Industrias Bachoco, S.A.B. de C.V.
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Good morning. My name is Richard, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2021 Industrias Bachoco Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you for your attention. I would now turn the call over to Andrea Guerrero, Investor Relations. You may begin.

[Andrea Guerrero:]

Good morning and welcome to Bachoco’s second quarter 2021 conference call. We released our financials yesterday after the market closed. If you need a copy of the release, please visit our website or request it from our Investor Relations department. This morning’s call contains certain information that could be considered forward-looking statements regarding anticipated future events and performance. These statements reflect management’s current beliefs based on information currently available and are not guarantees of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our Annual Report or 20-F, which could make our current results differ materially from the forward-looking statement discussed in this call. Except as required by applicable law, Industrias Bachoco undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

[Rodolfo Ramos:]

Thank you, Maria, and good morning everyone. During the second quarter, we observed an increase of close to 40% in corn and soybean meal prices when compared to 2020. In this regard, our focus on efficiencies to our production processes has allow us to partially offset the negative impact on input cost. On the other hand, when we removed from the worst impact of COVID-19, economic expectation was positive both in Mexico and in the United States. According to Akiko, Mexico is expected to grow around 5.8% in 2021. While the economic projection of the Federal Reserve expected for the U.S. an economic growth of 7%. This positive forecast is in combination with a good balance between supply and demand in the market in which we compete, has allow us to successfully transfer the increases in raw material costs to our sales price. Particularly in our chicken segment, we observe good levels on demand in the main conversion challenge in we compete. And all of our production was absorbed by our markets. We didn’t see neither over supply condition nor high inventories in the industry in general. Regarding the U.S. good dynamics in the economic have incentivized consumption of the point then we kept observing good levels of commodity prices during all the orders and expectation remain strong. Regarding our other segments, both the volumes sold and revenue remains strong for the quarter. Our biggest challenge remains in the pork business line, since currently most of our meat needs come from third-party companies, which is currently putting some pressure on margins for this category. As a result of the conditions about our total sales and cost of sales increased 27% and 16% respectably, when compared to the second quarter of 2020. We have reported an EBITDA of MXN2,437.4 million with a margin of 11.7% and earnings per share of MXN2.46 for the quarter. If you look at the first half of 2021, we’ll reach a net sales of MXN40,218.6 million, which is 25% higher than the six first months of 2020, achieving an EBITDA margin of 30.3% higher compared to the EBITDA margin for the same period of 2020. The company remained in a healthy financial condition as we reached a net cash level of MXN19,490.6 million, which allow us to continue the support of our growth plan as we reported the CapEx of MXN1,307.5 million for the second quarter of 2021.

[Maria Jaquez:]

Thank you and good morning, everyone. As a result of the conditions mentioned before, our company’s second quarter of 2021 net sales totaled MXN20,860.9 million, MXN 4,429 million or 27% higher than the MXN16,431.9 million reported in the second quarter of 2020. This increase was mainly a result of higher prices across our main business lines, a better sales mix and the reflection of the effects of higher raw material costs. Total cost of sales for the quarter was MXN16,901.1 million representing an increase of 16%, when compared to the same period of 2020. The mentioned combination resulted in the gross profit for the quarter of MXN3,959.8 million, with a gross margin of 19% higher when compared to the MXN1,857.4 million and 11.3% reported in the same period of 2020. For the first half of the year, we reached a gross profit of MXN8,177.9 million with a margin of 20.3%. This amount is higher than the gross profit of MXN4,038.5 million and 12.6% margin reached in the first half of 2020. Total SG&A for the second quarter was MXN1,729.2 million, representing 8.3% of our total sales, which compared to the MXN1,567 million, a 9.5% of total sales achieved in the second quarter of the 2020. Operating income for the second quarter of 2021 totaled MXN2,088.8 million and operating margin of 10%. This is higher than the 0.5% margin reached in the second quarter of 2020. On the other hand, operating margin for the first half of 2021 was 11.6% compared to the 2.1% reached in the same period of 2020. Our EBITDA margin was 11.7% for the quarter and increased when compared with a 2.7% for the second quarter of 2020. While for the first half of the year of 2021 and 2020, margins were 13.3% and 4.3% respectively. For the quarter, we had a net financial expense of MXN97 million for the quarter and the net financial income of MXN222.6 million for the first half of the year compared to the net financial expenses of MXN122.3 million and the net financial income of MXN2,304.2 million for the same period of 2020. Our total taxes were MXN548.7 million for the quarter compared to the favorable MXN11.2 million recognized in the same quarter of 2020. For the first half of 2021, our total taxes were MXN1,352.6 million higher than the income taxes for the same period of 2020. All the above led us to a positive net income of MXN1,443.2 million for the quarter resulted in a 6.9% margin compared to a negative net income of MXN28.2 million and negative 0.2% margin reported in the second quarter of 2020. For the first half of 2021, net income totaled MXN3,517.8 million with a net margin of 8.7%, which is higher than MXN2,141.9 million for the net income and 6.7% margin for the first half of 2020.

