Grupo Bimbo SAB de CV

BMV:BIMBOA

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, everyone, and welcome to Grupo Bimbo's Second 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'd 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 will now turn the call over to Mr. Daniel Servitje, Chairman and Chief Executive Officer of Grupo Bimbo. Please go ahead, sir.

[Daniel Servitje Montull, executive]

Good morning, and thank you very much for joining us.

I am here with Diego Gaxiola, our CFO; BBU President, Fred Penny; and several members of our finance team.

As usual, we will start with the introductory remarks about performance in the period, and then we will open up the call to any questions you may have.

Important developments in the quarter combined with underlying trends in the business were reflected in our results.

On one hand, sales growth was strong, particularly in Mexico, and with the integration of Bimbo QSR and other recent acquisitions. We also benefit from FX rates and so EBITDA and operating margin expansion in Mexico, Latin America and EAA.

On the other hand, as we previously announced, we successfully finalized our voluntary separation program in the U.S. That already had started to deliver the expected operational benefits by having a leaner and much more agile organization.

We are confident about the positive long-term impact to the business with an expected payback of less than 2 years.

As we move forward, we will continue to implement these kind of restructuring opportunities throughout all our geographies, with the aim of investing and creating leaner and more optimized organizations with agile [ beams ] that will be a key part of our path to group profitability as we reach our productivity standards.

I will also say that a handful of other factors affected performance in the period such as commodity energy inflation across North America, some market issues in Latin America and the integration in Iberia, but we will cover those in the regional comments.

So I will now provide some detail on our performance by region.

In Mexico, sales rose a healthy 13% over last year while volume performance was strong in every channel, every region, every category and every brand.

At the operating level, EBITDA also increased almost 18%, primarily reflecting the positive effects from the top line growth coupled with lower raw material costs due to a bigger foreign exchange rate while the margin expanded 50 basis points.

As for North America, net sales increased 7.9% due to exchange rate benefit and a 4% growth in dollar terms.

In the U.S., growth was attributable to price increases, growth in the strategic brands and overall in the snacks category, as well as the integration of Bimbo QSR and base English muffins, which was partially offset by private label volume declines.

Meanwhile, results in Canada were strong, particularly in the bread category on the back of -- got good volume performance in the large format stores.

Even though sales were strong in dollar terms, EBITDA declined 68% due to a $105 million noncash charge related to the VSP completion, and to a lesser extent, the integration of the bolt-on acquisitions than favorable impact of commodities and energy inflation.

We expect to face inflation and commodity headwinds for the rest of this year and the next one.

So to offset this effect, we will continue working on our pricing discipline, improving our product mix and in all our initiatives to increase productivity such as the VSP that are the essential strategic tools to continue expanding our profitability metrics in the longer term.

Moving on to Latin America. Even with the disruption happening at Nicaragua that is affecting our distribution throughout the Central American region, sales increased almost 2%, showing strong performance at Central America and a stronger execution at the point of sale combined with increased plant penetration at the provisional channel.

Keep in mind that last year results continued to reflect the changing accounting method for the Venezuelan operation that was put into place in June of 2017.

Partially offsetting these factors were the significant impact of the national truck strike in Brazil, and in Argentina, we're expecting a weaker consumer sentiment due to the recent change in FX.

Nonetheless, efficiencies across our supply chain coupled with a lower restructuring expenses contributed to the significant[ 390 ] basis point expansion in our EBITDA margin.

One of our best improvements ever.

Moving on to EAA. The strong sales increase was mainly attributable to the integration of Bimbo QSR. The bread category in Iberia delivered strong results including market share gains, offset by pressure in the sweet baked goods category and the bagels operation in the U.K.

Organic sales and EBITDA performance in Iberia continued to be slower than what we would expect going forward due to the multiple labor negotiations that have delayed our expected integration plan.

We are still working on this process and expect to see the benefits of our investments in the near future.

EBITDA was benefited by the integration of Bimbo QSR, but partially offset by higher integration expenses in Iberia and China.

As we announced, we completed the Mankattan acquisition in China, and we're delighted to welcome Mankattan's 1,900 associates to the Grupo Bimbo family.

They have built a sizable customer base in key urban markets and a business that complements and enhances our current product portfolio, distribution network and manufacturing facilities.

