Grupo Bimbo SAB de CV

BMV:BIMBOA

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone, and welcome to Grupo Bimbo's Third 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 risk 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 conference over to Mr. Daniel Servitje, Chairman and Chief Executive Officer of Grupo Bimbo. Mr. Servitje, the floor is yours, sir.

[Daniel Servitje Montull, executive]

Good morning, and thank you very much for joining us. I am here today with Diego Gaxiola, our CFO; BBU President, Fred Penny; and several members of our finance team.

We're pleased with the third quarter operating results. We posted strong sales performance in key markets like Mexico and North America and the achievement of our debt-to-EBITDA ratio target of less than 3x earlier than our year-end goal. We are rapidly deleveraging the balance sheet with double-digit EBITDA growth. We faced macroeconomic challenges not just in Latin America but also in global commodity prices. From an operational perspective, the majority of our other expenses in the period came from restructuring efforts, particularly in North America, with organizational restructuring initiative implemented in Canada and further efforts with some additional personnel restructures at the U.S.

Regarding our manufacturing footprint, we were able to close 3 plants, 1 in Canada and 2 in Argentina, which will translate to important benefits in the future. During the quarter, integration costs were significantly lower in Spain and remained on track in China. We understand the impact of these expenses on our consolidated results, but we believe that all the restructuring efforts will present a vital investment in our longer-term journey towards a leaner, more profitable business in sustainable terms. We will continue to proactively search for and implement such opportunities throughout all our geographies on the path to greater profitability and productivity.

On a different note, I am proud to share that over 110,000 runners from 23 different countries and 35 cities participated in our Third Annual Global Energy Race in September, now the largest sports event of that kind in the world. This is an increasingly valuable brand-building event for us as it showcases our commitment to healthy living and giving back to local communities through donations of bread to food banks for every kilometer run, which donated 1.5 slices -- million slices per kilometer. I got it wrong here. Last month, we announced our commitment to use 100% renewable electricity for our global needs by 2025 and became the first company in Latin America to join RE100, a global collaborative initiative of the climate group.

Now let's move on to our performance in the quarter, taking a look at each region. In Mexico, we delivered strong top line results with healthy volume growth across all categories and channels. The convenience channel outperformed, and the reformulation of Gansito and good results of Nito, Oroweat and Barcel brands also contributed. Raw material costs were lower on the back of a favorable exchange rate, and as a result, we saw solid EBITDA growth of 10.6% and a margin expansion of 20 basis points.

In North America, net sales rose 9.4% in peso terms while dollar sales increased by 2.8%. The growth came despite lower volumes in the private label and premium businesses, healthier volumes in Canada coupled with price increases, freight optimization and good volume performance in our strategic brands in the U.S.

The restructuring expenses in this quarter were related to routes and manufacturing streamlining efforts across the region, including, as we mentioned, the closure of the Woodstock plant in Canada and the implementation of an organizational restructuring initiative in Canada as we were able to identify opportunities to streamline the structure as part of the journey I previously mentioned to increase profitability, generate cash flow and the improve profitability. Just like in the U.S., the VSP, we see this initiative leading to a leaner, stronger and less complex organizational structure that accelerates decision-making and enhances collaboration across our supply chain. All of this resulted in adjusted North American EBITDA growth of 8.2%.

Looking ahead, we expect to continue to face commodity, energy and transportation cost headwinds for the rest of this year and the next. So to offset these effects, we will continue working on our revenue management processes, improving our product mix and in all our initiatives to increase productivity. To that end, a few days ago, we announced the closure of 3 plants and 1 line in another one in the U.S. that will take place over the coming months.

As for Latin America, we can point to the positives such as good performance in the Latin Centro business, most notably in Colombia, Guatemala and Costa Rica. But the big story was Brazil and Argentina where political and market turmoil, coupled with the depreciation of currencies, had a significant impact on almost every sector as well as on consumer confidence overall. Nonetheless, we were able to generate positive EBITDA in the period despite the contraction in the operating margin.

Lastly, while EAA remains one of the smaller of the Bimbo regions in terms of sales, it is also the strongest in terms of growth rate, which shows how compelling these markets will be for us. The top line expansion is mainly due to the integration of Bimbo QSR and Mankattan. And despite the pressure in sweet baked goods in Iberia, the bread category continued to grow in this market as well as in India. As we have shared with you in previous quarters, although, integration in Iberia is not yet complete, integration costs are lower, and we're starting to see part of the synergies. For China, we expect total integration costs to come in around $20 million, of which $3 million were booked this quarter.

Well, this concludes my operational comments. But before we take your questions, I'll ask Diego to touch on the financials.

