Grupo Bimbo SAB de CV

BMV:BIMBOA

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone, and welcome to Grupo Bimbo's Fourth Quarter 2018 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the company's website at www.grupobimbo.com.

Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements.

I 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]

Thank you very much for joining us. I'm here with Diego Gaxiola, our CFO; our President of the U.S., Fred Penny; and several members of our finance team. I will get us started this morning with the result for the quarter and an update on our global operations. Diego will provide the financial review, and then we can answer your questions.

I'm pleased to share the news coming out of the quarter. We closed the year achieving record levels in net sales, gross profit, operating income and adjusted EBITDA, highlighting good performance in Mexico, North America and an important improvement in EAA.

In the fourth quarter specifically, we achieved strong results, completed the acquisition of Nutra Bien in Chile and continued to deleverage the balance sheet through double-digit EBITDA growth and debt reduction.

We also continued our focus on corporate social responsibility and job creation for the next generation through our Youth Building the Future initiative in Mexico. There were few challenges in the quarter, including those in our markets related to macroeconomic issues in Brazil and Argentina; delays in the integration in Spain; and a higher inflationary environment in the U.S., which I'll touch in more detail shortly. But overall, thanks to increased alignment and the ongoing support of our associates around the globe, we are well positioned to continue growing strategically, creating value, improving profitability and better serving our consumers in 2019 and beyond.

I would now move on to a more detailed explanation of performance by region. We delivered strong top line results in Mexico with healthy volume growth across all categories and channels. The traditional channel outperformed, as did new product launches like Bimbo Donuts, which is a cross-market introduction from Spain.

We did see pressure coming from the cost of sales and expect 2019 to be challenging with regards to commodity prices. However, we were able to reach record EBITDA levels for the region, and I believe we are set-up for continued growth as we proactively identify savings throughout our supply chain.

In North America, net sales rose 6.4% in peso terms, while dollar sales increased by nearly 2%. We implemented price increases and experienced growth in our strategic brands such, as Sara Lee Bread, Entenmann's Little Bites and Barcel snacks.

We achieved market share gains in the sweet baked goods and mainstream bread categories in the U.S. as well as in the bread and snacks categories in Canada. However, these results continued to be pressured by the decline in the private label category.

The adjusted EBITDA margin for the quarter expanded 90 basis points. This was achieved by the top line growth, along with the benefits from past investments, such as the VSP in the U.S. and the organizational restructuring initiative in Canada, which more than offset the commodity, energy and transportation pressure as well as restructuring expenses in part related to the closure of the Madison, Wisconsin, plant in the U.S. and an impairment charge related to some trademarks due to a strategic portfolio rationalization initiative to drive growth and profitability in our core to top-performing brands.

Looking ahead, we expect continued inflation pressure from commodities, energy and transportation in the region. To offset this, we will leverage our revenue growth management processes to drive efficiencies in promotional strategies, improve our product mix and increase productivity through our supply chain optimization initiative. Specifically, our previously announced U.S. plant closure will take place over the coming quarters in 2019.

And for Latin America, we can point to 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 and disposable income. Regardless, we were able to generate positive adjusted EBITDA due to the strong performance in the Central American region, Colombia, Ecuador and great results in Chile. So we remain moderately optimistic looking forward as we start to see recovery in many of our main markets in that region.

Lastly, EAA top line expansion can be mainly attributed to the acquisition of Mankattan in China, good performance of the bread category in Iberia and healthy growth in the U.K., especially in the croissants category as well as the FX rate benefit.

In Iberia, we began to see part of the benefits of the integration. However, the sweet baked goods category continued to underperform. In China, the integration of Mankattan has gone smoothly, and we'll continue with these efforts during 2019, which include the closure of our Bimbo Beijing plant and moving all the operations to the Mankattan plant in that city.

Before I close, I would like to share that Grupo Bimbo became the first company in Mexico to produce clean energy certificates for distributed generation. This initiative, accomplished thanks to the collaboration of private companies and the government, will continue to contribute to achieving Mexico's goal of using 50% renewable energy by 2050.