Not only does the addition of Mankattan strengthen our presence in the country, it also provide us with a platform to grow the market of branded packaged baked goods, as well as the food service channel throughout China.

This is a vital growth market for us and an acquisition that bolsters our global profile.

I would like to note that the integration plan encompasses the closing of our current Beijing facility, and we will be moving all the production to our new Mankattan plant, from which we expect integration expenses to be in the range of $20 million to $25 million in the coming month and part of the next year.

Lastly, as you know, Mexico elected a new President and Federal Congress on July 1.

As always, we're proudly committed to Mexico, and we continue to give our best to make the country stronger and more prosperous as we build a sustainable, highly productive and [indiscernible] company.

We look forward to working with the incoming administration in our hope to advance security, rule of law and growth in Mexico.

Before we take your questions, I will ask Diego to talk about our financials.

[Diego Cuevas, executive]

Thank you, Daniel, good morning, everyone.

As Daniel mentioned, the second quarter results reflected strong sales growth of 11.2%, while EBITDA declined 23%.

While adjusted to exclude the VSP charge, EBITDA would have increased 10% while net income, considering this adjustment, increased 25.6%.

As for our financing costs, we saw an increase of 23% compared to the same period of last year.

Mainly due to our higher debt position, primarily reflecting the acquisitions completed over the past 12 months, and also because of a slightly higher interest rate due to the recent change of our currency mix.

On this point, it is important to highlight that we significantly reduced the Canadian portion of our debt, moving from 16% to 5%, and we also removed all the euro portion with a prepayment of approximately $120 million outstanding from the revolving credit facility.

This left us with a much higher Mexican peso in nominal debt of 36% of the total, which better matches our cash flow generation.

Moving onto our balance sheet. Our debt position was lower mainly because of the prepayment I already mentioned, while our total debt-to-adjusted EBITDA ratio excluding the VSP charge closed at 3.2x compared with 3.5x as of December, 2017.

This improvement is an indicative of our commitment to deleverage our balance sheet as we go forward.

Although our operating free cash flow was negative by MXN 700 million, we have a positive expectation for the full year, which along with our sales growth and margin expansion, will lead us to our deleveraging target of being below 3x total debt-to-adjusted EBITDA.

I would like to highlight that we consume MXN 1.3 billion in working capital in the first half of the year, mainly because of an increase in accounts receivables related to the changes in electronic invoicing in Mexico that has created a delay in declaration process, particularly at the modern channel.

We are confident this will be resolved in the coming months, while we are currently in the process of implementing a working capital project to accelerate the cash flow generation through all of our different organizations.

And lastly, CapEx during the first 6 months totaled nearly $340 million, as we continued to expect investments to be between $800 million to $850 million for the full year.

Carefully aligning our investments with cash flow generation in order to have a priority and the deleverage target.

That concludes our remarks this morning. So Roco, will you help us with the Q&A session, please?

[Operator]

[Operator Instructions] Today's first question comes from Isabella Simonato of Bank of America Merrill Lynch.

[Isabella Simonato, analyst]

I have 2 questions. First of all, in the U.S., in North America, if you could breakdown the top line growth of 4% dollars between what you're facing in Canada and the U.S., and also what were -- was volumes? And what was pricing mix in the top line growth? And the second question in Mexico, also, what has been exactly driving the very strong volume growth? How much depth represented of top line? And what's your outlook for cost in the second half of the year?

[Fred Penny, executive]

Isabella, I'll...

[Daniel Servitje Montull, executive]

Go ahead, Fred, on the North American.

[Fred Penny, executive]

We don't provide breakouts of the elements of the North American businesses, but I will tell you that we saw very solid growth in our biggest category, which is mainstream bread. We have growth in our breakfast category, and we have very strong growth numbers in sweet goods in particular. And I would say, relative to the mix, I would say it is more true volume growth, tonnage growth than it is pricing, but we did realize some pricing in the quarter as well.

[Daniel Servitje Montull, executive]

Yes. And Isabella on the Mexican scene, as I mentioned, we had a very solid quarter, and we're seeing, I would say, an even growth, probably more so on some categories like tortillas or cookies, but in general, it's very even growth in the country in all channels, in all regions, all categories, and our hope is that we stay on that -- with that momentum and we don't -- we're not foreseeing big changes in the economy in the coming months, and we're basically covered on most of our ingredients and hedges on FX for the year. So that's basically just the way we're seeing it as of now there. And obviously, for next year, much will depend on what happens with the incoming government, and what are the policies and sort of the changes that it might impact on the consumer behavior and obviously on the cost inputs to the company and that's still not very clear so far.

