helping sales to trend positively.
In Canada, sales also trended positively with outperformance in salted snacks, mainly the Takis and SANISSIMO brands as well as the breakfast category. The region was mainly affected by the unfavorable impact of commodities, offset by our pricing strategy and lower restructuring expenses. North America as a whole adjusted EBITDA margin contracted 40 basis points. So to offset this effect, we must continue to work on our pricing strategy and product mix.
Moving on to Latin America. Results continue to reflect the change in accounting method for the Venezuela operation that was put in place last June. Excluding this effect, sales were up in local currencies in each division. Notably, the region is continuing to trend positively with every country growing, particularly Argentina, in part due to strong performance in the bread and snack categories as well as our global brands. Furthermore, our turnaround stories are going in the right direction. In the first quarter, Brazil, Argentina and Peru performed as planned, and we remain optimistic as we continue to see opportunities going forward. All of this resulted in a significant 350-basis-point expansion in the margin, one of our best improvements ever even considering that we no longer have Venezuela in our numbers.
We also completed a small acquisition in Peru, International Bakery, that produces bread, buns, turron and panettone out of one plant in Lima. This acquisition strengthens our presence in the modern and QSR channels and expands our footprint in the country.
Moving on to Europe, Asia and Africa. Sales nearly doubled over the same period of last year with the integration of Bimbo QSR, India and Morocco. The bread category and the Donettes brand in Iberia as well as the croissants category in the U.K. delivered good performance.
Organic sales and adjusted EBITDA performance in Iberia continues to be slower than we expect going forward due to integration-related delays. We're still working on this process and expect to see the benefits of our previous investments in the near future. Adjusted EBITDA performance was strongly benefited by the integration of Bimbo QSR as well as by lower integration expenses.
As for the Mankattan acquisition in China, we're still pending some approvals, but expect to complete the acquisition during the second quarter of this year.
Finally, I would like to emphasize that although we continue to be positive about the global outlook for the year, we are at the same time cautious and concerned about the potential volatility and change in the direction of our country. As you know, we will have the largest electoral process ever in July 1. These are not "business as usual" times. There's much at stake for Mexico in this election. Our investment policy has always been prudent. Our geographic and revenue diversification remains a key strength as we don't rely in one country, but the current situation in Mexico demands a cautious stance.
We are currently working on different fronts. We are reviewing and delaying part of our CapEx. We're tightening our cost structure in order to prepare ourselves for a volatile economic environment in Mexico in which our consumers and customers may be affected as well.
We're following closely what the President candidates are saying and taking every measure to face the possible challenges ahead. As a Mexican company, we remain committed to our country, our communities and our associates.
Before we take your questions, I will ask Diego to talk about our financials.
Thank you, Daniel, and good morning, everyone. We had a strong first quarter. I would like to highlight some of the metrics that we were able to achieve with a sales growth of 1.6% and adjusted EBITDA of 12.2%. Excluding the translation effect, sales would have grown 6%, while adjusted EBITDA would have grown 15%.
We posted a strong EBITDA margin expansion of 90 basis points, arising from strong sales performance as well as lower SG&A and integration expenses in all regions. I would like to highlight that for the third consecutive quarter, the Latin South division reached positive EBITDA with a strong performance in almost all the markets, which offset the effect of the change of accounting method in Venezuela, a country that positively contributed to our earnings in the first quarter of 2017.
As for our financing cost, we saw an increase of 10% compared to the first quarter of 2017, mainly due to a higher debt position, reflecting the acquisitions completed over the past 12 months. And to a lower extent, a higher average cost of debt coming from the shift of currency mix towards more Mexican pesos.
As we shared with you last call, we started to see the benefit from the U.S. tax reform in our effective tax rate, which, coupled with the strong operating performance, contributed to the 27.7% net income growth and to the 40-basis-point expansion in the net margin.
Moving on to our balance sheet. Our total debt to adjusted EBITDA ratio closed at 3.2x compared with 3.5x in December 2017. This is a notable improvement over just a 3-month period and indicative of our commitment to deleveraging our balance sheet as we move forward.
Finally, as you might already know, 2 weeks ago, we priced USD 500 million in Perpetual Notes to yield 5.95%, making us the first Mexican consumer company to issue this kind of instrument. This bond supports our effort to preserve a healthy financial position, enhances the strength, stability and flexibility of our capital structure, reinforces our commitment to deleverage and maintain our solid investment grade rating.
That concludes our remarks this morning. So Brandon, please, can you help us with the Q&A session.
[Operator Instructions] Our first question comes from Álvaro García with BTG Pactual.
My question is on the new Voluntary Separation Program in the U.S., which you mentioned aims to buy out employees with compelling long-term severance. What's the scale of this project? And I was hoping you could potentially provide some color or your longer-term strategy is with this compensation tool, perhaps shedding some light on how much more attractive compensation terms will be like versus your offering today. And how can we expect it to interact with your multiemployer pension plans in the U.S. is another question as well? So yes, how relevant is it for you over the longer term?