Additionally, we have been opening our doors to 2,000 women and men as part of Mexico's Youth Building the Future program. The Mexico Ministry of Labor and Social Security launched this program to provide young Mexicans with the skills they need to join the workforce. We are proud to have this diverse group join us as we train them for the future and fuel our talent pipeline.

Looking forward, 2019 presents many opportunities for our global business as well as challenges, particularly the uncertainty and volatility related to the global economic cycle extension and recent political and macroeconomic changes in markets like Mexico, Brazil and Argentina.

We will continue to focus on building a stronger, leaner and faster business with efficient processes as we proactively look for opportunities to invest in restructuring, research and development of new products and innovation across our existing ones as well as in automation in our supply chain.

Deleveraging the balance sheet will also continue to be a priority for us during 2019 to keep strengthening our financial position.

This concludes my comments on our operations, and I would like to invite Diego to review the detailed financials. Please, Diego, go ahead.

[Diego Cuevas, executive]

Thank you, Daniel. Good morning, everyone. To summarize, this quarter was marked by strong sales growth, double-digit growth in EBIT, adjusted EBITDA and net income, reflecting strong operating performance and savings achieved from the ongoing restructuring investments implemented in the past. We will continue to work on finding and successfully implement this type of initiatives going forward as part of our profitability plan.

As you saw in our results, we have significantly lower extraordinary expenses, down by around MXN 960 million when compared with the fourth quarter of 2017. This primarily reflects lower integration expenses and a MEPPS benefit of approximately $21 million mainly from the interest rate hike. However, we registered some impairment charges for less than MXN 600 million, mainly as a consequence of our commercial strategy in the U.S., focus to rationalize our portfolio and keep pushing growth and profitability of our strategic brands.

Moving on to our financing costs. The 18% increase was partially explained by the change in our debt currency mix where we have increased the portion of Mexican pesos and reduced the exposure to Canadian and U.S. dollars, which was partially offset by a benefit of having recognized MXN 200 million related to the net monetary asset position in Argentina, reflecting the shift in the classification of the country as an upper inflationary economy.

As for our effective tax rate, we closed the year with a significantly lower rate of close to 42%. The 11 points reduction as compared to the full year of 2017 was mainly due to the implementation of the tax reform in the U.S. last year. The main rationale for the difference between the 30% statutory tax rate in Mexico and our current 42% rate are, first of all, the effect of the effective tax rate from operating losses in some markets where we did not recognize a deferred tax. Going forward, as they start to generate earnings, our tax rate will improve substantially. Another effect is the partial deductibility of some benefits in Mexico, and lastly, the higher inflationary effects on the monetary position in Mexico.

For 2019, we expect our effective tax rate to remain in the range of low 40s. As a result, net income for the quarter presented an important growth of nearly 6x, which represents a net margin expansion of 270 basis points, while earnings per share stood at MXN 1.23, and our return increased 90 basis points to 7.7%.

Moving on to our balance sheet. We were able to reach our year-end target, closing the year with a total debt to adjusted EBITDA ratio of 2.8x compared with 3.4x at the end of 2017. This improvement is indicative of our profitability increase and a debt reduction, coupled with our commitment to deleverage the balance sheet.

On this point, we closed the period with a total debt of less than MXN 90 billion, 4% lower than our position in 2017. We significantly reduced the Canadian portion of debt moving from 16% to 5% and eliminated the entire Europe portion with a prepayment of approximately $120 million from the revolving credit facility. As a result, 36% of our debt is now denominated in Mexican pesos, which better aligns with our cash flow generation. Moreover, we have greater visibility and reduced risk with our debt structure, given that 100% of it is on a fixed rate.

We also invested MXN 1.2 billion in our share repurchase program, buying back around 30 million shares and almost MXN 450 million of our local bonds.

CapEx during the year stood at nearly $750 million, of which 75% was allocated to our manufacturing footprint, mainly focused on increasing on our production efficiency and improving production capacity where needed.

Finally, for 2019, we expect CapEx to be within the range of $800 million to $900 million as we continue to invest in increasing and modernizing our production capability, enhancing our distribution network and rolling out digital transformation projects.