[Operator]

And our next question today comes from Benjamin Theurer of Barclays.

[Benjamin Theurer, analyst]

One question, just coming back to the U.S, clearly, we get it, there was obviously a lot of pressure because of the restructuring charge and so on, but you're also showing the adjusted EBITDA that there was a year-over-year pressure in terms of profitability in the North American business and you've mentioned some of the points that were impacting it because of some of the integration expense but also some of the commodity and energy inflation having some impact there. Could you elaborate in a little more detail on each of the segments? How much that contributed? And then as you said that the restructuring is going to have a benefit from a profitability point of view in the U.S., how much do you think it will offset from that roundabout 130 basis points pressure that was, let's say, on the underlying business except for the restructuring? How much would that have been if you would have seen already benefits from the restructuring? That will be my first question. And the second one is, clearly, you're doing some very nice progress in profitability on the international operations with that operating income up 400 basis points, LATAM, roughly 600 basis points, Europe, Asia and so on. The question is, I mean, clearly, we're still in negative territory from an operating income point of view. Do you have any sense of what's required to get that to 0 plus from an operating income point perspective?

[Fred Penny, executive]

Benjamin, Good morning. It's Fred Penny. Let me take your first question. Adjusted for nonrecurring items, the largest of which obviously was the VSP program, but there are a couple of other much less significant items but adjusted for all of the nonrecurring items in the quarter, our operational EBITDA was -- I would characterize it as overall to fairly solid, even to even, year-over-year even on EBITDA dollars and only a slight contraction in the EBITDA margin. And I would say that I characterize it at least from a BDU standpoint as fairly solid performance, given the significance of the inflation headwinds we faced in the quarter, and relative to VSP, we noted in the -- in Daniel's opening comments that it has -- it will have a less than a 2-year payback, and the savings, there were essentially no savings in the second quarter but we expect to see savings for the remainder of the year obviously, and we expect to have a positive earnings performance year-over-year for the second half of the year.

[Benjamin Theurer, analyst]

Okay. And on the other markets.

[Daniel Servitje Montull, executive]

Yes, regarding the negative EBIT that we have on the other markets, I will probably divide the answer in 2 -- first for the region EAA, we will start to see an important improvement once we finalize with a integration expenses from the acquisition of Spain, I can tell you that as it has been mentioned before, we do have a delay, but we are at the final stage of this process. So we feel very confident that for next year, we will see a very different P&L, because we're not going to have the expenses, and we will start to see the benefits from all the integration and the restructure. Now for LATAM, we were already positive EBIT, as of the first quarter, unfortunately, during the second quarter, we had some extraordinary events of the strike in Brazil, that hurt the profitability of that market, which is very relevant in the region. So we also feel confident we will be back to the positive numbers in the coming quarters.

[Diego Cuevas, executive]

I would add that we're seeing also a good change in Argentina even with the difficult situations that they are in. And obviously, in Central America, the situation in Nicaragua still not resolved, and we're managing as we can, given that, that country is basically in the middle of the whole region and it's creating problems to distribute our products not only to Nicaragua but to all the region as a whole. But only now we're -- we have a positive outlook for both regions and probably a little bit more bullish on LATAM as of now.

[Operator]

And our next question today comes from Lucas Ferreira with JP Morgan.

[Lucas Ferreira, analyst]

I have 2 questions. The first one on, you mentioned a bit about some cost pressures in Mexico. Just wanted to hear your outlook for COGS for the whole company, especially looking at 2019? How are these cost spaces doing especially regarding wheats and freights in different regions, if you can talk a little bit about how challenging those costs or basis would look like for '19? And your perception about how to increase prices to offset those in key markets? And the second question, we were very, very impressed about the profitability of the Latin America business, just we mentioned the strike in Brazil, if you could quantify to us, more or less, what was the impact on margins or even in nominal terms so we can better understand that profitability in the second half of the year?

