Grupo Bimbo SAB de CV

BMV:BIMBOA

Earnings Call Transcript 2019-Q4

[Operator]

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

[Daniel Servitje Montull, executive]

Good morning, and thank you very much for joining us 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 year and share an update on our global operations. Diego will cover our financial results in more detail and then we can continue with questions from those joining us on the call.

For the year, we achieved nearly MXN 292 billion in revenue, driven by our operations in Mexico and EAA, especially our QSR business and the snacks category globally as well as strategic bolt-on acquisitions, principally Mankattan in China and Nutra Bien in Chile. Our continued focus on becoming a leaner company as well as aggressive restructuring efforts where necessary enable us to grow EBITDA in almost every region.

In 2019, we put in place cost control efforts to reduce our SG&A by leveraging our global shared services model, managing procurement globally and enhancing our Zero Based Budgeting methodologies. In addition, we proactively invested in restructuring opportunities, streamlining our manufacturing footprint by closing 7 plants globally. We are also reinvesting in our business to drive growth with the new distribution centers in Mexico and Latin America and 5 plants in EAA and Latin America.

Before turning to a discussion of our results by region, I would like to take a moment to discuss our operations in China as it relates to the coronavirus. We have 10 plants in China and 1 of them is in Wuhan, which serves our QSR customers. This plant is temporarily closed and operations will resume once the Chinese authorities give their approval to resume business in Wuhan. I am happy to report that none of our Bimbo China associates have been infected with the virus.

Although we do expect softness during the first quarter of 2020, considering these circumstances, we are confident about our future growth and profitability in the EAA region.

Now I will begin with our largest market, North America. For the full year 2019, net sales were flat versus prior year. We achieved strong growth in the sweet baked goods and the snack categories overall. In Canada, we captured additional market share, driven by strength in the bread, buns and rolls and English muffins categories. Offsetting these gains was our portfolio optimization initiatives implemented in Q2 '19. This initiative resulted in temporary volume softness as we eliminated close to 16% of our branded SKU -- SKUs across premium bread, mainstream bread and breakfast categories.

Despite significant inflation challenges in the U.S., EBITDA margin expanded 60 basis points in North America as a result of excellent performance in Canada and in our snack businesses. As we continued our journey towards world-class efficiency, we closed 5 plants and 5 production lines during the year and continue to invest in our manufacturing footprint, automation and a rough structure in order to support profitable growth.

Just after the end of the year, we acquired the Lender's Bagels business from Conagra. We are pleased to add this iconic brand to Grupo Bimbo's portfolio, and we fully expect this business to be complementary and accretive to our existing powerful bagel business.

Looking ahead, we expect growth from our core branded portfolio to continue as we execute a strong pipeline of innovative products and we continue to leverage our D&D capabilities. We also expect lower inflation in 2019. Finally, we will continue to look for opportunities to optimize our overall supply chain and administrative structure.

Turning next to Mexico. We achieved both sequential and year-over-year growth. The growth in Mexico for the year reflects increases in volume across most categories in every channel with certain categories such as buns, cookies and cakes as well as the convenience channel, outperforming the prior year. We are constantly working on becoming more competitive, making our products more accessible to our consumer base and creating a flexible portfolio of offerings, adjust to market and consumer needs.

In Latin America, we faced a challenging year in our main markets, Argentina and Brazil. The first, due to the macroeconomic conditions in the country and the latter due to a challenging competitive environment as well as extraordinary expenses. Partially offsetting these effects were Latin Centro and Latin Sur divisions, with Peru and Chile outperforming. We experienced good results in the bread, sweet baked goods and the cookies categories.

Lastly, the Europe, Asia and Africa top line expansion was generated by the continued strong performance of our quick service restaurant business as well as good results and market share gains in Iberia. The business in Iberia performed well overall, in part driven by the launch of natural crustless bread as well as strength in the sweet baked goods category, more specifically with our Donuts brand. We achieved a 13-fold increase in EBITDA in the EAA region. This enormous profit improvement reflected synergies achieved from the acquisition of Donuts Iberia, lower integration expenses and the strong performance of Bimbo QSR. As usual, last week, we announced a joint venture with Food Town, exclusive bun supplier and franchisee of McDonald's in Kazakhstan. This JV will strengthen our manufacturing footprint within the high-growth QSR industry and aligns our relationships with our QSR customers across Central Asia.

Regarding our sustainability initiatives, 2019 was a year where we reached several milestones in our commitment to the environment having signed agreements related to the food waste, electric energy and plastics. This past Monday, we launched over 140 sustainable vehicles in Mexico, which represents our first delivery on our commitment to increase the electric vehicles fleet to 4,000 in 2024. We are actively working on these initiatives to achieve our purpose of building a sustainable, highly productive and deeply humane company.

