Grupo Bimbo SAB de CV

BMV:BIMBOA

Earnings Call Transcript 2020-Q4

[Operator]

Good day, everyone, and welcome to the Grupo Bimbo's fourth 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 would now like to 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, and good afternoon, everyone. 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; our BBU President, Fred Penny; and several members of our finance team.

2020 was a year in which we were tested, confronted by the uncertainty caused by the proliferation of COVID-19, which required us, as individuals, as a company and as a community, to rise to meet the great challenge of the pandemic with Unity, creativity and dynamism. I am truly very proud of what our associates have accomplished, especially those in the front lines.

It was a remarkable year for Grupo Bimbo, evidenced by several milestones, including record financial results even in this challenging environment, market share gains across multiple categories. IRA named us the fastest-growing large consumer products company in the USA. And finally, the presence of Grupo Bimbo in the mindset of Mexicans has strengthened with the growing knowledge of our company.

Sustainability is a core aspect of our philosophy. We continued with the objective of mitigating our environmental footprint all over our entire value chain through actions such as innovation in our packaging with biodegradable and compostable technologies, the reduction of our water footprint and emissions due to efficiency in our processes, risk management and the use of renewable energy and alternative fuels, highlighting that by year-end, we have increased our global use of renewable electricity from 49% to 80%, meeting our 2020 objective and progressing in our commitment to achieve 95% renewable electricity by 2023.

Although we continue to face the most challenging worldwide crisis of the modern era, I am left with the satisfaction of having reached Grupo Bimbo's 75th-year anniversary with record results and with the unwavering commitment of our people, excited and energized with how our company is positioned for the future. I am confident that the future will bring opportunities for progress that will help us continue to fulfill the great responsibility of feeding and better serving our customers and consumers around the world.

Now taking a look at the regional results of the fourth quarter. In North America, dollar sales increased by more than 11%, excluding the favorable impact of FX rate. We were able to gain market share in all our branded categories, especially in breakfast from the Thomas' bagels brand, buns and roles driven by ballpark brand strength and sweet baked goods were intimates outperforms the category. We also continue to see strong performance of the retail channel, which includes grocery, mass merchandising and club, and the e-commerce channel more than doubled its size. We gained millions of new households due to the exposure of our brands in the pandemic, which we intend to retain by continuing to add incremental marketing investments and excellent in-store execution.

Due to the lack of demand as customers continue to lean towards branded products, volumes continue to be soft across the private label category and in foodservice as institutions and school closings persist through the pandemic. Our adjusted EBITDA margin reached a record level, reflecting the strong sales performance, lower commodity prices and productivity benefits from past investments, which were partially offset by onetime expenses incurred due to the coronavirus as well as statistic investments in our brands.

In Mexico, despite the pandemic, sales grew 1.6% driven by positive price/mix and good performance of the traditional and retail channels. Remember that our channel mix in Mexico is different than it is in the U.S., specifically the traditional and convenient channels are larger than the retail. And we also have a meaningful presence in wholesale and foodservice, which have struggled during the log downs. Adjusted EBITDA margin contraction was mainly attributable to the sales mix and onetime expenses associated with COVID-19, such as labor, distribution requirements, donations and safety equipment.

In Latin America, the 6.5% sales increase was attributable to good growth in our Latin Centro division and in most countries, mainly Chile and Brazil, despite the devaluation of the Brazilian real. This was offset by a weak performance in Argentina, primarily due to the macroeconomic situation. Also, we experienced market share gains in the bread category in the Latin Centro division and in Brazil. The strong sales performance, coupled with the productivity initiatives across the region have enabled us to expand our margin by 100% basis points.

In EAA, sales increased 17.3% and as a result of strong results in the U.K. in our QSR business and in the bread and buns category in Iberia, mainly due to the Patera plant acquisition completed early in 2020. The strong EBITDA margin expansion of 440 basis points was mainly explained by the strong operating performance in Iberia, Bimbo QSR and the U.K.

I'm pleased to announce that we acquired Modern Foods in India and signed an agreement to acquire a plant in Medina del Campo in Spain. This plant in Spain has state-of-the-art technology and was owned by Cerealto Siro Foods. It manufactures sweet baked goods for Mercadona and other customers. This acquisition allows to enter the sweet baked goods private label market in Spain, and it's still subject to regulatory approval.