[Daniel Servitje Montull, executive]

Yes. On the -- our view on cost for the company as a whole, as Fred Penny mentioned, I think that we're seeing the market has been [ heating ] up in the U.S. in many buckets of the P&L. And in general, some of the commodities are growing or increasing its prices, some others are still stable. We're continuing to use our hedging policy, whenever applicable, and that's giving us a little bit more clarity on the expected cost of goods. On that end, I would say that we have more or less a similar view on [indiscernible] in general, but it differs region by region. On -- in LATAM, the main impact, actually the main hit was in Brazil, but we're recovering from it, and it was a hit, obviously, in sales, a big hit in a couple of weeks, but that's mostly the impact on it. So going forward, I -- we hope that the impact is going to be a lower one, although the cost for moving goods in Brazil has increased as a result of that strike. So there is now an additional cost of transporting throughout the country.

[Operator]

And our next question today comes from Luca Cipiccia of Goldman Sachs.

[Luca Cipiccia, analyst]

Diego, I wanted more to expand maybe on a couple of the previous questions. First on Mexico, and I appreciate you commented on this already, but 13% top line growth for a company of your size and penetration is -- seems quite impressive, especially as you commented, this is mostly volume-driven. And I was hoping maybe you could give us a little bit more in terms of what you think is driving that, is it certain categories, certain -- is it general consumer backdrop, again, double-digit top line of what I think was also fairly challenging base, and I think you had a 10% in Q1, 10% last year, just was just curious to hear little bit more on what you think is driving such a positive momentum top line wise in Mexico? And then secondly, maybe on the U.S., again, expanding on your previous question, I was curious to understand, how much of a stepping stone this agreement obviously actually does represent more in terms of how long you've been working on this, how -- it's not a game changer, it's probably too much, but how significant it is in relation to the things that you're planning to do? How relevant it is? And what does it mean for the future? And how much maybe this type of a bottleneck could have helped some of the initiatives back in the past? This would be my 2 questions.

[Daniel Servitje Montull, executive]

Yes, Luca. Well on the Mexican team, we have volume growth, very strong volume growth but also inflation, a bit around the general inflation rate or a bit of both. And that price -- those prices are holding up and we're very happy with the way that we are basically managing the whole situation. We're -- we have been basically doing a good job in trying to take advantage of the opportunities presented at each channel. We kept on basically executing on our plans for the provisional channel and that is paying off and also good growth in the convenient store channel and the modern channel, which is also a channel that's been growing significantly this year in general. So all in all, I would say it's -- this is a reflection of our actions as well as the consumer sentiment in the country this year. On the U.S., I don't know Fred if you want to just take that question?

[Fred Penny, executive]

Yes. Sure Daniel, I'd be happy to. I guess Luca, I would start by saying it's a -- this was a -- was and is a significant event. We're talking about approximately a 15% reduction in our salaried workforce and I mentioned on the last quarter call that this program was only for the salaried population and it was a major event, a major undertaking to do and we did not take it lightly. I have to say also that I give credit to the leadership team of BBU in the U.S. on the manner in which it was executed and the timeline in which this was executed, we're talking about from conception to execution, probably no more than 3 months' time. The objectives are -- were clear to create a leaner, more nimble, more cost-effective organization and quite frankly, to create opportunities for high potential talent to move more quickly through the organization and contribute in a greater way to BBU. So I would leave it at that.

[Operator]

And today's next question comes from Alex Robarts of Citi.

[Alexander Robarts, analyst]

I had a -- 2 as well and I wanted to just start off on the CapEx initiative this year. You've kept with the guidance, I guess at $800 million to $850 million, up from last year clearly but you seem to be coming out of the blocks this first half of the year with the [ 3 ]-- kind of less than half of that, the $340 million in the first half. Could you tell us a little bit about the deployment of where that's been going? And since it seems that this is back loaded, i.e. most of it coming in the second half of the year, where might we be expecting the investments to be deployed? So wanted to come back on a second question in the U.S. but maybe we could start with that one.