As we wrap up 2019, we're pleased with the significant progress that we have achieved despite challenging environments in most geographies. We're carrying momentum into the new year and in the long term, driven by improvements in Iberia and Canada, solid execution and improved trends in our Mexico business, excellent momentum in the quick service restaurant business as well as our opportunity to increase our penetration through marketing investments in our global and emerging market brands. We remain committed to reinvesting in our business to drive long-term growth and shareholder value.

And at this time, I would like to turn the call over to Diego to cover our results for the year in a little more detail. Please, Diego, go ahead.

[Diego Cuevas, executive]

Thank you, Daniel, and good morning, everyone. Thank you for joining us on the call today. I would like to walk you through our full year 2019 results, which are exceptional considering the challenging comparison due to the strong results that we posted in 2018. Despite these difficult comparisons, excluding FX, net revenues increased 2.5%, EBITDA rose 5.4% and our margin expanded by 50 basis points. These results are indicative of the measures we have undertaken to effectively manage our cost and expenses, the positive effect of past restructuring initiatives and to grow organically in a productive and sustainable way.

The strong operating performance across most regions was partially offset by restructuring investments in North America, impairment charges in North America and Latin America as well as the net related noncash charges and the extraordinary expenses in Brazil, which were related to fiscal and labor provisions. Although 2019 was a very challenging year in Brazil, we are encouraged about the potential of this market in the mid- to long term, as we have begun a turnaround process with identified tracks to generate value in this high potential market.

Full year results also reflected a 22% increase in our financing costs, mainly associated with a onetime expense related to the $600 million liability management transaction for the 2020 notes, a loss from the net voluntary asset position in Argentina and the effect of the adoption of IFRS 16 in our financial statements.

The cumulative effective tax rate for the period closed at 39.1%, which is slightly below the guidance we provided for this year-end. At the net effect of these factors yielded an 8.8% increase in net income, an expansion of 20 basis points in our net margin, closing at 2.2% and a 40 basis point improvement in return on equity.

Turning to the balance sheet. We ended the year with a net debt to adjusted EBITDA ratio of 2.4x. In terms of our debt profile and our liquidity position, we feel very comfortable closing the year with an average tenor of 13.3 years, with only $200 million coming due in the next 2 years. Under our debt currency mix, we have a well-balanced mix aligned with our financing needs and the assets behind.

With respect to the free cash flow and capital allocation, our working capital shows a sequential delay in the collection of positive balances of the VAT in Mexico. However, our net operating working capital that mainly considers account receivables, inventories and supplier has improved significantly by almost 4 days, which is the equivalent of MXN 3.1 billion, mainly due to an improvement in our accounts receivable processes and the supply chain finance program implemented in North America. This program is in the first phase, and we expect additional benefits over the course of 2020.

We closed the year having invested nearly $680 million in capital expenditures, of which 75% was allocated to our manufacturing footprint, mainly focused on increasing our production efficiency and improving production capacity where needed. The balance was dedicated to streamlining our distribution network and investments in IT efforts. As a result, free cash flow before acquisitions, dividends and share buybacks totaled MXN 2.4 billion.

Looking into 2020, let me remind everyone of the guidance we provided at our recent Investor Day. We expect a low to mid-single-digit top line growth coming from solid organic growth across every region and a mid- to high single digits EBITDA growth as a result of lower raw material costs, productivity benefits from restructuring investments that we have been able to achieve in the past as well as continuous improvement in our SG&A.

We also anticipate that our tax rate will be similar to the one that we had in 2019. And finally, we expect that our CapEx will be between USD 700 million and USD 800 million. With that, let me turn the call back over to our operator. So please, Alicia, go ahead.

[Operator]

[Operator Instructions] The first question today comes from Isabella Simonato, Bank of America.

[Isabella Simonato, analyst]

I have a couple of questions. First of all, when -- in the Investor Day last year, you guys provided an EBITDA guidance for 2020. And based on the initiatives that you guys are implementing mainly in the U.S. but outside of Mexico overall and considering the acquisitions that you recently announced, how can we think about the EBITDA guidance for 2020, which I understand was between mid- to high single-digit growth this year?

And the second question in the U.S., would you guys give us an idea of what would have been the sales performance if we exclude this optimization in the portfolio as -- in the quarter as well as in full year 2019? And how can we think about this growth going forward?

[Diego Cuevas, executive]

Yes. So let me probably first take the question regarding the guidance for 2020, and I will probably let Fred take the second question. As I mentioned during my script, what we expect in terms of the growth for EBITDA for 2020, it's going to be in the range of mid- to high single digits. And we expect this because of several factors: First, we do expect to have an organic growth across the different regions; second, we expect to start to see, again, as it has been the case in the past, the positive effect from past restructuring efforts. And also, we will have a positive effect from commodities or the main commodities that, in fact, we have already had as well as with the exchange rate for the Mexico operations that we have a slight positive effect in our P&L. So all in, we feel confident and we're maintaining the same guidance that we provided in the Investor Day back in November.