[Diego Cuevas, executive]

Thank you, Daniel. Hi, good morning, everyone. As you saw in our quarterly report, we had a strong third quarter marked by double-digit sales growth and rise in EBITDA and net income, reflecting the positive effects from past restructuring investments such as the VSP in the U.S. and, of course, strong operating performance in most of our organization.

I would like to go deeper in the restructuring projects we have implemented, specifically in North America, for which our EBITDA margin quarter-over-quarter improved sequentially by 120 basis points, thanks in part to the benefits coming from the VSP and other initiatives. This is a perfect example of how these investments have quick paybacks and are helping toward the objective to increase our profitability.

During the quarter, we implemented an organizational restructuring in Canada, where we recognized CAD 12 million of expenses. So this program has an even better payback than the VSP, and we expect to recover the investments in less than a year. So having said this, as we move forward, you should expect to continue seeing this kind of investments, in line with our long-term view of how to continuously improve the profitability of the company.

As for our financing costs, we saw an increase of almost MXN 500 million as compared to the same period of last year, mainly due to a higher debt position arising from the acquisitions completed over the last 12 months and a slightly higher interest rate due to the recent change of our currency mix. As Daniel mentioned at the opening of the call, we were able to reach our year-end target with a total debt-to-adjusted EBITDA ratio of 2.9x compared with 3.5x at the end of 2017. This improvement is indicative of our profitability increase, coupled with our commitment to deleverage the balance sheet as we go forward. Moreover, CapEx during the first 9 months stood at approximately $500 million. We consider that we will close the year slightly lower than initial estimate of $800 million for the full year.

We also invested more than MXN 960 million year-to-date in our share repurchase program, buying back nearly 25 million shares. And lastly, as you already know, the competition bureau in Canada is conducting an industry-wide investigation among several great suppliers and retailers in which Bimbo Canada is included. We will continue to fully cooperate with the authorities during the course of their investigation and keep you updated with any further information.

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

[Operator]

[Operator Instructions] The first question we have will come from Benjamin Theurer of Barclays.

[Benjamin Theurer, analyst]

So I have 2 questions, if I may. The first one, the EAA region. So clearly, and as you just mentioned, it's so small but has a very strong growth rate, mainly driven by the acquisitions, Bimbo QSR as well as Mankattan. Could you -- and that's actually the question I'm going into. Could you share the organic sales growth, like the underlying growth that can be -- even on a stand-alone basis, I mean, what you've had but also considering how, for example, Mankattan is growing? So just to get a little bit of a sense going forward, because I think we're now more at the end of integration from new assets, what we should expect in terms of growth rates to see in the region and how that can translate into cost dilution and ultimately, margin expansion. That would be my first question.

[Daniel Servitje Montull, executive]

Yes, Benjamin. We're pleased with this growth in the region. And as we mentioned, mainly, it's due to the inorganic growth. But I would say that both the Bimbo QSR business in that region as well as the Mankattan acquisition as well as the Indian one that we had last year, all of them are growing on an organic terms. We don't give numbers on that split, but I would say that we're pleased with their plants and the growth momentum that they are having.

[Diego Cuevas, executive]

Benjamin, I will probably add that in terms of the margin expansion and what we expect in the coming quarters, it's important to consider that we just started the process of the integration of Mankattan. And as you know, we do expect to recover all the synergies, top line synergies, cost synergies. We're going to be moving the plant of Bimbo Beijing to the facilities that Mankattan had in Beijing, and this is going to create substantially more efficient company. And that's going to be reflected once we conclude the integration process.

[Benjamin Theurer, analyst]

Okay, perfect. And then my second question, you mentioned, and clearly, that's a problem for a lot of the companies in the region, like cost pressure, be it commodity linked but also energy, fuel and so on. What's your price strategy going into end of the year and into next year, considering that we continue to see pressure not only on the commodity side but also on fuel cost, transportation, which is a big part for you, especially here in Mexico? So just an update on the pricing strategy, that would be much appreciated.

[Daniel Servitje Montull, executive]

Well, I mean, we try to do careful analogies on what are the costs that we're incurring in each business, and this is a locally driven decision that each business takes into account. But we always try to find sort of a healthy balance of maintaining our margins and hopefully, also growing our volume in each business. All in all, I would say that we're managing this on a decentralized basis in a good manner, and in most of the countries we are in line with inflation, and we also include these hedges that we have in our consideration of what we will be looking for, for prices in the future.

[Operator]

And the next question we have will come from Ulises Argote of JP Morgan.

[Ulises Argote Bolio, analyst]

One quick question here from our side. Can you please elaborate a little bit on the North American operations' top line in terms of how much of what we saw can be explained by price versus volume and how you're seeing the dynamics there and also how the private-label business continues to evolve in the region?

[Daniel Servitje Montull, executive]

We will let -- Fred, do you want to take this one?