That concludes our remarks this morning, so Harry, will you help us with the Q&A session?

[Operator]

[Operator Instructions] Our first question comes from Luca Cipiccia with Goldman Sachs.

[Luca Cipiccia, analyst]

My question relates to Mexico. We continue to see a very consistent and impressive top line growth. I think 2018 is the second year in a row where you -- on a full year basis, I think, your top line was up more than 10%. Can you give us maybe some more color on the pockets of drivers that are causing this, given that I understand it's still mostly volume-driven?

And if we think about the forward and the momentum in the business, what seems reasonable to expect for 2019 or for the following year? So maybe just if you could qualify a little more the past trends in the last couple of years, in the past quarters, but also, how should we think about that looking forward?

[Daniel Servitje Montull, executive]

Let me tell you that we had a very strong year, 2018, in Mexico. It covered basically all the channels and almost all or all the different categories in which we participate. And so I have to congratulate our Mexican team for doing an outstanding job.

2019, we're starting on a good foot, but certainly, there are more uncertainties on the consumption pattern or environment due to the doubts on what's going to be the -- what's going to happen with economy. We're forecasting growth, although maybe smaller growth than we had last year. Nevertheless, consumption as per the policies of the new government might continue to grow as lower-income consumers may have more resources at their pocket. So it's still early to tell. We have to have more visibility on what the impacts of the new government policies will be and how they will affect the consumers. So far, we're starting on, as I was saying, on the right foot and continuing with the trends that we had during 2019 -- '18.

[Luca Cipiccia, analyst]

And maybe just on the performance this year. It seems that you are outperforming -- if we look at other consumer companies' top line, I think this sort of high single-digit, low double-digit top line does appears to stand out. What is that you're doing? What has been changing incrementally to support this acceleration? Are there certain things that you can identify that have been implemented in the last year, in the last couple of years that made you drive that step change? Also comparatively to the fact that the broader consumer market being stable doesn't seem to grow as much as you have.

[Daniel Servitje Montull, executive]

Well, we are -- I will say that we're trying to have our eyes on the ball and basically trying to find the opportunities for growth that we have in our industry. I would say that there has been a lot of innovation in the different categories, trying to take advantage also of our deep distribution that we have throughout the country and aligning ourselves with our customers to try to take the opportunities on the market to a reality. And it was a good year, what I can tell you, but we have to be focused on what's right now happening.

[Operator]

The next question comes from Fernando Olvera with Bank of America Merrill Lynch.

[Fernando Olvera Espinosa de los Monteros, analyst]

I have a couple of questions, both of them are related to North America. In 2018, North American top line had a very good performance in U.S. dollar term. Can you share your outlook for this year? I mean, I'd like to understand what would be your pricing strategy and how volumes should behave in 2019, given your portfolio penetration. Also, can you comment on competition?

And my second question is, how should we expect margins to behave this year, given the wheat price -- give the wheat price has remained high year-over-year?

[Daniel Servitje Montull, executive]

We have different businesses in North America, but I -- the leading one is BBU, so I will ask Fred to cover this question.

[Fred Penny, executive]

Yes, sure, Daniel. Let me begin by saying that in '18, we're, obviously, pleased with the results in the quarter in '18. I think we were successful this year in managing the inflationary headwinds through a combination of pricing, favorable mix and our productivity efforts. And looking forward, we really have to continue to do the same thing. I think the commodity and other inflation headwinds are going to continue from what we see today. In fact, they may be a bit more significant in certain input costs. And so we're going to have to continue to look for additional pricing efficiencies and trade promotion efficiencies and, obviously, continue to work hard, which the team has done a great job of this year on driving wastes out of our business and driving productivity across the supply chain. And I think, Fernando, you asked about -- asked me to comment on competition. I don't -- I'd prefer not to do that.

[Fernando Olvera Espinosa de los Monteros, analyst]

Okay. Yes, my question on competition was more like to know if competition is following you with your -- with price increases or not?