Modern Foods is a leading player in the baking industry in India. In fact, it is the market leader in South India. It manufactures and distributes making products in its 7 plants. This acquisition strengthens and expands our geographical presence in the country as its current product portfolio and manufacturing footprint complements exceptionally well with our long-term strategy to grow in India.

I would like now to turn over the call to Diego who will walk you through our financials. Please, Diego, go ahead.

[Diego Cuevas, executive]

Thanks, 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, reaching record levels of sales and adjusted EBITDA. We are clearly benefiting from being a global and diversified company in terms of channels, categories and geographies and from participating in the Brazilian industry as most of our revenues are in hard currency and volume has been strong in most of our markets, especially in North America. In fact, we were able to substantially increase the proportion of profits outside of Mexico from 49% in 2019 to over 58% in 2020.

A strong sales performance across every region, coupled with the lower commodity costs and productivity savings, enabled us to grow our operating income by 40% and expand the margin by 200 basis points. Our financing cost increased 18%, reflecting higher interest expenses due to an unfavorable FX rate versus the fourth quarter of last year. The net effect of these factors yielded a significant improvement in net majority income of 58% and a margin of 3.4%, while our return on equity improved by more than 300 basis points.

Now turning to the balance sheet. We closed the year with a net debt-to-adjusted EBITDA ratio of 1.9x, the lowest level in the last 10 years. Our total debt decreased by MXN 8 billion when compared to 2019. This was mainly because of the strong cash flow generation, which was partially offset by the peso devaluation that went from MXN 18.84 to MXN 19.95, impacting our leverage in pesos in more than MXN 3.7 billion. With this, we currently have the full $2 billion available in our credit line, which provide us with flexibility and liquidity for the future as we keep a flexible amortization profile with an average maturity of more than 30 years and an average cost of 6%.

Our net operating working capital, which mainly considers accounts receivables, inventories and suppliers have improved significantly by almost 2 days as compared to 2019, which is the equivalent to MXN 1.3 billion, and it was mostly due to an improvement in our accounts payable. Our gross cash flow doubled when compared to 2019. And our free cash flow before dividends and share buybacks totaled nearly MXN 15.1 billion, from which we returned MXN 6 billion to our shareholders, MXN 3.7 billion in the buyback program and close to MXN 2.4 billion in dividends.

Finally, I would like to share with you our outlook for the year. Given that in 2021, like many other companies, we will have a difficult comparison to the extraordinary and unique year of 2020, we will be sharing with you our quarterly reports, a comparison with 2019 as well as with our guidance.

So versus 2019, we are expecting a low double-digit growth rate for our sales and mid- to high teens for our adjusted EBITDA. While versus 2020, our sales and adjusted EBITDA will remain essentially flat. We are expecting an effective tax rate in the mid- to high 30s, and our CapEx for the year is estimated to be close to $1 billion. We are optimistic about the future as our results continue to be strong. Our teams are doing an extraordinary job, and our global diversification continues to pay off.

So that concludes our remarks, and now we will proceed with a Q&A session.

[Operator]

[Operator Instructions] And the first question will come from Fernando Olvera with Bank of America.

[Fernando Olvera Espinosa de los Monteros, analyst]

Two, if I may. The first one is related to Modern Foods. Can you share some details about the acquisition? I mean maybe the enterprise value of the transaction and the sales generation, something like that, that would be great. And also if you can comment about some growth dynamics of the baking industry in India. That would be my first question. And I'll wait for the second one.

[Daniel Servitje Montull, executive]

Thank you, Fernando. Very quickly, it's a rather small deal in the context of Grupo Bimbo. But we believe, for the long haul, the prospects of that region are quite interesting. I have to note also that the price of bread in India is much lower than what is in the rest of the world given their particular circumstances. But I have to say that, at this point in time, it's a small acquisition, and we're not giving more details.

[Fernando Olvera Espinosa de los Monteros, analyst]

Okay. And my second question is about North America. Given the solid top line growth that we saw in 2020, what -- can you share your outlook on consumption for this year? And how do you expect to behave that channel?

[Daniel Servitje Montull, executive]

Fred, do you want to answer it?

[Fred Penny, executive]

Sure. Thanks for the question, Fernando. Yes, our branded business was strong in 2020, and we've seen a relatively consistent pattern in the beginning of 2021. I think you have to think about 2021 in really 3 -- the way we think about it, the way I think about it, in 3 phases: sort of pre-pandemic, the first phase, where we're going to go up against numbers that are more akin to 2019 with relatively strong run rates; and then like many other food companies, we hit week -- I think it's week 12 and 13 or week 11 and 12 -- I think 12 and 13 and then the balance of the second quarter when we had panic buying and extremely strong numbers that I don't think any food companies are going to be able to actually cycle.

