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 Third Quarter 2019 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 would now like to turn the call over to Mr. Daniel Servitje, Chairman and Chief Executive Officer at Grupo Bimbo. Please go ahead, sir.
Good morning and thank you very much for joining us today. With me on the call are our CFO, Diego Gaxiola; our U.S. President, Fred Penny; and several members of our finance team. I will begin with a review of the results for the quarter and share an update on our global operations. Diego will cover our financial results in more detail and then Fred will join us to take your questions.
We're pleased with the results of the third quarter as we experienced improved trends in our markets with an organic sales growth of 3%. This growth, together with our past restructuring efforts, led to a significant year-over-year double-digit growth in adjusted EBITDA as well as record EBITDA levels in Mexico and North America.
Turning to a discussion of our results by region. I will begin by -- with our largest market, North America. Net sales increased 3.4% driven by good performance in the sweet baked goods and snacks categories in the U.S. as well as strong volume and market share gains in Canada. We also benefit from new product launches, such as Arnold, Brownberry and Oroweat No Added Nonsense, which is a smart clean label initiative in the premium bread category.
This increase was partially offset by the continued compression in the private label category, our own portfolio simplification strategy and a flooding in a plant in Canada, which occurred in Q2 and is now behind us, but impacted both Q2 and Q3.
Adjusted EBITDA double-digit increased and the significant margin expansion reflected the efficiency gained from past restructuring initiatives, improved portfolio mix from growth of the strategic brands, and snacks and trade spend optimization. We will continue to leverage revenue growth management to improve our portfolio mix.
Turning next to Mexico. We had improved trends versus the second quarter as this market returned to year-over-year growth attributable to volume performance. Sales increased across most categories and channels, primarily the bread, buns, cookies and snack cakes categories as well as the modern channel. Although we continue to see a challenging competitive and consumption environment, sales priorities were skewed towards volume growth, and we hope to see improved trends as we move forward. Moreover, margin expanded 60 basis points despite commodity pressures, resulting in a record EBITDA level for the third quarter of nearly MXN 5 billion.
Latin America, despite challenging macroeconomic conditions in some markets, had overall trends improved. More specifically in our Latin Centro and Latin Sur divisions, Chile and Colombia outperformed, growing at double-digit rates in local currencies. We also experienced good results in the tortillas and sweet baked goods categories and in Argentina, which -- in which profitability has begun to improve. We're pleased with the positive trends in these countries and it is our expectations that they will continue, helping to offset the challenges we face in Brazil.
Lastly, Europe, Asia and Africa top line expansion resulted from the continued strong performance of our Quick Service Restaurant business as well as good results in Iberia, notably in the bread and sweet baked goods categories. These factors more than offset the impact of moving the Bimbo Beijing plant production to the Mankattan plant, which took longer than anticipated and put pressure on our sales and expenses, but it has already been completed.
Adjusted EBITDA for EAA almost quadrupled and the margin expanded by 400 basis points. This strong profit improvement reflected synergies achieved from the acquisition of Donuts Iberia, lower integration expenses in Iberia and the strong performance of Bimbo QSR.
We signed an agreement to acquire a plant in Spain that produces sliced bread and buns for Mercadona, the largest retailer in Spain under the brand Hacendado. Once authorized, this acquisition will further strengthen our business in the country, complementing our customer reach to better serve more consumers. The transaction is conditional upon review by the Competition and Markets Commission.
We also acquired Mr. Bagels in the U.K., a small plant of fresh and frozen bagels.
Regarding our sustainability initiatives, we announced that in Mexico, 100% of our packages where the technology applies are already biodegradable, and we will launch the first compostable packaging in the country for bread, which will be used for Bimbo Vital bread soon.
We also opened the largest solar roof system in Chile and South America, built in our plant in Santiago. And the Global Energy Race took place in 22 countries in the same day, gathering around 120,000 participants. And due to everyone's participation, 1.5 million slices of bread were donated to food banks in host cities.
In summary, our teams globally are diligently working to manage challenging economic, political and competitive conditions. The results of the third quarter reflect the success that we have had to drive efficiencies in our business and expand profitability year-over-year. We will continue to be focused on tightly managing expenses, pursuing restructuring initiatives, making investments to drive long-term growth, generating significant cash flow and delevering our balance sheet.