[Fred Penny, executive]

Well, I would say, if you look at Nielsen and IRI data, you would see pricing movement in certainly most of the categories we participate in. No one is immune from the inflationary pressures that are out there. So everybody is got to deal with them as best as they can, I suppose.

[Operator]

Your next question comes from Lucas Ferreira with JPMorgan.

[Lucas Ferreira, analyst]

My first question is regarding the expenses. We saw a big improvement in the expenses lines this quarter, interesting driving the margins up. So my question is on the expenses. You mentioned a lot about efficiency, so should we assume that the level of expenses you guys had this quarter are sustainable going through 2019? Can you elaborate a bit on that? And also if you could talk a little bit about those one-off expenses -- charges, how should we think about those in 2019 compared to the levels that we saw in 2018?

And my second question maybe to Daniel. Daniel, I think you -- it was interesting that you concentrated a lot your initial speech, your opening remarks on the efficiency, making the company more profitable. I was wondering how much the top management is allocating time regarding looking for growth opportunities vis-à-vis efficiency? If this is something that -- or in other words, if M&A is still taking a substantial portion of your time or no? You see the company definitely really more focused on digesting the assets you bought in the last couple of years and delivering efficiencies. And if this is the case, if you can talk a little bit about what are the main assets that you guys have to make more efficient? And what sort of margins you're expecting for the mid- to long term?

[Diego Cuevas, executive]

Okay. Regarding the efficiency on the operating expense, I will say, definitely, it's sustainable. As we have mentioned in the past, we did important restructuring investments, including the VSP ISP in the U.S., an organizational restructure in Canada and many other efforts that have been focused in order to control and reduce and have a more lean and efficient company. So we definitely will believe this is going to be sustainable, and we will continue to see these benefits in the coming quarters. We will still see in the first and the second quarter, let's say, an easy comparison in North America because of these programs that were implemented in the second and third quarter.

Regarding the one-off expenses in the quarter that amounted close to MXN 900 million that were substantially lower than the same quarter of last year, it had to do that we had substantially less integration expenses in one hand because, as we have mentioned, we are substantially more advanced with the integration in Spain. We had a higher profit coming from the MEPPS because of the movement on the interest rate, which we net had a benefit of a little bit more than MXN 400 million in the quarter. And I would say, I mean, this income is not necessarily sustainable, but it's very clear that we have this effect and we -- will depend on what happens on the interest rate to see, I mean, the effect in 2019 and going forward. And as I mentioned in my script, we still are very focused on doing and finding productivity projects that can help us to have better margins in the future. So you can expect to see some restructuring expenses going forward.

[Daniel Servitje Montull, executive]

And your questions were quite detailed, so I might take a little bit more time to expand on them. I will say, as you probably well know is that our business and our focus is -- it's on building a sustainable one for the long haul and making sure that we have models, processes and, at the end of the day, assets that perform efficiently for the long haul in order to build sustainable positions in the markets. And in that sense, I would say that we have been, over the many years of the existence of the company, really trying to have a balanced view of growing and also investing and reinvesting in our business for the long haul with an efficient -- within an efficient framework and a profitable one.

So we will continue with that emphasis, both on growing our business organically and on making it more efficient. What I would say is that we have been and we will be devoting less resources than we had in the past to M&A as we focus more on fixing or improving the businesses that we have. And that is -- as a result of that, many of the closures that you have seen in the past and that we have announced this year as well will continue to delve into building a much more efficient network of manufacturing assets to allow us to have a very efficient system in the future. So that's a reflection of what we want to do internally, and that's why we are also investing the CapEx that we have announced for this year.

Nevertheless, our intent is also on deleveraging ourselves on a debt-to-EBITDA ratio, and that is an important part of our business plan for this year. But we will continue to look for opportunities for granular growth, whatever -- whenever and whatever we can find them. And we have detailed plans in the different regions to take advantage of the opportunities that present for ourselves and also to look at opportunities of expanding our local icons into new markets as we have done recently with Little Bites, which was introduced with successful numbers in Canada, in Spain and in Mexico as well as many others that we are doing as -- in this direction. So all in all, that's sort of the plan for 2019.

