Grupo Bimbo SAB de CV
BMV:BIMBOA
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Grupo Bimbo SAB de CV
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Good day, everyone, and welcome to Grupo Bimbo's third quarter results conference call. If you need a copy of the press release issued earlier today, it is available on the company's website at www.grupobimbo.com/en/investors/quarterly-reports.
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 will now turn the call over to Mr. Daniel Servitje, Chairman and Chief Executive Officer of Grupo Bimbo. Please go ahead, sir.
Well, good afternoon, everyone, and thank you for joining us. On behalf of Grupo Bimbo, I hope that you and your families are healthy and staying safe. Connected on the line today is our CFO, Diego Gaxiola; BBU's President, Fred Penny; and several members of our finance team.
I am very pleased with our third quarter results. Despite challenging comparisons, the 6.5% pressure coming from FX rates, significant inflation and supply chain complexities, we have sequentially reported record sales and profits. And our free cash flow has been consistently growing. Our strong results are a reflection of our team's dedication, global diversification, strong consumer demand, investments in our brands and pricing strategies.
Volume grew across multiple categories, more importantly, in buns and rolls, pastries, snack cakes, confectionery, bagels and snacks with Mexico and our QSR businesses outperforming. All in all, very good results in terms of volumes, price realization and revenue growth management initiatives across all our markets.
I would like to highlight that we continued to cycle difficult comparisons driven by the pandemic-induced buying, which occurred in some of our geographies starting in March of last year. Our run rates are demonstrating strong performance versus 2019 with sales growing at 17.8%, adjusted EBITDA at 26.2% and a net majority income more than doubling.
Nevertheless, I have to say we are facing a significantly higher inflationary environment. More specifically, we are seeing increases in commodity, freight and labor costs as well as shortages across the supply chain in the U.S., U.K. and Canada. We have been taking pricing, trade and productivity actions and we'll continue to take them as well in 2022 to offset part of the cost increases across all our geographies.
Before I move on to our results by region, I would like to share with you that we organized the 2021 Virtual Global Energy Race, and thanks to more than 294,000 runners, more than 5.8 million slices of bread will be donated to food banks around the world. And finally, we are proud to announce a big milestone towards our sustainability goals for our commitment to achieve net zero carbon emissions by 2050. Through the global coalition business ambition for 1.5 Celsius, our objectives have been validated by the Science Based Target initiative, and we have now joined the United Nations-led Race to Zero campaign, the first globally coordinated attempt to reduce carbon emissions on time.
I want to mention that we also advanced towards our sustainability commitment of having 100% renewable electricity in all our operations by 2025. I'd like to report that during the quarter, France, Italy, Russia and the Turkey operations started working with renewable electricity. We will soon share with you our renewed sustainability strategy with more ambitious targets, so stay tuned.
Now looking at the regional results of the third quarter. Despite the difficult comparisons as we lapped COVID-19, our North American business had a great quarter. Net sales grew 5.5% in dollar terms. The branded business performed very well, led by buns, breakfast, sweet baked goods and snacks. And our front line execution was strong as well. We implemented price increases late in the quarter, and given the outlook for 2022 with the significant inflation pressures we're expecting, we are expecting a second round of price increases and additional productivity. Market share grew across multiple categories, especially breakfast and mainstream bread.
Our top line run rates when compared to prepandemic levels were very strong. The strength was driven by consumer demand and the investments we have made and continue to make in our brands. The private label run rate has remained soft, while food service is beginning to rebound as schools and restaurants manage reopenings.
Our adjusted EBITDA margin in the region contracted 110 basis points mainly due to a higher inflationary environment, including commodities, labor costs and shortages across the supply chain. This was partially offset by favorable branded mix and productivity benefits from past restructuring investments and cost-saving initiatives.
We're cautiously optimistic about our top line going forward as we begin to see postpandemic trends evolve. The significant inflationary headwinds we are facing do apply pressure to our margins, and we're combating this with a second round of pricing as well as productivity. And we're confident our brands will continue to resonate with consumers, and the breadth of our portfolio positions us well for the future.