And then so the question then becomes what's going to happen in the back half of the year, and that really depends on lots of things like availability of vaccine, when are schools going to be fully back in, when are colleges going to be fully back in, what happens with changes in work from home versus work from office, et cetera. And that remains to be seen. I wouldn't want to overly speculate on that. But we've had strong brand performance across most of our categories. We're working hard to continue that. And at the same time, we hope for recovery in segments of our foodservice business, if you think about that as a different channel.

[Operator]

The next question will come from Felipe Ucros with Scotiabank.

[Felipe Ucros Nunez, analyst]

I hope you guys are doing well. Congrats on the results again. Maybe the first one, kind of piggybacking on the question on M&A, and it's related to that on private label. You just made another acquisition of another plant in Spain. And from what I read, it looks like it's focused on private label as well. It's an area where you've been present in the U.S. for a long time. In the last few years, it's been rather difficult for private label. So just wondering how Spain differs from the U.S. in this strategy and how you think private label fits in the future of the company.

And then if I can ask another one, simpler than that, less strategic on commodities. Obviously, wheat has jumped quite a bit on the back of Russia's news. How well prepared are you on hedges? And if the hike persists, how well situated are you for price increases? I recall in Mexico, there have been times where you chose not to increase prices. And I think in the U.S., if I remember correctly, Fred, you dialed prices back a little bit at some point, not too long ago. So just wondering what you're thinking about prices if the commodities issue should persist.

[Daniel Servitje Montull, executive]

Yes. Thank you, Felipe. Great questions. On the deal in Spain, this is geared towards serving Mercadona, which is the leading retailer there, and we believe that it is a long-term positive development for our company as it strengthens our relationship with this retailer and allow us also to use this facility and participate in that category. The industry, the private label industry, in Spain is different from the one in other countries. And it's a healthy industry and one that we believe is very important for us to participate in the context of the strategy of that particular country.

And the private label in the U.S., as we have mentioned, has suffered this year. And the business in the U.S. and other countries is reacting differently from this case. And let me tell you that the decisions on private label strategy are driven not by a global strategy but more so that the particular circumstances of each country. And we take a good look at them, but they're driven by local management.

Regarding the second question, yes, we have seen that the global commodity prices have risen significantly in many commodities, including our raw materials, and we're facing them. We do have hedges and we're covered for differently -- for the different commodities, but we will be facing cost increases in our raw materials. And we have -- sort of taking the right steps in order to take the necessary measures to maintain our margins in the different countries where we operate. So this is a global phenomenon. And we have to make sure that our margins are maintained through this period of time.

[Felipe Ucros Nunez, analyst]

Great. Daniel, maybe if you can comment a little bit on how far you guys are hedged given how different programs or different companies.

[Daniel Servitje Montull, executive]

Yes. We don't give specific details neither by region nor by raw materials, but we do have coverage of a few more months. And in some commodities, the smaller ones, we're covered for longer periods of time. But I would say that the bulk of our hedges will be basically finishing in the latter part of the year.

[Operator]

The next question will come from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

First of all, congrats on the results. Just had a question around capital allocation. And I mean you've shown very strong balance sheet. And if I remember, in most of your quarterly presentations, you always show about the ability to grow with the prudent leverage. And it's really like this kind of pattern, goes up to 3x through an acquisition, you bring it down to 2. You buy something else, goes up to 3, you bring it down to 2. You buy something, goes up to 3. And while now we're at 1.9, so right at the point where we could potentially expect something bigger on the M&A side. But at the same time, you've been guiding to $1 billion in CapEx, which obviously is above what we've been seeing in prior years in dollar terms.

So help me out understanding where do you want to take the company next? Is it more big M&A? Is it organic growth? Is it investments in technology and renewable energy and becoming greener? So just to understand the capital allocation. I mean ultimately, at 2x leverage, how do you think about share buybacks, dividends, et cetera?