[Rodolfo Ramos:]

Thanks, Maria. Even though the second half of the year is seasonally our toughest, so far, we are entering with a good balance between supply and demand. Despite that, the comparation with the same period of 2020 will be difficult, particularly considering that the corn and soybean meal prices are still high year-over-year. So far, we have been able to transfer some of those increases to our sales price, and we think we can keep doing it to some extent. However, we are entering a period with seasonal demand is soft, so that might represent some challenges in terms of our price increases. In terms of what we can control, we will continue to be focused on efficiencies, improvements in our sales mix and our organic growth strategy in order to keep delivering positive results to our shareholders. With that, we will now take your questions.

[Operator:]

Thank you. And our first question comes from Mr. Fernando Olvera from Bank of America. Please go ahead.

[Fernando Olvera:]

Hi, good morning, everyone and thanks for taking my questions. I have two, if I may, both related to the poultry business in Mexico. Can you comment how does the balance between supply and demand perform month-by-month during the quarter? How can these sustain pricing in the remaining of the year? Rodolfo as you mentioned that you were witnessing also a good supply and demand during July, if I understand correctly. And my second question is related to your EBITDA margin. We saw this Rodolfo very solid margin. So how do you expect the margin to end up at the end of the year, given the increasing green cost? Thank you.

[Rodolfo Ramos:]

Well, thank you, Fernando, for your questions. Well, starting with the second one, I expect the EBITDA margins for the second quarter be more normalized, even in the lower part of the normalized EBITDA margin. And that is because of the cost of the raw materials in the near future, we don’t see a price reduction in the corn and soybean meal prices. So that is going to be put some pressure in the margins. And in terms of a supply and demand here in Mexico for the rest of the year, well, we have been very decent clean in terms of cover just the requirements, our customers, we are very, very close to our customers to meet their needs. And we’d have very, very disciplined and tracking of their consumption and our production hours and our supply. We are just keeping very, very close to the mid to the – to our customers and to the market in general, to see what is the effects and the ended for the demand side, trying to read that demand very closely.

[Fernando Olvera:]

Balance, I mean how do you see pricing? I mean, do you think that pricing could remain relatively positive to help mitigate rain pressure?

[Rodolfo Ramos:]

Well, it’s going to be tough to – it’s tough to predict about prices in the future, because the thing is in the third quarter normally is the weakest in terms of demand. But with the disciplines that I mentioned, we are thinking that we are going to maintain that the same level. I’m not sure if we are going to absorb the raw material prices at a 100%, but for sure some of those increases right now we are trespassing those increases to the sales price. And in the other hand, our efficiencies has been good. We have been very, very close to our productivity following this all the results and all the levels, farms processing, our supply chain is working very, very well. So we can deliver good results and as for part of those cost increases to our efficiencies and trespassing some of blowers increases to the sales price.

[Fernando Olvera:]

Great. Thank you so much.

[Operator:]

Thank you. Our next question online comes from Mr. Emiliano Hernández from GBM. Please go ahead.

[Emiliano Hernández:]

Hi, Rodolfo and Lupita congrats on the results. Very impressive. Just a quick one on capital allocation, you have now reached very impressive MXN19 billion in net cash. What are the main priorities on deployment there? Could we see – maybe a transformative acquisition in the short-term or maybe an extraordinary dividend would make sense?

[Maria Jaquez:]

Well, like, we have mentioned in the past we think that with the results that we’re now seeing, we think that we have the firepower to move either way to go after a transformational acquisition or a series of acquisitions which we think at this point seems more feasible. Currently, we are looking at an opportunity outside, but at this point, it’s very soon in the process for us to share something with you particularly, but we want to give you a message that that we are actively looking, that we are participating in some process in order to make a better use of these cash. Like, the priorities are in Mexico in to grow in other proteins and outside Mexico, the priority is in chicken.

[Emiliano Hernández:]

Thanks, Lupita. That’s great color.