I'm happy to share that during the quarter, we completed the acquisition of Popcornopolis in the U.S., one of the fastest-growing popcorn brands in retail channel with a pristine reputation for quality. Popcornopolis produces premium, ready-to-eat popcorn made with natural and best-in-class ingredients. This acquisition marks our entrance to the attractive popcorn category in the U.S., which is an excellent platform for innovation.
Turning now to Mexico. Our sales improved by 16.4%, attributable to volume growth, favorable product mix and price increases. Almost every category and channel grew, more strongly in cookies, pastries, buns, salty snacks and confectionery as well as the traditional modern channels and a recovery of the convenience and vending channels.
Adjusted EBITDA margin expanded 110 basis points as a reflection of the strong sales performance and distribution optimization initiatives such as the implementation of digital solutions across the supply chain.
In Latin America, net sales increased 17%, excluding the FX rate effect. This was driven by strong volumes and price mix across our 3 organizations. More notably, our turnaround efforts in Brazil resulted in strong gains in EBITDA. The 8 countries of our Latin Centro division keep posting excellent results, and we are experiencing a significant growth in Chile behind our expansion of the direct sales delivery channel in all our categories. We have seen a positive development of our main core categories and a successful path in salty snacks in some countries.
Going forward, we will continue to focus on rebuilding and expanding our distribution in order to strengthen our profitability in the region.
Following the end of the quarter, we completed the acquisition of Aryzta's Brazilian operation. Aryzta do Brasil is a major player in the QSR bakery market in the country, specializing in hamburger buns and breadsticks and baguettes with a growing business in the sweet and savory bakery market. With this acquisition, we strengthened our position in this industry and have an opportunity to expand our global leadership within the QSR industry and become a relevant player in Latin America, offering our customers better-quality service and innovation with a dedicated team.
Finally, moving on to EAA. Excluding FX effects, sales increased nearly 16%. This was a result of double-digit growth across almost every country where we operate, mainly Iberia, the U.K. and the QSR business, coupled with the acquisitions of Medina del Campo in Spain and Modern Foods in India. We also continue to see a recovery of our QSR business throughout all the region.
The adjusted EBITDA margin expansion of 230 basis points resulted from the strong sales and lower general expenses, driven by a better product mix and cost-cutting initiatives across every country, including lower COVID-related expenses.
I also am glad to announce that during the week, this week, we acquired Kitty Bread, the #2 bread manufacturer in Northern India. Kitty Bread produces white, brown, whole wheat and fruit breads, among other products, in a strategic located facility. This acquisition complements our current product portfolio and it enhances our presence in India and our long-term commitment for the country.
I would like now to turn over the call to Diego, who will walk you through our financials. Please, Diego, go ahead.
Thank you, Daniel. Good afternoon, everyone, and thank you for joining us today. I would like to start with a summary of our financial results, which were outstanding.
Despite difficult comparisons, FX rate pressure and higher inflation, we achieved record levels for sales and adjusted EBITDA for the third quarter and a 270 basis point expansion of our return on equity. We continued to benefit from being a diversified company as we see strong run rates in our core business and a recovery of the channels and categories that were under pressure during the beginning of the pandemic. We are strengthening our global profile, and the positive mix is driving our strong margin expansion and free cash flow generation.
Moreover, we have benefited from lower material costs when compared with the spot prices over the last months due to the hedges in place, which has given us time to adjust our commercial strategy. We have also achieved substantial and sustainable productivity savings coming from capital and restructuring investments we have made in the past, which enabled distribution efficiencies, automation improvements, integrated system solutions. And additionally, we also had the positive from having lower COVID-related expenses.
This contributed to us reaching a record adjusted EBITDA margin for the third quarter at 14.7%.
Our financial costs decreased by 10%, reflecting an appreciation of the Mexican peso.
And our cumulative effective tax rate stood at 35.1%, which continued to reflect the benefit of our turnaround businesses that have been performing substantially better than last year.
As a result, the net effect of these factors yielded an improvement in net majority income of 11.9% and a margin expansion of 40 basis points to 4.6%.