[Fred Penny, executive]

Sure. Absolutely, Daniel. I would say, Ulises, for North America, we had volume growth and some revenue growth on top of that in our strategic brands, and our total branded business was up slightly as well. And that -- I think the other factor I would put in there as well is that we've also been working hard, and I mentioned this on prior calls, on improving our trade promotion efficiency and our optimization of trade promotion, so that played into it as well in the quarter. We're continuing to see, generally, pressure -- volume pressure on our non-branded business. Some of that is just the category trend. And in addition, some of that is, on a regional basis, some lost business. But overall, we're pretty pleased with the top line performance in the quarter.

[Ulises Argote Bolio, analyst]

And can you elaborate a bit on the -- kind of on the regional lost business that you're talking about? Is it with some specific retailers? Or is it across the board? What's kind of the dynamic there?

[Fred Penny, executive]

No, I think it's -- I wouldn't want to be any more specific than it was not a significant part of the softness in the quarter.

[Operator]

[Operator Instructions] Next, we have Luis Miranda of Santander.

[Luis Miranda, analyst]

A couple of questions. The first one is with regards to the announcement of the 2 plant closures in the U.S. I would like to know if you have any estimate of the potential impact of any extraordinary restructure charge by the end of the year. And also, in Europe, you mentioned the start of integration of Mankattan, but I just want to understand that -- I know that you don't like to disclose the specific numbers, but in terms of trends, can we start to see EAA posting positive EBITDA and in more ways, improving margins? Or should we expect, with integration of Mankattan, additional volatility in profitability?

[Daniel Servitje Montull, executive]

Fred, do you mind taking the second and then...

[Fred Penny, executive]

Yes, sure. The -- yes. As we said, we announced the closure of, as Daniel mentioned, 3 plants and 1 line in another facility. We'll recognize the charge for that -- the restructuring charge for that in the fourth quarter, but we don't give specific guidance at that level in our restructuring.

[Daniel Servitje Montull, executive]

Diego?

[Diego Cuevas, executive]

Yes. So Luis, I mean, just to give you a little bit more color. It's not going to be very significant in the numbers. In terms of the question regarding the integration of Mankattan and the profitability that we state for the EAA region, I mean, as you mentioned, we do not give specific guidance for the coming year or coming quarters, but what I can tell you is that we do feel optimistic about the potential of the region. What we can state is that the pressures that we had before from the integration expenses that we were facing in Spain are not going to be there. We're at the final stage of the integration. We might probably continue to face some additional expenses probably in this fourth quarter. But we will start to see the benefit from all these investments that we recognize as an extensive way in the previous years. And regarding China, it's a little bit the same. We've -- today, we're going to be facing some integration expenses. This is going to be an easier integration that we will start to see the benefits quite quickly. So in the long run, we feel very confident on the potential and the profitability that this region can achieve.

[Luis Miranda, analyst]

And if I may, a follow-up just to Fred on leases, a question on the U.S. market. Just from your comment, Fred, I would say that the 2.8% volume -- growth that we saw in dollars, it's mainly driven by volume rather than price. Is that correct?

[Fred Penny, executive]

I'd say -- no, I'd say it's more price than volume, but we did see positive volume growth as well.

[Operator]

[Operator Instructions] Our next one is a follow-up from Ulises Argote, JP Morgan.

[Ulises Argote Bolio, analyst]

Just to keep on the same trend there on the U.S. dynamics. Are you gaining market share there in the North American branded business? Because from the trends we have been seeing and hearing from other companies, the industry in general is not growing volume, correct? So are you gaining market share -- or significant market share there?

[Fred Penny, executive]

Yes. We're gaining market share in some categories inside of total commercial breads, wheat-based goods, not in every category. But I would say we're pleased with the performance of our most important brands like Sara Lee, Artesano, Thomas' and Entenmann's in particular is performing well and driving market share improvement for us.

[Ulises Argote Bolio, analyst]

And this is both in the U.S. and Canada, correct?

[Fred Penny, executive]

I'm speaking to the U.S. specifically.

[Daniel Servitje Montull, executive]

We're also trending well in market share data in Canada, all in all.

[Operator]

Well, at this time, we're showing no further questions. We'll go ahead and conclude the question-and-answer session.

At this time, I'd like to hand the conference call back over to Mr. Daniel Servitje for any closing remarks. Sir?

[Daniel Servitje Montull, executive]

Well, thank you all for your time today. And please do not hesitate to contact us with any further comments or questions you might have.

[Operator]

And we thank you, sir, and the rest of the management team for your time also today. Again, the conference call is now concluded. We thank you all for attending today's presentation.

At this time, you may disconnect your lines. Take care, and have a great day, everyone.