[Fred Penny, executive]

Isabella, yes. I'd like to -- I'd give you a little -- I'd give you some color on your question on the top line. I don't want to be specific on forward guidance on the number. We do that at the JV level. But I will say that if you look at the full year, if you look at the quarter, our top line was essentially flat, varied a bit by quarter, with growth in our core brands and our core categories, largely offsetting the impact of the portfolio optimization. And we're going to cycle through that as we exit Q1 into Q2. And then I would expect that we'd see the net top line growth.

[Operator]

The next question today comes from Felipe Ucros of Scotiabank.

[Felipe Ucros Nunez, analyst]

So just 1 on my side. And as I look at the history of acquisitions and capital deployment that Bimbo has had. I look at your moves to Mexico and Latin America and to developed markets, like the U.S., Canada and Europe. And it seems like your M&A strategy has morphed more recently. And I can think of 3 axis where things have changed. I described those as size of the stage of the market that you're targeting and also the product focus. And the size is obvious, I mean, you've been making acquisitions that have been less transformational. But you've also moved away from low-growth and high-penetration markets like North America and Europe. And now you're looking at high-growth and low-penetration markets like Asia, with the risk that, that brings, right? And the additional focus on the product side is QSR. So I'm wondering if you can walk us through the lessons learned from the past and how this has shaped the new M&A strategy.

[Daniel Servitje Montull, executive]

Yes. Thank you very much for your -- for sharing your views. Let me tell you that, yes, all in, we're pursuing more bolt-on acquisitions than larger, bigger ones than the ones that we had in the past. So there is clearly a size distinction from what we were doing in previous years. But we're doing opportunities all across our business all the time. And wherever we see fit, we pursue those deals. That's why we went for a small bolt-on acquisition in the U.S. recently and we pursued the deal in Spain, that provided us very relevant position with the largest customer. So we're not necessarily eyeing just 1 particular region, as you mentioned, or a particular line of business in our company. We're constantly looking for opportunities of organic growth and inorganic growth throughout all across the geographies and our categories.

[Operator]

The next question comes from Rafael Romero of GBM.

[Rafael Romero, analyst]

Congratulations on the results. My first question is related to the impairment charges you mentioned on your press release about North America, Argentina and Brazil. So I wanted to know at least what percentages is attributed to North America and what to Argentina and Brazil. And can you give us a little bit more color about this expense? And my second question is related to volumes, expectations in Mexico. What are your expectations in volume for the upcoming year?

[Diego Cuevas, executive]

Rafael, this is Diego. As you know, we did book a hit of MXN 1.1 billion from impairments. This has to do with -- in North America, mainly because of the portfolio optimization that we recognized an impairment in some of the brands that were pushing less than what we were doing in the past. We had a small amount also coming from Brazil.

In Argentina, it's quite challenging because you know that in one hand, we have the -- because of being hyperinflationary economy, we have to restate the value of the assets and with a very high inflation adjustment, but at the same time, the expected cash flow for the future is not being adjusted in the same magnitude. So we're kind of offering an accounting plot, let me put it this way, that created this negative effect. And it might be probably to have the same effect because of having outside of the P&L, this adjustment on the assets and the value of the assets on the balance sheet and not necessarily having the same magnitude on the expectations on the cash flow.

Now virtually, we do not disclose specific information. I mean just directionally and I can tell you that those were the reasons on recognizing the various impairments that we have.

[Daniel Servitje Montull, executive]

And regarding Mexico, we feel positive about the growth that we had in the quarter and the outlook for the year. It's still a low growth economy, but we're seeing some resilience in the categories and we are executing in a very positive manner. So all in, I think we're positive -- we have a positive sentiment towards the region.

[Operator]

The next question comes from Ulises Argote of JPMorgan.

[Ulises Argote Bolio, analyst]

Two quick ones from my side. First, a follow-up here on the issue that you were just talking about on the volumes in Mexico. Just wondering if you could comment if the issues you had there in the past, specifically in the south part of Mexico have now faded away and if you're seeing any kind of differentiation in trends across the country? And the second one, I was wondering if you can maybe give a bit more color on timeline and some of the specific opportunities that you have identified there for the Brazil business turnaround?

[Daniel Servitje Montull, executive]

Yes. On the volume side, we're seeing more growth in the northern part of Mexico, and that was sort of the same view that we had last year. But in general, the market has some upticking. And we're -- executed, as I was saying, in a very efficient manner. So the plan is working, and we're also making efforts on all aspects of the company to improve our profitability as well there.