Turning to our balance sheet. Thanks to the strong cash flow generation, we closed the quarter with a net debt-to-adjusted EBITDA ratio of 1.8x. Our total debt increased by MXN 6 billion when compared to December 2020, primarily due to the FX effect as well as to the funding of the acquisitions that were concluded on top of the MXN 6.5 billion that we have given back to our shareholders through the combination of the share buyback program and the dividends.
As I'm sure you all know, we renewed our committed revolving credit facility in the current amount of USD 1.75 billion. I am proud that this successful transaction perfectly aligns with our philosophy of building a sustainable, highly productive and deeply humane company. Over the past decade, we have benefited from having a committed revolving credit facility providing Grupo Bimbo with liquidity and flexibility.
With this sustainability-linked loan, we continue to strengthen our financial profile. And given that sustainability is part of our DNA and its growing relevance in our world and business, we have renewed and linked it to our sustainability goals.
Our net operating working capital, which mainly considers accounts receivables, inventories and suppliers, has improved significantly by 3.4 days over the third quarter of 2020, which is the equivalent to MXN 2.8 billion. And this is mostly due to improvements in almost every caption. Our supply chain finance program continues to pay off and bring significant savings.
Our cumulative free cash flow before acquisitions, share buybacks and dividends totaled MXN 3.7 billion.
And lastly, given the strong results during the quarter and during the year, we are happy to reaffirm our guidance for 2021 and would like to provide some visibility on what we are expecting for 2022.
In terms of net sales, we expect to see a growth of mid-single digit. Taking into account that we will have a tough comparison given the remarkable results of 2021 and despite the high inflationary environment, we are still expecting adjusted EBITDA to increase from mid- to high single digit, which will translate, of course, into a potential margin expansion.
As we keep investing in our business for organic growth in the markets where we operate and also to increase our profitability, our CapEx for the next year will be approximately $900 million. And finally, our effective tax rate should remain in the mid-30s.
With that, we conclude our remarks this afternoon. So Matt, please proceed with the Q&A.
[Operator Instructions] The first question will come from Ben Theurer with Barclays.
Perfect. Daniel y Diego, congrats on the results. Two major questions and one smaller one. So the first one is really around everything you've been doing on the sustainability side and how you're looking into using cleaner energy and really working here in all the different countries and jurisdictions to make the most out of it to comply with that agenda.
Now we all know there is a reform being talked about here in Mexico that could have potentially some adverse implications on what you've been doing and all the investments into solar energy on your plans here. Is there any commentary you could share with us and any maybe preliminary analysis what the implications would be for you if that reform, as it was presented in the first place, would go through? I know it's a tough question.
Okay. I might answer this one, Ben, and thank you for your comments and questions. Yes, sustainability is super important for us and we are strongly committed. We have been committed on this journey for many years. We will continue to be moving along on this path.
The energy reform that has been proposed by the federal government still is being discussed in the Congress, so we don't have any clarity as to what's going to be the conclusion of this proposed reform. And what I can tell you is that in any -- we are, I would say, an energy-light company, even though we have a lot of -- more than 1,000 electric vehicles running in the streets of Mexico and we have this conversion to renewable energy, it's still not -- being a food company, it's not a very critical component of our total cost. So we'll have to wait and see.
Okay. Perfect. Yes. I guess in that direction it's going to go. And then the next question, I suspect that one is more for Diego also in light of the guidance you just gave. So when we look at your performance and profitability, and not comparing it against last year, but comparing it to the prior year, and you've made our lives easier by putting it under the presentation, so clearly, Mexico is like that one spot where profitability is still somewhat behind the levels of the third quarter of 2019.
Could you provide some incremental color on to what have been the issues in Mexico, considering that you've had such a good quarter 2021? What is still missing to kind of catch up on the margin? And in light of your guidance, is that essentially what you assume you can achieve in next year that could potentially help you deliver that small margin expansion versus that already very high base?
Yes. In the case of Mexico that we have a very diversified portfolio within different channels and the categories in this market, if you remember, we had an important impact back when the COVID started to happen, which is a little bit of the opposite to what happened to some other regions.
We have, as you can see in this third quarter, started to see and continue to see a very strong recovery. So we feel very confident on the outlook. And of course, the guidance that we provided at the Grupo Bimbo level is considering part of this recovery in Mexico.