[Operator]

The next question comes from Álvaro García with BTG.

[Alvaro Garcia, analyst]

I was wondering -- I mean, you've been mentioning that a big plan for 2019 is deleveraging. I was wondering if you could highlight a particular goal for your net debt to EBITDA, a particular medium-term target, whether it's this year or 2020, that you're aiming for?

[Diego Cuevas, executive]

I mean, we're not disclosing a specific target for this year. It is clear that, I mean, directionally, we will continue to be very focused on having a lower ratio. I would say that more in mid- to long term, we're targeting to be at or slightly below 2.5x by both continuing to grow the EBITDA, but also to generate free cash and lower the level of the debt.

[Alvaro Garcia, analyst]

Great. And just one quick follow-up. On LATAM, we saw significant FX headwinds in Argentina and Brazil and you were still able to grow your sales 5% in peso terms. I was wondering if you can give us a little more color on dynamics there, where that came from, perhaps highlighting some volume growth from other regions. It seems quite impressive.

[Daniel Servitje Montull, executive]

Yes, as I mentioned before, we had a very good performance in what we call Latin Centro region that spans from Guatemala to Ecuador, and also impressive results -- record results in Chile. So those 2 regions were the ones to allow us to basically cover what were the issues on the other 2 countries. Nevertheless, I would say that even with the issues in Argentina, we were able to have a positive volume growth in units. So I mean, our teams are trying to manage these economical issues as best as they can.

[Operator]

The next question comes from [ Ron Divina ] with MUFG.

[Unknown Analyst]

Firstly, congratulation on the reduction in debt. That is good news. As you know, with the news committed facility, the Bimbo's total debt to EBITDA was over 4x, and which is considered as a leverage loan according to fed guidelines here in the U.S. So this is very good news. My question is with regard to the impact of the policies of the new administration on your top line as well as EBITDA in 2019 and beyond. Like, do you expect any impact with regard to the minimum agricultural prices that the AMLO administration plans to set as well as the minimum income which -- there is going to be some change along those lines also, so do you expect any impact of that on your top line or EBITDA margins going forward?

[Daniel Servitje Montull, executive]

Yes, Ron. Well, it's early to tell, as I've mentioned really on what are the impacts of the new policies. So far, what I would tell you is that our wages are significantly higher than the new minimum wages that were set out for the market. We also don't feel that the price -- the guaranteed prices for commodities will be impacting the general market as they are focused specifically for the small land tenants. But there are many other policies that will be enacted by the government. And in that sense, we're trying to understand the impacts, and we're trying to also engage with the authorities in order to understand the new atmosphere for business here in Mexico.

[Operator]

Next question comes from Felipe Ucros with Scotia Bank.

[Felipe Ucros Nunez, analyst]

I think most of my questions has -- have been asked, so I want to dive a little deeper into a couple of those. I think the first one has to do with the restructuring expenses, restructuring and integration expenses. And in addition to Daniel's remarks at the beginning of the call, I also realized that the quote from Diego in the report mentioned at the end of the quote some words saying: following a period of investments in restructuring. So I want to focus on that last part a little bit about restructuring. And are we to understand that the period of the restructuring is mostly over, and then at least in the future, we can think of those expenses being lower than they have been? Or it was just more of a 1-quarter event and we'll probably see those expenses revert to where they were before?

And then my second question is around the pension, the MEPPs, the reserve reversal that you guys took. You mentioned that it had to do a little bit with interest rates in the U.S. We have been expecting a reversal of that reserve for a while because interest rates started increasing quite some time ago, but they're only happening now. So I wanted to know why there was a lag. And if there was a lag, does that mean that even if interest rates don't continue to increase, we might see another reversal at the end of 2019? So it's -- I'm wondering if that lag is going to persevere through time?

[Daniel Servitje Montull, executive]

Let me tell you that I also have made some comments in that -- this direction in other conference calls. We regard ourselves as builders, as really developers of our business for the long haul and making sure that we make the right decisions, taking into account not only what impact we'll have in the short-term but really how can we build a sustainable competitive position in -- for our different businesses in the marketplace. And we have done this for over 73 years, and we will continue to do that.