Fred, would you like to take that one, please.
Yes, certainly, I'll take it. Let me start by saying that we're in the process at the moment. So we're not prepared to give specific financial guidance on the impact of the program. I will say, this is a decision we did not take lightly. We certainly value all of our associates, but the economic environment has changed certainly as it relates to cost inflation pressures, and we felt we had to make a significant move to put a much leaner, more efficient organization structure in. The program is focused on our salaried workforce only, Álvaro. And we expect to see approximately a 15% reduction in our salaried workforce as we get through the process. But as I said -- as I mentioned in the beginning, we're in the selection window right now so we don't know exactly how that's going to come out. It will be a second -- so there are no -- on your next question, it is not subject to our hourly associates. Let me see, the other point I wanted to make. So it will be a second quarter charge. And we expect to realize savings beginning in the third quarter of the year for the full second half of the year.
Great. And if you can maybe shed some light on like the scale of it. So what percentage of your employees or you're just not ready to share that information yet?
I don't want to go beyond that we're thinking it will be in the 15% -- a reduction of approximately 15% of our total salaried workforce.
[Operator Instructions] Our next question comes from Juan Guzmán with Scotiabank.
I have a quick one here. We have seen a nice improvement in your general expenses, about 150 basis points before integration. So we'd like to know how much of these gains are attributable to your zero-based budgeting program and how much come from other factors?
Juan, this is Diego. While we do not disclose the specific information regarding the savings that we have been able to achieve with the zero-based budget initiatives, what I can tell you is that we have continued to see benefits in our cost and expenses, mainly in Mexico and North America. And because of the benefit that we're seeing -- we have with this program, we're working on exploring how to expand the reach of our zero-based budget initiatives all across the company.
[Operator Instructions] At this time, I'm seeing no further question, so this concludes the question and answer -- oh, I'm sorry, we have someone who jumped in. There's Sergio Matsumoto with Citigroup.
I just have an additional question on the Voluntary Separation Program. Are the unionized employees eligible for this program?
Sergio, no, they are not. This program is for salaried associates -- nonunion salaried associates only.
Okay. So if that's the case, then it will not affect your contribution to the MEPP going forward?
That's correct. Yes.
Our next question is a follow-up from Álvaro García with BTG Pactual.
My question is on Mexico. So a very impressive sales print in the quarter, top tier across most food and beverage names in Mexico. I was wondering if there's any seasonality in this print and sort of your view on, if you can maintain this going forward for the rest of the year.
Yes. Álvaro, we are truly happy with our performance in the market, our efficiencies in our operations and all our programs that we have put in place. So I think that our Mexican team deserves a lot of credit. Going forward, I mean, from the market perspective, we have all our engines light up. And we're bringing on a lot of innovation, a lot of marketing programs. And now that's what we can do. We don't know what's going to be the consumer appetite. The election obviously brings volatility, and that's why we're in this case being more prudent because it could change the direction of our business in the near future. So that's why we're less clear about what's the future in the second semester.
That's clear. But you would say that, let's say, the consumer as it stands today is on firm footing, no?
Definitely. We're very optimistic as it is right now.
Our next question comes from Antonio Hernández with Barclays.
Just touching back on the point on volatility expected in Mexico because of the elections. It is like one of your main concern because as you said, you're optimistic on the consumer as it is right now. So basically after July 1, your outlook is a little bit more positive on considering less volatility. So that's basically my question. And also, you mentioned that you're willing to delay part of your CapEx because of this reason. So is that also going to be like more now on a normalized basis after the elections?
Well, we don't know what's going to happen definitely. Nobody knows what's going to happen after the elections. And we don't have an idea if there is going to be less or more volatility. What we're basically doing is being more cautious and planning our spend depending on what the outcome of the election in terms of CapEx, not only here, but in the whole company as the importance of the Mexican operations for our company is relevant. So this delay will -- I mean, we'll see how it goes and how volatile the environment is then to see if we proceed then with our CapEx plans or we delay them further on.
Our next question comes from Miguel Ulloa with BBVA.
The first one would be regarding the expected impact from the new wheat prices worldwide. Could you provide some color on the impact you expect in the margins per region, please?
We didn't hear you very clearly. What's the question?
It's regarding the new wheat prices worldwide. The increase that the prices have in the last couple of months and the expected impact in the margins per region.
You're referring to the Bimbo QSR business?
Sorry, the line is very bad. I'll try later on. Sorry about that.
[Operator Instructions] There are no further questions. Sir, go ahead.
Thank you very much all for your time today. And as always, please do not hesitate to contact us with any further comments or questions you may have. Thank you very much.
Thank you. This concludes today's presentation. You may now disconnect your line at this time and have a nice day.