Okay. Perfect. And then when it comes to M&A, you're doing all these small ones. Is it because there is nothing big? Or is it because you think that's the right way to do the strategy between internal CapEx and adding capital towards some smaller acquisitions just given that your leverage is so low and you would have a lot of balance sheet opportunity to actually engage in something bigger?
If I may, Diego. Ben, this is not something that you can plan for or you can put it in a spreadsheet. So opportunities come. Some of these opportunities we have been working for them for years, and they make sense for our strategy in the particular business unit. And that's how we basically see this happening in this quarter.
So -- we don't rule out bigger or smaller acquisitions. And everything has to make sense from a strategic standpoint, and it's something that materializes in different ways in every year, in every occasion. And we're very glad with the the 3 acquisitions that we made this quarter, and I think that they will allow us to strengthen our market positions in the different regions.
Our next question will come from Lucas Ferreira with JPMorgan.
Yes. Do you hear me?
Yes.
I have 2 questions. The first one, since you're seeing your EBITDA increasing by high single digits next year and your CapEx implicit guidance here is that it's also falling a little bit from this year's numbers, can I assume that your distribution should also be bigger next year unless, obviously, we have some relevant M&A to do. But should we expect your cash distribution to increase through more buybacks or dividends, is this the way to read it?
And the second question more regarding the business environment in -- outside the U.S. when it comes to the cost pressures that we are seeing in the industry. Is it fair to say that we're seeing this cost pressure coming first to North America then the other regions? When should we expect to see Mexico, Latin America and Europe costs kind of -- cost effect peaking for you? When exactly that should happen considering hedges, considering your inventories?
Yes. If it's okay, Daniel, I can take the 3 questions -- the 2, sorry. Just let me be very clear. You mentioned in terms of the EBITDA guidance, high single digit. The guidance is mid- to high single.
Now in terms of the expectation on how much we're going to give back to the shareholders for 2022, it's still early to tell. We still have to go through all the processes, of course, finish the year in order to propose to the Board and then the Board to the shareholders' meeting what's going to be the dividend for the year. So hard to give any specific comments if it's going to be more or less than last year.
And also in terms of the buyback program, I mean, we will continue to execute the program with the same guidelines that we have been executing it for the last years. So as long as we continue to have strong cash flow generation, strong financial position and we see an opportunity, we're going to be active.
How active? Impossible to know. I'm sure you understand that it's very hard to predict and give an estimate on the resources that we're going to be investing on the buyback program. What I can tell you is that today, we still have, on our buyback, legal reserve approximately MXN 6 billion.
Perfect.
Okay. And in terms of the cost that you mentioned for Mexico, Latin America, we're still -- we are already seeing the impact. The thing is that the strong performance on the top line created some economies of efficiency, some operating leverage that allow us to have part of our reduction. But if you see the gross margins in Mexico decreased even with a strong top line performance, we had a decrease of 60 basis during the quarter.
Our next question will come from Felipe Ucros with Scotiabank.
Daniel, Diego, congrats on another good set of results. I have 2 questions on my side, one on B2B platforms and the other one on raw materials pressure.
So let me start with the first one. We've been observing how some global and Latin American players have been deploying digital B2B platforms to serve the traditional channel in Latin America. Most of that has been happening in beverages, not really in food yet.
But given your regional makeup, you're uniquely positioned in the food sector with a presence in almost every country in the region. But then on the other -- flip side, I tend to think that traditional trade has not historically been your forte.
So just wondering here whether you have any plans to develop a digital B2B platform for the traditional channel or if you have contemplated jumping into another third-party platform at some point, something with likes of Ambev or The Coca-Cola Company or something like that, given that they're going into food as well.
And then the second question, much shorter and less strategic, on raw materials pressure. Obviously, we saw some raw materials pressure and you guys moving on with prices. But the hit seems pretty mild at this point. Do you think we've seen the bottom of the gross margin pressure? Just trying to think how we phase this into our models going forward.