So the decision to bite the bullet or to invest CapEx, it's not because what's going to be the impact of the decisions on the financial market but, most importantly, how will that affect the performance of our business in the future. And in that sense, I would say that restructuring has happened, has been basically over or reduced in some countries, but it's still ongoing on -- in many of them. And we will continue with this path whenever we see opportunities to create that stronger, more sustainable business whenever and whatever it happens. And that's why we announced these 3 closures of U.S. bakeries this year, and that's why we are consolidating our business in Beijing into 1 more efficient plant. And we will continue to look on whenever we see opportunities to do that, even though that they might not be -- bring us positive numbers in the next quarter or this year. So that's our focus, and we're staying the same course. And we have made progress in many regions as we consolidate the restructuring and integration, but we will keep on finding opportunities to get us in having a better business in other markets. And I'll probably leave the specifics to Diego.

[Diego Cuevas, executive]

Yes. I mean, Felipe, regarding the MEPPS effect that happened in the fourth quarter, this has to do because we have an accounting policy in which we do, on a yearly basis, the mark-to-market of the MEPPS for the interest rates. So -- and we will continue to do it that way because we believe that we take out some noise and volatility on our quarterly results, basically waiting for the end of the year to adjust the value of the MEPPs on the liability.

[Felipe Ucros Nunez, analyst]

Okay, understood. And I was wondering on the restructuring charges, whether you could comment on magnitude going forward. I understand that they will stay there and you will continue being acquisitive, so -- and you will continue optimizing the company. So it -- they will always be there probably, but I'm kind of looking at a comment on magnitude. Could we expect them to start coming down in the future?

[Diego Cuevas, executive]

It's hard to tell because that really depends on the ability that we have in order to find productivity projects and depending on the size that can be the heat that we will have to recognize. So it's very hard to give you a specific comment. I mean, it's clear that 2018 was intensive because of the VSP ISP program, we are now seeing the benefit. As I mentioned, we also implemented a similar program on a smaller magnitude in Canada that also had a charge in the third quarter. As Daniel mentioned, we were taking the heat from closing 3 plants in the U.S. So it's -- that really depends on the ability in how we're able to successfully implement the changes. So very hard to give any specific guidance.

[Operator]

The next question is a follow-up from Lucas Ferreira with JPMorgan.

[Lucas Ferreira, analyst]

Thank you very much for the follow-up, but that's a very simple one. I'm trying just to summarize everything was said in the call regarding the operations, mainly in the U.S. and Mexico for 2019, the higher efficiency, your sort of a cautiously optimistic tone on the top line and the message on the costs. Is there any reason why you think this -- your overall, let's say, EBITDA margin for the 2 regions would -- wouldn't remain, let's say, flat or slightly up, given the higher efficiency? So could we assume at least the same level of margins you guys are posting now in 2018 versus -- sorry, 2019 versus 2018?

[Daniel Servitje Montull, executive]

Well, as you know, we don't give guidance on earnings and EBITDA. I would say, we're seeing many positive signs for our businesses in the different regions. We're still having our heads to get cleared more on what the direction of Mexico and, certainly, the impact of the government policies will have or could have an impact on our performance here in the country.

[Operator]

Your next question is a follow-up from Ãlvaro García with BTG.

[Alvaro Garcia, analyst]

Perhaps, this is wishful thinking, but I was wondering if -- as we reduce leverage over the medium-term, I was wondering if you can comment on your dividend policy. If you'd expect some form of change, some sort of increase in dividends over the medium-term, or maybe even an increase in buybacks over the medium-term?

[Diego Cuevas, executive]

Yes, Álvaro. I mean, what we have today is a priority, as we mentioned, to delever the company. As we continue to see this in the right direction, I mean, there might be an opportunity there to increase dividends or increase the share buyback program, but that really depends on the leverage of the company, no? We're going to have the shareholders' meeting in April. So still, we will have to wait in order to see the dividend that will be proposed for this year.

[Operator]

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.

[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]

Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.