Regarding Brazil, we underwent a major review of all the operations in the company. I was there a few months back and I came back with a very positive sentiment of the team, the structure put in place for this restructuring. So we're quite hopeful that many streams of work that we have launched will render positive results. Some of them will be more short-term in its timing and others will take more time. But all in, a very positive outlook of this new big project that we have out there.

[Operator]

[Operator Instructions] The next question today comes from Antonio Hernandez of Barclays.

[Antonio Hernández Vélez Leija, analyst]

Well, actually, some of my questions have already been asked but a follow-up would be on China, the impact of the virus. Do you have an estimate? Or is it too soon to tell?

[Daniel Servitje Montull, executive]

Well, it's early to tell because as events unfold in China, we'll see how long will -- the effect will take to impact our operations. It's clearly affecting both the QSR business in China as well as the branded business we have out there, more specifically in Wuhan. But in general, in the whole country, we're facing a softness in volume. China is a relatively small part of the whole EAA business, but it still will have an impact in the quarter and we'll see how much the impact will be for the full year.

[Antonio Hernández Vélez Leija, analyst]

Okay. And in terms of profitability, are these -- the QSR branded business in Wuhan, do they have higher or lower margins than the average operations in the region?

[Diego Cuevas, executive]

Antonio, we do not disclose the margins by the country or -- and lest by region. What I can tell you is that this will, as Daniel mentioned, will have a negative impact for the country, which is a small part of EAA and, of course, a small part of our Grupo Bimbo results.

[Operator]

The next question comes from Álvaro García of BTG.

[Alvaro Garcia, analyst]

The question is for Diego. I was wondering if you could provide some additional color on the tax reforms -- small tax reform change concerning the deductibility of interest in Mexico. And if you would expect some form of impact from this change for Grupo Bimbo.

[Diego Cuevas, executive]

Well, you know that still, the ruling hasn't come out so I couldn't answer with 100% certainty because it might probably depend on how the ruling is specifically written. Now if we consider the amount of interest that we have at the Grupo Bimbo level as a percentage of our EBITDA, we will have no impact from this change.

[Alvaro Garcia, analyst]

Great. That's very helpful to know that. And then just 1 follow-up. I was wondering if you could provide any additional color on the new packaging laws. I understand we're still in this back and forth phase with the government, but what are your sort of expectations, given what you know today?

[Daniel Servitje Montull, executive]

Yes. Also, I mean, in regards of the packaging rulings and the possible impact that this regulation might have on our operations. It is still too soon to know since it has not been published yet.

[Operator]

The next question today is a follow-up from Felipe Ucros of Scotiabank.

[Felipe Ucros Nunez, analyst]

Yes. Maybe a couple of small follow-ups since we don't have so many people on the line today. Alvaro already asked about the labeling law, but I wanted to ask you whether you feel that the lessons that you learned from the ambient countries namely Ecuador, Peru and Chile, which already passed these types of laws. What type of impact you had in those historically? And then the other one, as I understand it, from talking to Stefania, you've already started the reformulation process. So it kind of feels like you've gotten a head start before there's an implementation of the labeling law.

And then the second follow-up I had was on Argentina. I know you don't disclose the weight of different countries within the regions, Diego. But I was hoping maybe you could tell us how hyperinflation has affected the weight of the country within results. Obviously, the sales growth for the quarter was somewhat of an underperformance in Latin America. I'm wondering how much of that is just Argentina versus the rest. So any color there would be great.

[Diego Cuevas, executive]

Yes. I'll probably say, Felipe, but definitely by being a global company that we have had various experiences in the past including markets such as Chile, Ecuador, Peru, we have been able to adapt, and we feel very confident that we're going to be able to adapt and to comply with however the regulation comes. Again, we still have to wait and see and learn the specifics and also the transition of how long it's going to take to have the implementation in the country. Important to mention that the regulation is really not promoting the reformulation on the product, just a labeling issue for the packaging.

In terms of the impact of Argentina, I would say, and as mentioned, we do not disclose specific information by market. But I can tell you that the biggest impact that we had in EAA came from Brazil and mainly -- in LATAM, sorry, came from Brazil, sorry. And this was mainly because of the extraordinary expenses that I mentioned that we had to recognize in the fourth quarter, which are onetime noncash expenses.

[Felipe Ucros Nunez, analyst]

Great. And talking about reformulation. I know the law doesn't require formulation, but the history of Latin America with these types of labeling laws has been that very often, companies will reformulate the products to avoid the labels. So that's what I was talking about, whether you have started -- have started to move to reduce different contents, for example, sugar to avoid labels on products that are kind of on the margin, where you don't affect the recipe too much, but you can avoid the label.

[Daniel Servitje Montull, executive]

That -- you know that we're always in a continuous effort to reformulate our products and adapt to consumer need. Now again, this law is not really focused on promoting the reformulation, and it's very different to the one that has been in Latin America.

[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 in the future.

[Operator]

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