[Maria Jaquez:]

Thank you, Emiliano.

[Operator:]

Thank you. Our next question on the line comes from Ulises Argote from JPMorgan. Please go ahead.

[Ulises Argote:]

Rodolfo, Lupita, thanks for the space for questions. A couple more on my side. First, Rodolfo, you mentioned on your opening remarks a little bit on the SASA business, and maybe you guys facing some challenges there on the supply of pork and how that cost of coalition has kind of ramp up. But maybe can you provide us an update of how the investment there that you were making the CapEx for the business to grow like the integration of the business. How that is going? What do you expect probably in the coming quarters from that? And then maybe if you can elaborate a bit more on the U.S. market dynamics, obviously, we saw there more challenging trends already in the quarter. That’s from the very tough conveys from last year, obviously, but what are you seeing there in terms of pricing evolution of volumes of how the industry is kind of evolving. That would be very helpful. Thank you.

[Rodolfo Ramos:]

Yes. Well, the first question about the pork industry. For the rest of the year, the situation in the pork side is going to remain in the same direction. Right now, we approved the project to – the CapEx to expand our live production. Right now, 80% of their requirements of that type of business are coming from the third company. So right now we have a huge expose today, live price of the hogs. So right now, the price – the live price is very high. So that puts a lot of pressure in our margins because we are buying our raw material for this business at a very high price. Right now, in the last month, we start to see a trend to reduce those prices. So I think the rest of the year is going to be more friendly in terms of the pricing of the live hogs. Our project – we started our project and we are in line of our expectations in terms of the schedule of the building or the expansion of our own capacity to produce our own live hogs. Our goal is to have at least the opposite, 80% coming from our operation, our own operations and saying that we are going to expand our international markets, mainly Asia and even United States. Right now, we have a huge opportunity in that side of the business to export to some international markets, including United States. In terms of our – the situation of the U.S. industry and the volumes, right now we are seeing a pretty good balance again, between supply and demand, even the inventories at this time are lower than the frozen inventories of chicken compared with the same period of last year. So demand is there and with opening of all the states we are seeing a rebound for this demand side. And even the pricing of commodities, breast meat, leg quarters at a good level. So far, a small reduction, but I think because of the inventories, we are going to see a good demand and a good balance between supply and demand.

[Ulises Argote:]

Thank you.

[Operator:]

Our next question on the line comes from Alonso García, Private Investor. Please go ahead.

[Alonso García:]

Good morning. I have a question. I expect management to keep track of performances of competitors because I consider it a healthy habit. How would you analyze and compare Bachoco’s performance. Any comparison and with the volatility movement of competitors performance just like, say Tyson Foods in the U.S. market, meaning the correlation between their performance and yours?

[Rodolfo Ramos:]

Well, in terms of the benchmark we participate in egg research or we use those figures just in production. And in terms of the market, we use just the public information that exists in the market and that’s it.

[Alonso García:]

Okay. Thank you.

[Operator:]

Our next question on the line comes from Guadalupe Villar from Credit Suisse. Please go ahead.

[Guadalupe Villar:]

Good morning. Congratulations on your results. My question is regarding the demand in the sense, did you see the demand more resilient now to price increases that make this question, and in terms of regions, where do you see a clear improvement in terms of the consumer demand?

[Maria Jaquez:]

Well, in terms of the part of your first questions. Our pricing, it’s very much correlated to GDP. And GDP one have and also it has a strong correlation with green lean prices. So like Rodolfo have mentioned before, for us it’s very important to follow with the economic growth both in Mexico and the U.S., as long as there is a growth in that side. We think that we are – that gives us a chance to actually trespass the increases in raw material cost. And that is something that, that we have been seen in this course, because all the elements are putting in that way like he mentioned also in his remarks as long as this is something that is sustainable and also there is a supply and demand imbalance in the market. We think that situation could be sustainable as well.

[Guadalupe Villar:]

That’s very clear. And in terms of the regions what do you see a clear improvement?

[Maria Jaquez:]

In terms of the regions, when you talk about regions, do you refer to Mexico and the U.S. or regions within Mexico?

[Guadalupe Villar:]

If you are more particular within the countries, that would be very helpful?