[Diego Cuevas, executive]

Alex, this is Diego. Yes, as you mentioned we invested during the first 6 months close to $340 million, which is clearly less than half of the initial estimate that we had as a range of between $800 million to $850 million. We maintain the range, probably will -- going to be more at the lower end of the range, more closer to $800 million. I'll probably like to say first of all that we have continued to be very cautious on starting new projects, as we're able to grow the EBITDA and to generate the cash, taking care of the deleverage objective that we have, as I mentioned to be below 3x by the end of the year. If we see the CapEx, that where we have been investing on upper region basis, I would say probably half of it has been going to Mexico, like 1/3 has been going to North America and like a 1/4 approximately to EAA and Latin America. I think that the mix for the second half is going to be similar, probably a little bit heavier on the EAA as we continue to build a couple of factories, 1 in France and another 1 in Russia. So that can be a little bit more intensive in the second half.

[Alexander Robarts, analyst]

Right. Okay. That's helpful. So on the lower end perhaps for the year, okay. And the second one was around the voluntary separation program and I appreciate the detail that you've given us and it was really for us to clarification, I guess I look back at the initial announcement and I had the impression that this had covered 9% of the eligible, non-union employees but I think I heard during the call that it was 15%. And I'm wondering is it 9% or 15%? Or just kind of are you -- if you could clarify that? And it seems to me that one of the other elements to this is that it can likely change your contribution expense for the multi-employee pension plans. Could you confirm that there could be a connection there? And just remind us, it's been a few calls now that -- how much is that contribution expense running? I mean it was a $120 million on an annual basis, the last time that we had checked in on that and just kind of where you stand on the MEPPs and the current negotiations with the sponsors there? So kind of a multipart question but around that more technical aspect that you've got in the United States.

[Fred Penny, executive]

Alex, it's Fred. Relative to VSP, we gave the numbers 15% and we gave guidance in the Q1 call that it would be in that range. I don't know where the 9% came from, but it's 15%. And it is only the salary pop -- the non-union salary population, so there is no linkage or impact on contribution expense. I'll let Steve Mollick take the second question on MEPPs.

[Steve Mollick, executive]

So Alex, there's no change in the contribution -- to the contribution rate per Fred's comment. And it's in the range of $110 million to $120 million annually and relative to the contingent withdrawal liability and the progress there, we continue to make progress to look at alternatives to manage that risk but it is -- it's stable and there is no major material developments since the last time we talked.

[Alexander Robarts, analyst]

So we're still just about $1 billion to $1.3 billion in the off balance sheet liability? Is that a safe range?

[Steve Mollick, executive]

That's a safe range and it's a little less than 50% of the overall contingent withdrawal liability.

[Operator]

And ladies and gentlemen, our next question comes from Luis Miranda of Santander.

[Luis Miranda, analyst]

A couple of questions. The first one is I know you mentioned in the negotiations in Europe with labor are being slightly more complicated than expected. I wanted to understand if this could lead or we could see some program like the VSP implemented in the U.S.? Or if these negotiations could be too higher than expected integration cost? And then 2 follow-up questions very quickly. You mentioned about the pricing in Mexico in line with inflation, I was just wondering if the very solid volume that you're seeing could open some opportunities for pricing or right now it's something that you're not considering during the second half. And the final one, just a clarification, you mentioned the pay-out for the VSP in the U.S. for 2 years, I just wanted to know if that was the correct number?

[Daniel Servitje Montull, executive]

Yes. On the VSP side, that's the right metric. With -- on the Spanish negotiations, in their lines, we would say that we're arriving at the reasonable conclusions with the different parties involved. It's a -- I would say, it's a rather complex process and we're doing things for -- with a long-term view in mind and not rushing it to conclude it. So whatever we're doing, it's for us to have the right combination of conditions so that we can prosper in the country in the long term. So that's -- just I would say mainly a delay, it might have some implications in some parts of the organization on the functional areas, maybe from more headcount in some areas but in generalized states, it's proceeding alongside the objectives, but with a rather significant delay on the expected closure of the different items. But I would say that we're -- so far, we probably accomplished more than 3/4 of the negotiations in both. On the activities that we're doing in the company in terms of being more productive, that is happening in the different businesses, as I mentioned in my general comments, we will be doing in the remainder of the year, obviously not as big as it happened in the U.S. but we will continue to look in the different countries and areas, where we could resize our structure so as to become more nimble and more agile. And that is -- there is a plan for that to happen in every organization in the remainder of the year and we're proceeding it with that strategy in a thoughtful and sensitive way. And I don't know if there was any other question?