Well, on the second question, let me tell you that I don't think that we know clearly what's the path for some of the cost increases that we've been facing. We don't know if it's basically the worst of it or there is more to come. So that's why we mentioned that we're taking further actions for next year in terms of pricing and revenue growth management as well as productivity initiatives.
So I mean we still don't think that we have seen that this is the end of it. And there are issues not only on commodities, but in some countries, most notably the Anglo-speaking countries, the labor shortages, the supply chain constraints are even bigger and more complex in other places.
The -- regarding the question on digital platforms. We have had, for a good number of years, a project in Mexico. We now have basically control of that project. We have been renewing our digital connection with our customers. It's called T-CONECTA, and it's basically in all the countries. We are aware of all the different initiatives that are happening. And we're not only strengthening our own platform, we're also talking and seeing if it's possible to work in other platforms.
So this is an evolving journey and one where we do have a role to play, and we will be playing a role in the traditional channel given the exposure and the importance for us. But it's something -- it's changing every day and we have a full team dedicated to take advantage as much as we can on the emerging opportunities.
Our next question will come from Ricardo Alves with Morgan Stanley.
Just a quick question. How will you be expanding margins next year, given all the cost increases? I mean commodities was talked about this extensively over the past few months, but now we have labor, freight, cost supply chain issues. Is it any particular market that are -- you're more optimistic on? I mean is the U.S. prices implementation surprising to the upside? Is it the efficiencies that you're carrying from the COVID savings? I mean Diego mentioned a few questions before that Mexico is part of the story. But can you just give some more granularity on this issue because I mean mid- to high single-digit EBITDA expansion over a tough base seems like a quite remarkable performance.
Yes. In the -- in terms of the margin expansion, but of course, as I mentioned, we do expect something because of having this mid-single-digit top line growth, probably a mid- to high single-digit EBITDA expansion, of course, this will mean some margin expansion.
One of the big drivers, I would say it's the top line expectation. And here, what we're considering is strong volumes to continue, but also on prices, on the pricing strategy and the product mix that can help also to offset part of the pressures that we will see with the commodities and the labor that was already discussed.
On top of this, we have several initiatives today as we speak that are work in progress, initiatives that will generate efficiencies and productivity for next year that will also help us to offset the headwinds that we're going to face. And that's why -- I mean what we think in terms of the margin is that it will be flat to a slight expansion.
Our next question will come from Alan Alanis with Santander.
Congratulations for the results. A couple of questions. The first one is regarding -- I mean you've done an amazing job in many fronts but also including extending all of your debt and the maturity is very, very long. I mean according to your press release, you don't have more than $200 million of amortization in the next 2 years and you're already at a very low level of net debt-to-EBITDA.
So my question is how low do you think it will go the net debt-to-EBITDA? I mean the last time you were below 1 or 1.5x net debt-to-EBITDA was in 2008. So you don't have any issue going back to that low level of leverage, which I guess is a good thing that you want to reconfirm. That will be my first question.
Yes. Yes, we're very happy with the profile of our debt. The tenor that we have is close to 16 years -- a little bit more than 16 years. So it's very strong. We still have a -- some debt in the short term. Basically, part of it is the $200 million remaining of the 2022 bond that matures in January. Of course, I mean it's not going to be an issue. And then we've got till 2024 with the next bond that is $800 million. So we have a lot of time to plan and to see what we're going to do in terms of liability management transaction. So we feel very confident and very happy with this debt profile.
Also remember that we have the new sustainability-linked revolving credit facility for $1.75 billion. That also provides a lot of flexibility to Grupo Bimbo.
In terms of the ratio, I think -- I mean for many years, we have received the question that -- and we perfectly understand that in the past, there were some cycles when Bimbo deleveraged and then some big opportunities came into the table and we went back to 3, 3.2, 3.4x. And that probably happened like 2, 3 times after we got the deleverage.
And now it's been, I would say, a steady period of deleveraging the company. We ended 2017 at 3x. As you mentioned, we are at 1.8. Last year, we ended at 1.9. With the acquisitions that we already discussed during the press release and this presentation, we're going to see probably a small pickup in the ratio slightly.