At this time, I would like to turn the call over to Diego to cover our results for the quarter in a little more detail. Please go ahead, Diego.
Thank you, Daniel, and good morning, everyone. Thank you for joining us on the call today.
We are seeing improved momentum in our business. On a sequential basis, revenues in the third quarter rose 4% over the second quarter. Adjusted EBITDA rose nearly 20%, and the margin significantly expanded by 150 basis points. These results are indicative of the measures we have undertaken to effectively manage our cost and expenses and to grow organically in a highly productive and sustainable way.
Importantly, in Mexico, trends improved in our business as remittances posted record highs in an environment in which inflation has been controlled. These results are particularly noteworthy, considering that we had a difficult comparison with the third quarter of last year, where sales posted a strong growth of 9% and also because they included the results of the commercial strategy implemented between our Mexican and U.S. operations. North America and EAA were also significant contributors to their results of the quarter as trends improve on a sequential basis and EAA continues posting significant profitability improvements.
Partially offsetting this solid quarterly results, we recognized a MXN 48 million noncash charge related to the MEPPs liability due to the decrease in interest rates. Excluding this effect, operating income posted a strong 16% increase.
Third quarter results also reflected a 7% increase in our financing costs mainly associated with the adoption of IFRS 16 in our financial statements. The cumulative effective tax rate for the period closed at 37.6%, which is slightly below the guidance that we provided at our past year-end. And the net effect of these factors yielded a 7% increase in net income, and return on equity significantly improved by 370 basis points. Importantly, this includes the MEPPs charge impact. So excluding this effect, net income increased by almost 60%.
Turning to the balance sheet. Many of you will recall that we recently issued $600 million of debt at 4%. The proceeds of this issuance were used to retire a portion of our 2020 notes. Our diversified portfolio across geographies, categories, products and channels as well as our strong position as the #1 player in the highly resilient baking industry contributed to attract the attention of nearly 150 institutional investors in an offering which was more than 5x oversubscribed. This transaction supports our long-term strategy, while enhancing our financial profile by increasing our average duration, from 10 to almost 14 years, and maintaining a healthy and flexible balance sheet.
Moreover, we ended the quarter with a net debt-to-EBITDA ratio of 2.6x, and we remain committed to deleverage our balance sheet over time. With respect to free cash flow and capital allocation, our working capital continues to reflect the delay that we have experienced in the process for collection of our positive balances of [ BAP ] in Mexico. However, our net operating working capital has improved significantly by 3.6 days, which is the equivalent of MXN 2.7 billion, mainly due to the improvement in our accounts payable.
Through the third quarter, we have invested USD 440 million in CapEx. So for the year, we estimate to be in the low end of our initial estimate range of USD 700 million to USD 750 million. Our share buyback program was active. During the third quarter, we were able to bought back almost 40 million shares. As a result, our free cash flow before dividends, share buybacks and acquisitions improved by MXN 6.2 billion where compared to the same period of last year.
Looking into the fourth quarter, we expect a moderate performance considering the tough comparison of the same period of 2018 as we reported record results in almost every metric.
I would like to conclude with a reminder. We are hosting our Investor Day on November 12 in New York City. I welcome our investors and analysts to attend the meeting, hear more about our strategy, meet with our executive leadership and join our operating team in the afternoon to tour our plant in Greenwich, Connecticut. Transportation to the plant and back to the city will be provided. We look forward to seeing you all in New York.
With that, Chuck, we can open the phone for the Q&A.
[Operator Instructions] And the first question will come from Isabella Simonato from Bank of America.
So I have 2 questions. First of all, in Mexico, mainly, when we look at the top line performance, I think it gained better than what we were expecting, especially on the volume side. Can you provide us some sort of an outlook for the next year or so and what will be the pricing strategy of the company? And second, when we look at profitability in North America, there was an important recovery year-on-year and Q-on-Q. And unlike the impacts that we saw from intercompany last quarter, both margins, right, in Mexico and North America, improved. Can you give us some color more regarding -- aside from the mix and efficiencies, what else helped on profitability and how should we expect that line going forward?