[Luis Miranda, analyst]

Yes. There was just if you see pricing opportunity for the second half in Mexico? Or is it already the pricing increases that you implemented out already, the structure is there?

[Daniel Servitje Montull, executive]

I mean it will depend on a case-by-case, but in general, I would say that we will maintain the -- basically the prices that we have in general and that's our expectation. So we'll see how inflation goes in the remainder of the year.

[Operator]

And our next question today comes from Autumn Graham from Schroders.

[Autumn Graham, analyst]

I had a question on the delevering target of 3x for the end of this year. Are you including the VSP in the calculation of EBITDA for that? And as well as other one-off expenses, as in will that be based on adjusted EBITDA? Or will it include those type of things?

[Diego Cuevas, executive]

This is Diego. Yes, the target that we have will be below 3x, this is excluding the VSP one-time charge we had during the second quarter.

[Autumn Graham, analyst]

Okay. And then in the U.S., I'd be curious to know, a little bit of color on the labor situation there and just what your businesses are experiencing in terms of difficulty in sourcing labor as we've seen across other labor intensive industries in the U.S.?

[Fred Penny, executive]

Hi Autumn, it's Fred. Yes, I guess the general comment I would make on a labor situation is that like other -- many other industries, we're certainly feeling the effects of a much tighter labor market and it manifests itself in longer recruitment time to fill positions and it's just something that we're going to have to deal with and work through as we go forward to the extent that it doesn't change anytime soon.

[Operator]

And our next question comes from Botir Sharipov of HSBC.

[Botir Sharipov, analyst]

I've got a couple, first on top line growth in U.S., 4% in U.S. dollar terms, sounds pretty good to relative to what we've seen in the past few quarters. As you could maybe elaborate where you're seeing the volume growth and how were you able to accomplish that in the second quarter? And whether it is sustainable? And the second question is again on going back to VSP, nice to see that today that the 15% of your non-union now started workforce, but if you could maybe clarify for us, what is it as a percentage of your sales, maybe what kind of savings are you're going to see, hoping to see in the next few quarters? Either as a percentage of sales or maybe overall COGS if it's coming at that line? And also, how do you see the payouts evolve in the next couple of years? Is it going to be sort of $105 million and even payouts over the next few quarters? Just kind of give an idea of the cash outflow that we should expect?

[Fred Penny, executive]

Yes Botir, it's Fred. I'll take a couple of -- I think I'll be able to take a couple of your questions and then I'll let Steve Mollick take the last piece of the question. Relative to the growth of 4%, that's across North America so it's U.S. and Canada, I would -- and it's a combination of tonnage growth and price -- and some pricing. As I mentioned earlier, in terms of categories, it's in largely mainstream bread, what we define as mainstream bread. In breakfast, which would be muffins and bagels for us, and in sweet goods and snack cakes, those categories to varying degrees all experienced tonnage and dollar growth. And really, what's behind it at least from a U.S. standpoint is what we've talked about in past calls is, we've been very heavily focused on driving our strategic most important brands and we're seeing that come to fruition for us and we're going to continue to do that going forward. Relative to VSP, I would say simply, we're not going to give specific dollar guidance. I think we said it's less than 2 year payback. It's directionally 15% of the workforce and we expect to recognize savings essentially now through the rest of this year and into next year.

[Steve Mollick, executive]

And related to the cash usage of -- cash profile of the $105 million VSP charge. That $105 million is largely driven by salary and benefits continuation and you're going to see the cash profile, I'll say spread over the remaining 18 months, the next 18 months, skewed more toward the first half, the first 9 months, if you will, and then tailing off in the back half of 2019.

[Daniel Servitje Montull, executive]

Yes. I will also add that Canada is doing very well. It's probably performing better than in previous years. So we're also very happy about our Canadian performance as well.

[Operator]

And today's next question comes from Felipe Ucros of Scotiabank.

[Felipe Ucros Nunez, analyst]

Most of my questions were answered. Let me ask a quick one about interest expenses. They surged quite a bit over this quarter obviously. You were finalizing transactions and kind of changing a little bit the makeup of your debt mix, but I was wondering if there are some transaction or advisory expenses built into that number? Or any other type of noise? Or whether that's the type of number that should we be -- that we should be expecting for interest rates -- for interest expenses going forward?