And again, I mean the strategy that we have in terms of the inorganic growth for the company is not changing. So it's not really that because we deleverage we're going to start to look for a big, transformational acquisition. There are still a lot of projects in the pipeline and a lot of opportunities. So we will continue to be active doing and executing the acquisitions that we feel -- are very confident will bring a lot of value to the markets and will continue to build on the long-term strategy of the company.
Got it. That's very clear. And maybe last question, maybe a bit more strategic for Daniel, and it has to do with innovation. I had the perception, and I could be wrong, that lately the innovation of Bimbo in terms of product has been more effective in contributing to the top line growth. What has changed, Daniel, in the way that you do innovation right now versus the way you did innovation 5 or 10 years from now?
Am I right to say that now you're much more effective? I'm seeing all of these products in the United States and the Takis and the -- and you see all these products also in the supermarkets in Mexico. And it seems that they become increasingly more successful in terms of contributing to the top line of Bimbo.
Thank you, Alan. Yes, let me tell you that we do have basically renewed and changed our innovation process. We have a team just focused on innovation and on making sure that whatever works in one place can be studied and tested in others. And really, we're proud to see that some of our key products in some markets are now getting to be a relevant item on the portfolio of a number of our countries. So that's been in the works and we've been refining it for the past, I mean, 3, 4 years.
The other part that I see that we're doing is we're making sure that we can support those launches better than what we did in the past, and that implies a better strategy, a more -- a focused program, and I mean, at the end of the day, more economic support behind these launches.
So we have done -- I think that we always have room to improve, and we have to be careful of making sure that we learn from our successes and also from our mistakes. But in general, I would say that innovation is playing a larger role in the company, and I'm glad to see that you're appreciating it.
Yes. No, it is very noticeable, and congratulations.
Our next question will come from Álvaro García with BTG Pactual.
A couple of questions. The first one is on Aryzta in Brazil. When you bought East Balt, that was noticeable and you included this in the presentation that their margins -- East Balt's margins and your QSR business margins were a lot higher than average. And I'm just curious if it's fair to assume that Aryzta in Brazil has sort of a similar dynamic if margins are higher than your LatAm average or your Brazil average?
And then my second question is on tax loss -- sort of tax loss carryforwards in the context of your tax guidance for next year -- your tax rate guidance for next year. Will you be tapping into these in some markets like Brazil, in other markets in LatAm or Iberia? Or is this not the case?
Yes. So Álvaro, on the first question, yes, this acquisition will be accretive to our operation in Brazil. And not only that, we strongly see a lot of synergies being developed over the course of the next 2 years in Brazil with the opportunity of merging this business also in the other side of our existing Brazilian place.
Yes. Álvaro, regarding the tax loss carryforward that we have and what we are expecting, first, I would say, remember that we have a very conservative accounting policy where we typically don't recognize any deferred tax asset on the losses. So once we're able to turn around the business and we see an operation to be positive in terms of profit before taxes, then we will start to see the positive effect on the effective tax rate. And with what Daniel mentioned, that's going to be the case for Brazil, as an example, and some other.
So yes, on the 35%, mid-30s, it can probably be below 35% or in the range of mid-30s on the effective tax rate. We do consider that we will start to use and see the benefit of some -- the uses of some NOLs.
That's very helpful. And if I could just do one more, sorry. On the U.S., it's been pretty remarkable to see your market share gains. I'm not sure if Fred's online or if Daniel could take it on. Just -- it's been 2 years now in a row of gaining market share, particularly in breakfast and I'm surprised we haven't seen a pullback as activity has normalized. I was wondering if you could just talk about that a little bit.
Yes. I'd be happy to take that question. Yes, we're continuing to see fairly strong market share gains, not in every category, but most of our categories. Breakfast, I think, is a reflection of the continued shift to consumption at home, which, even though we've cycled the most significant impacts of the pandemic from a year ago in the quarter, I think that there's a continued trend of more consumption at home. And I think breakfast is one of the categories, along with buns, I would argue is another category where the trend seems to be continuing. And so we feel good about that, and hopefully, that will continue as we move into 2022.
This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Daniel Servitje for any closing remarks.
Well, thank you very much for attending the conference. If you have any other questions, please refer to the Investors group, and we hope to see you in the next conference call. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.