Let me answer the first question and maybe I'll deal the second one to Diego. On the Mexican trends, what we're seeing in the economy, as you were seeing it, is that the GDP growth is diminishing and the market is tight. And what we're trying to do is, basically, organize ourselves for, basically, allowing us to have more competitiveness, more accessibility of our products for our consumer base and to prepare ourselves for that scenario. We don't have an idea of what the market will look like next year, but we're trying to be more flexible on our offerings and have the capability to react to the different circumstances that might happen next year.
Regarding the profitability in North America, as you mentioned, we had a strong performance in terms of the margin expansion as compared to the previous quarter and also as compared to the same quarter of a year ago. I will probably highlight that this was due to the positive performance that we're seeing in Canada, with a very strong recovery in top line and also with a very strong control on cost and expenses, which is yielding an important expansion in the operations of Canada. Also very relevant, all the restructuring initiatives that -- what we're seeing is the payoff of all these past investments' yields, some that have been reflected directly to the P&L as an expense, as restructuring or integration expense, such as plant closures, organizational restructures that we implemented in the U.S. and in Canada as well, the buyback of routes and some other investments that we have done in both businesses that are delivering the expected profitability.
Our next question will come from Benjamin Theurer of Barclays.
Congrats on the results. Two questions as well. So staying international, can you share a little more details on what you expect in terms of the improvement in China with the changes in the plan and the consolidation over there and by when you expect to see some of the benefits over there? And then the second question would be, I mean, you've highlighted in your prepared remarks that Latin America continued to -- did actually well, with the exception of Brazil. So if you could elaborate a little more about the issues in Brazil and what you think you can do to get the problem solved and actually get operating profit into positive territory because I believe it's only negative because of Brazil. So that would be much appreciated.
Well, on the China progress, I would say it's -- basically, we have 2 businesses there. One is the QSR business and that is a healthy business that is growing significantly and we're adding capacity to serve better the needs of our customers. On the other hand, on the branded side, we have this issue for a long time in the Beijing area, the North part of China, and that impacted our sales and our -- evidently, our profits. That has already been solved, and now we're in this process of recovering customers and trying to build up our distribution network. So this is not going to be a, basically, a quick fix. It requires a long-term plan to strengthen the distribution and to deal back again the brand that was severely affected during these circumstances. And we're in this process and I think that we'll be doing better every quarter now since this issue happened.
On the Brazil business, we have -- more than half of our losses now are basically related to paying the legal lawsuits related to labor issues of the past. And I would say the past, talking about 3, 4, 5 years ago, where we had basically a mishandling of the controls that we needed to have to make sure that we didn't have problems relating -- related to, basically, labor or overtime. And this has been already corrected, but a big chunk of that impact is on what it's now -- the cases being closed.
Fortunately, as with the new labor laws and with our much better controls, this is something that has been addressed and is taken care for whatever is happening from now on, on that part.
We also are changing our go-to-market strategy in Brazil, and we're quite excited about the results that we're finding. This is something that is just starting and it will take place over the next 9, 12 months. But so far, it's looking very good what we're doing there.
So those are basically the 2 main things that we are dealing with in the P&L. And I'm looking optimistic about what Brazil should be in after we have faced the distribution change. And on the labor lawsuits, this is something that will be diminishing gradually over the coming, I would say, 2, 3 years.
The next question will come from Luis Miranda of Santander.
I had a couple of questions. The first one, for Diego, regarding the cost outlook for the short term. I don't know if you could just share with us your view how are you finishing -- entering the year considering your hedges, both in terms of grain and in terms of FX. And the second question, for Daniel, with regards to this initiative in Mexico about the labeling of these product. If you could give us just some color on your view and the experience you saw you had in Chile and what could we expect.
Well, regarding the cost outlook, what we expect going forward is to see some improvement, basically, because of the decrease that we have seen in the past months on the cost of some commodities, so the main commodities, including wheat. So this will be reflected on our P&L once we start to see the hedges that we have taken in the past months, no? We're still seeing today the hedges taken at the end of 2018, beginning of 2019, where the spot rate for most of the commodities was higher than what it is today. For the exchange rate, I would probably say, considering where the peso is today, I think that the outlook is positive. But I would be very cautious because there's a lot volatility on the exchange rate, so hard to predict. We still have in place the same methodology for doing the hedges and taking out the risk of this volatility. So it also looks on the positive side for the beginning of 2020 as compared to 2019.