[Daniel Servitje Montull, executive]

No, really the increase on the cost of financing and the interest line comes first of all because of the increase on deleverage of the company, we have an incremental MXN 11.3 billion of additional debt as compared to same quarter of last year. And second, we were facing a higher interest rate because of the currency mix as I said, we're literally -- we have a more weight on the peso. And as you know, with a peso debt we have a higher rate. So that's also hurting a little bit in the cost of financing. So that's basically on the interest plan, offsetting these negative effects, we have a positive exchange rate gain in the quarter as compared to a loss in the same quarter of last year, that is creating a positive effect of opportunity for MXN 150 million. So that's basically what we can expect going forward, it's something similar to what we saw during the second quarter.

[Operator]

And our next question comes from Álvaro García of BTG Pactual.

[Alvaro Garcia, analyst]

I was wondering if you could provide an update -- I have 2 questions. First, I was wondering if you could provide an update on your outlook for restructuring expenses in the U.S. going forward. So for the next couple of years, if you could maybe provide a -- let’s say some guidance on the cash expenses, so what would be included within your adjusted EBITDA on a yearly basis? That's my first question. My second question is on China. You mentioned the $20 million to $25 million in integration expenses that you'd expect over the next couple of quarters. How should that be distributed, 1 ? And 2, if you could just sort of give an overall update on your strategy in China now that you have, let's say, now that you've closed the Mankattan deal?

[Fred Penny, executive]

Alvaro, it's Fred, I'll take your first question. We're not going to give specific guidance at this time on what restructuring dollars could be. I would tell you though that we continue to look for opportunities to make the company more efficient and if and when those opportunities present themselves, we're certainly going to execute against them. I believe there are more opportunities across the organization to become more efficient and we continue to work on identifying specific projects to achieve that. So we'll have to just wait and see as they develop.

[Diego Cuevas, executive]

Yes, on China, 2 comments. The first one is that we're spending about half of the integration cost on the movement and closing of our current plans, to the Mankattan plan, which is a much better basis for what we have in that city. So -- and the rest is all other areas of the business that we'll integrate. And I think we'll also flow a part of that cost into next year as well. The strategy in China, I would say it's been two-fold. On one hand, we are expanding our reach in the food service business and we are the leading player in that segment in the whole country and basically that was through the acquisition of East Balt and now with the Mankattan [indiscernible] also [indiscernible] as well, and as you probably know that was our [ exchange ] are growing at a very healthy rate in the country and we're benefiting from that growth as well. So we're very, I would say eager and conscientious of the way we're going to be providing service and added value to our customers in that category, in that business. The other part is the branded business and with the acquisition of Mankattan, we now have 2 brands, 1 with a larger footprint, which is Mankattan in the major urban cities in China. So just to give you a perspective in basically in a year, we have moved from having 1 plant in China to 10 plants in China and the region, the impact of the business in the company will grow over time and we're betting that it will provide a lot of growth and also much better margins than in the past, in the coming years for Grupo Bimbo.

[Daniel Servitje Montull, executive]

And I would importantly like to add that we, during the second quarter, the expenses that we faced from the integration of China, is because we made up our region recognizing the future impact from the write-off moving from the existing facility to a new one of Mankattan. So it's basically in the write-off of the net investment on the value that we had on the plant.

[Alvaro Garcia, analyst]

Great. So would it be fair to assume that -- of that $20 million to $25 million, which half is plant related, let's say, is most of that already reflected this quarter?

[Diego Cuevas, executive]

No, no, no. This was just basically the write-off of the existing net evaluation that we have on the plant, probably half of the total amount will be as a CapEx and the expenses that we will face for moving the plant and then the other systems and the ERP and some other expense and investments that we have to make. It's going to be this year and also it's going to be next year, it's important to mention.

[Alvaro Garcia, analyst]

Yes, perfect. That was clear, so basically just this quarter was basically the old plan, but it's clear that the $20 million to $25 million is now going forward.

[Operator]

And ladies and gentlemen, this concludes our question-and-answer session. At this time, I would like to turn the floor back over to Mr. Daniel Servitje for any closing remarks.

[Daniel Servitje Montull, executive]

Thank you all for your time today and please do not hesitate to contact us with any further comments or questions you might have. Thank you very much.

[Operator]

And thank you, sir. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.