[Daniel Servitje Montull, executive]

Yes. I think it's an expected question, Ben. And let me first say that the past is not necessarily a predictor of the future. And what we do every year is really take a good look at the issues that we have in front of us and the opportunity in alignment with our strategy. And what happened this 2020 was that we delayed some major projects due to the pandemic. And we're thinking on having a very strong CapEx for 2021, which basically reflects the delayed projects as well as specific categories where we need to increase our capacity given the growth that we had in our product lines. So that happens all around the world, and that's why we are basically strengthening the CapEx program as well as to include significant investments in renewing our IT infrastructure and becoming more digitalized in our different processes.

We're also upping up our investments in electric vehicles and, in some cases, also investing in renewable energy in our rooftops and in some other areas. But the majority of the investments go basically to the plant, the bakeries and increasing the developing capacity. And let me tell you that, definitely, we will also take a look at the opportunities in terms of share repurchasing as we have done in the past.

So all in all, I think that internally, we have a good sense of what we want to do with the free cash flow. And as always, we will be attentive to the marketplace and see if there are opportunities to fit with our strategy in terms of M&A. But I just want to reassure you that the past is not necessarily the future in terms of predictions.

[Benjamin Theurer, analyst]

Not that it was bad, but we see -- nothing to be worried about, Daniel, nothing to be worried about, but very clear.

And then just one quick one, maybe this one's for Fred. Within the U.S., have you seen, at least from an ordering perspective on the foodservice side, some signs of recovery, particularly considering that the vaccine rollout in the U.S. seems to move forward much smoother than, for example, in Latin America and including what we would have expected in Europe, it seems to be a little slow, but in the U.S. not. Have you seen some of the foodservice guys that buy your products putting in orders where you would expect some of a recovery towards summer?

[Fred Penny, executive]

I think it's -- Ben, I think it's still a little bit too early to tell on that. We haven't -- I can't think of a specific instance where we've seen a pattern of ordering up. QSR generally has fared better. But if you think about institutional schools, et cetera, casual dining, those segments are still, I would say, struggling. And it really is all over the map, depending on which state you're talking about, depending on whether they're at -- they've opened up to 25% seating or, in a few cases, actually more than that. So I think it's going to take a little longer to see that improvement.

If you read what's going on with the vaccine, yes, it's moving ahead. But I can tell you, talking just internally with some of my folks, depending on which state you're in or which county you're in, you may be able to get a vaccine fairly quickly or you may not even be able to get through on the website. So I think there's more to come on that. The second half of the year, hopefully, as the vaccines become more broadly available, will be better. But it's -- I would say too early to highlight a specific trend improvement.

[Operator]

The next question will come from Álvaro García with BTG.

[Alvaro Garcia, analyst]

A couple of questions. First, similar to CapEx in the sense that you're sort of catching up to what you missed in 2020, my first question is on the outlook for integration and restructuring expenses. They're typically pretty customary. Given the type of year we had, maybe some of those were on hold, will there be some catch-up there as well?

[Daniel Servitje Montull, executive]

Diego, will you take this one?

[Diego Cuevas, executive]

Yes. Yes, I can take it, Daniel, thank you. While we're not necessarily going to have a catch-up in terms of restructuring initiatives and expenses overall, we did put on hold some initiatives probably in the beginning of the second quarter of last year, but in most of the projects, we were able to catch up. Of course, we will continue to invest in that line. We -- fortunately, we still see a lot of opportunities particularly in North America not to continue to provide profitability for the business through these investments.

[Alvaro Garcia, analyst]

Great. And then just 2 more. One, just a quick clarification on your guidance on your tax rate. You said high 40s, to the 4?

[Diego Cuevas, executive]

No, sorry. I think my line was not very clear. What I mentioned in terms of the effective tax rate, it's mid- to high 30s. It is something similar to the rate that we had in '20.

[Alvaro Garcia, analyst]

Perfect. Yes, that worried me. And that leads me to my last question, which is on guidance. Nice to hear mid- to high 30s. You're obviously making more money in some of these markets like Latin America and Europe, which helps, let's say, the denominator for that equation.

But I was just wondering, Diego, if you could perhaps provide some guidance on, sort of directionally, what markets you expect to outperform. I'm assuming that would be Mexico within this guidance you gave on the EBITDA front and some markets that might pull back. But more specifically, my concern is sort of the -- sort of structural levels of profitability in places like Latin America and Europe. So any sort of color you can give as to what's going on, on a country basis would be very helpful.

[Diego Cuevas, executive]

Yes, what is very clear today is the very tough comparison that we're going to face, particularly in North America, as Fred already mentioned. In the second quarter, third quarter, we don't know exactly how this is going to evolve for the second half of 2021. But it's clearly that we will see very tough comparisons, and that puts some pressure to the growth rate and margins, particularly in that region.