Okay. Luis, on the labeling initiative, well, it has been approved in Congress. And now there's discussion on the Mexican Standard 051, which is the one that specifically details the new front pack labeling. And we're in this period of public consultation. We, as a company, and many others are providing the -- our views and comments on this legislation and on this standard. And we will see probably where it ends in the next 2, 3 months. And I just want to say that we have -- we're a global company. We have presence in 32 markets and we adapt to every requirement that happens in each of the countries. In Latin America, there are variations of what is proposed here, and we basically adapt to whatever the legislations require us to do, no? And obviously, we believe that the consumer must have clear information about the ingredients and the -- not only the ingredients, but also the characteristics of the products that we bake. And we are all aligned in this text.
[Operator Instructions] Our next question will come from Isabelle Irish with Barings.
Could you explain to me the effect of IFRS 16 on the margin expansion? How much of that comes from IFRS 16 and how did you treat it?
Well, first of all, what we have been trying to do in order for all the stakeholders, the analyst, all investors to have a clear understanding on the profits of the company, we have been reporting both EBITDA as traditionally was done, so this is without the IFRS 16 effect, and we are also reporting the metric called adjusted EBITDAR, which basically complies with the IFRS 16. So this is -- that excludes the rent expenses. Remember that an important part of the rent expenses are going directly to the amortization, to the D&A. And then another component is going to the cost of financing, and that's why, basically, we're seeing an increase of 7% in the cost of financing.
So the numbers that you see on the press release on EBITDA are apples-to-apples comparisons. So the 10.1% growth, it is what happened in the business. And then you can see that the difference between EBITDA and EBITDAR, it's almost MXN 1.1 billion in the quarter. This has been the case for the past 2 quarters as well.
So in total for the year, we're going to have the exclusion of the rent expenses, which will amount to close to MXN 4.5 billion in the year. Most of it will be reflected on D&A. And the other part, almost MXN 1 billion, it's going to be reflected in the cost of financing. So I don't know if that was clear.
That's great. Basically, you're saying the numbers on the release, the adjusted EBITDA, is apples-to-apples. It's a genuine expansion in margin.
Yes, correct.
Our next question will come from Pallavi Nagia of HSBC Bank.
I had a follow-up question on the new label laws in Mexico. I understand these are still in public consultation phase that you mentioned, but could you possibly provide some color on how this would impact you in Mexico and whether you expect this trend to spread to other regions as well?
No, we don't have any idea as to what is going to be the implications on the front-of-pack labeling. It's too early to tell. We still don't know, at the end of the day, how it's going to be designed. As we said, we're still in consultations about the standard. Secondly, there's going to be a time allocated for changing the packaging, so this is still a bit farther in time to understand the -- when this is going to be enacted and then the changes in consumer behavior in any case, no? So we don't speculate on this.
And would you expect this to also start -- this trend to start coming up in other Lat Am markets? It's already, I understand, in some format in Ecuador and Chile.
Yes. As we said, there are many variations on front-of-pack labeling in all the world. And in Latin America, there are differences in many markets. So we have -- basically, we're adapting to local legislations in every country.
Our next question will come from Ulises Argote with JPMorgan.
Just a quick one here on my side. Can you please give us a little bit more clarity on the use of the buyback program, maybe some expectations that you can share with us here related to the strategy, maybe what we can expect going forward?
Well, I will say that our current position, as I have mentioned in the script, is close to MXN 3 billion, with 77 million shares. And going forward, we will continue to analyze opportunities and have our eyes open to see what we can do.
Perfect. And like any levels where you would be interested or something that you can share or just keep an open tab there with the program?
We will lead -- I mean close to what's happening to the price of the stock, but we don't really have a specific level that we could comment on.
This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Daniel Servitje for any closing remarks. Please go ahead.
Well, thank you all for your time today. And as always, please do not hesitate to contact us with any further comments or questions you might have.
Thank you. This concludes today's presentation. You may now disconnect your line at this time and have a great day.