[Operator]

The next question will come from Ulises Argote with JPMorgan.

[Ulises Argote Bolio, analyst]

Two quick ones on my side, the first one on CapEx. Obviously, as you said, 2021 is going to be higher on the catch-up on some projects, but what level, maybe as a percentage of sales, do you see kind of sustainable in terms of CapEx going forward?

And the second one, maybe like a follow-up to the previous question there on margins across regions, but specifically thinking on EAA, we have seen strong performance, obviously, recently there in the region. So just wondering how sustainable do you see this? And how do you see the trends there in that particular region moving now with the recent acquisitions that you mentioned and the focus there on the region?

[Daniel Servitje Montull, executive]

Diego, you'll answer?

[Diego Cuevas, executive]

Yes. Yes, Daniel. Well, on your first question, let me tell you that -- let me put a little bit more of context. In the last 4, 5 years, we have been investing around $700 million. As we mentioned, we expect to invest more this year, more in 2021, close to $1 billion. So if we divide a little bit on the different buckets on the CapEx that we have, I would say, more than in terms of a percentage of revenues, which is not necessarily correlated, we have a maintenance CapEx bucket, which is in the range of $400 million to $500 million at the top. And then we have the other 2 buckets that we have also been investing proactively, which is growth and productivity.

In terms of growth, this is the one that is going to be demanding more resources for 2021, either in new lines, new plants. We are also investing a little bit more, although it's not entirely moving the needle as big as these growth initiatives, is on the digital transformation and technology investments that we plan to do in the company for '21 and I'm sure it will be the case for 2022. So I would say that on a regular year, we will go back more to the $700 million, $800 million range that we have been giving as a guidance to additionally, although we have been investing slightly less on the last year.

And in terms of the EAA also, I mean, I can take the question. I would say that definitely, we see the results as sustainable. And not only that, we feel optimistic about the potential that we have in this region in the long run to continue to have a top line growth and also margin expansion and continue to see an increased profitability in the region in Spain, India, China and in the different markets in which we have presence, in that particular region.

[Ulises Argote Bolio, analyst]

Perfect. Very clear. And congrats on the results.

[Diego Cuevas, executive]

Thank you.

[Operator]

The next question will come from Emiliano Hernandez with GBM.

[Emiliano Hernández Marvan, analyst]

Congrats on the results. My first question, can you give us some color on the signs of recovery in the depressed channels in Mexico, especially convenience and traditional? And then second one, can you comment on your share buyback strategy following the cancellation of shares you're doing?

[Daniel Servitje Montull, executive]

Could you -- I'll take the first one, Emiliano. Could you repeat it, please?

[Emiliano Hernández Marvan, analyst]

Yes. If you can give us some color on the signs of recovery in the depressed channels in Mexico, especially convenience and traditional.

[Daniel Servitje Montull, executive]

Well, let me tell you, the traditional channel is one channel that has basically been good during this crisis. So consumers really maintained their neighborhood stores during the pandemic, and the channels that were greatly affected were the convenience channel, the vending channels, the foodservice and the wholesale channels. Those were the 4 channels that were affected. And we're seeing a gradual comeback of the 4 of them. But still, they're below what was the number before the pandemic hit, so we'll be cycling over in -- broadly in the next quarter, some of these numbers, but that's where we are right now.

[Diego Cuevas, executive]

Daniel, I can take the one regarding the buyback program. Emiliano, let me tell you that in 2020, we bought back 100 million shares, representing MXN 3.7 billion. So we still have a little more than MXN 8 billion in our legal reserve for potential future buybacks. We will continue to analyze opportunities and, of course, we will be very active as we believe that it creates value to all our shareholders.

Also, if you remember, following our extraordinary shareholders' meeting back in October, we canceled nearly 170 million shares. So now -- and that was because doing the previous months, we were very active with the buyback program. So we didn't want to wait until April. So now on a yearly basis, what we're going to be doing is canceling the shares on an annual basis, and we will propose the cancellation of the shares that we have in the treasury today to the shareholders' meeting that will take place in April.

[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. Please go ahead.

[Daniel Servitje Montull, executive]

Well, thank you all for your time today. And as always, please do not hesitate to contact our Investors Relations team with any further comments or questions you may have.

[Operator]

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