[Rodolfo Ramos:]

Well, in Mexico, we have particular three regions, the north part of the country, that central part and the south. And we are seeing a balance in the normalized markets. For instance, the Southeast of Mexico, it’s more important than live chicken business and that’s a segment of the business has been very good in terms of the balance between supply and demand. So prices are normalized. The center part of the country it’s a combination of a traditional market and the supermarket and the retail market. So, right now the traditional market is in a good – in a very good shape too. And in the north part of the country, the consumption is more to the retail, the big supermarkets and the daily walks and the food service. So, run on the north part of the country it’s a normalized in terms of the supply and demand. Right now we are seeing a rebound in the consumption and the food service for instance, in the the hotels start to ramp up in terms of the occupancy and we are seeing recovery in those consumption. In the United States, as I mentioned, the disruption in the supply chain has been maybe, because of the shortage of labor. There’s a lot of disruption, not just in production or processing, but in transportation. And in the long of the supply chain, there are some disruptions, I mean, we have been dealing with in this quarter, and we expect for the rest of the year, and we want to have that sales. So, our strategy there in the U.S. operation is to maintain our working force in our processing facilities. So, we are not seeing any order being issued there.

[Guadalupe Villar:]

Okay, thank you.

[Operator:]

Thank you. Our next question on mic is from Héctor Maya from Santander. Please go ahead.

[Héctor Maya:]

Hi, thank you very much for those on the call thank you for taking the questions. And congratulations on your results.

[Rodolfo Ramos:]

Thank you.

[Héctor Maya:]

I couldn’t join – sorry I couldn’t join in the beginning. Sorry if this was already asked. But considering the second half of the year has say more difficult progradation and also taking our current raw material price environment, where do you still see opportunity to continue implementing pricing? I mean even in sequential returns and sequential terms, what channels still have rooms for further improvements? And specifically, what is use? And after that I would have a follow-up.

[Rodolfo Ramos:]

Well, I’d say it’s going to be tough to increase the prices for the second half, mainly because seasonally the third quarter is the weakest quarter. It’s going to be tough to trespass cost increases to price, at the end of the year. But well, as this moment margins we are expecting a more normalized EBITDA for second half of the year. Let’s say in the upper part of one digit, I think, I will – we are expecting a normalized EBITDA for the second half. And I am taking in account here right now the volatility of the raw materials is huge. But right now the prices have been, let’s say, $550, $570 per Bushel. So our cost is already impacted by those raw material cost. If the raw material cost remains on those levels, we are not going to have a cost increase for the second half. The comparison against versus the same period over the last year is going to reflect cost increase because we are taking into account a different base of comparation. But if we compare the second quarter with the third quarter, the cost increase is going to be a minimum in terms of raw materials, because we already impacted those costs in our speakers. So we are expecting a good growth for the last parts of the year. So if either whether – right now we are in the weather market and so we are expecting – we are not expecting past increase for the balance of the year.

[Héctor Maya:]

Got it. Very, very clear. And you were mentioning about the raw material prices. We saw over MXN7 per corn bushel by the end of April. And our direct talk-through, as you were saying, we are just seeing US$550, US$570 per bushel. So what – you’re taken advantage of this, I mean, I know it’s a higher price compared to store. We were seeing last year, but it’s still an opportunity when you can print the zip prices that we were seeing April. So are you taking any different approach to these new price to, I don’t know, consider – consider inventory management for next year or something different with that strategy?

[Rodolfo Ramos:]

No, not at all. We don’t like to speculate about these kind of things and our policy is to have them more than two months in advance of our raw materials. But the only difference is our domestic corn production, because we normally supply our requirements in the season that when there is some harvest and make you go, for instance. The last month we acquire the corn for our Norway operation coming from the local production area. And that is very efficient for us because the Norway’s are the country is far away from the production areas in the United States, the Midwest. So the freight to get that area is very high. So make sense to have more than two months coverage in that area using that advantage, then we have a local production in Iowa state mainly. The other important area – domestic area is here in the central part of the country. We have a very nice corn and soybean production here that is where our largest plants are located. So we have a season when we use the domestic and local corn. So it’s in general terms and in the present, we are importing, we don’t have more than two months of coverage, can be and the physical product of it can be just that the futures of the grain. But no more than that, the only, the other thing that we normally do is to hedge all the long-term contracts with our customers. So if our customers want to one price for the whole year, we hedge that price or that cost to have a margin with them. So that’s our strategy and we have been very disciplined following that process.

[Héctor Maya:]

Excellent. Thank you. Thank you very much and again, congratulations on the results. Thank you.

[Rodolfo Ramos:]

Thank you very much.

[Operator:]

There are no further questions at this time. I would now like to turn the call over to our presenters for closing remarks.

[Rodolfo Ramos:]

Thank you very much. Okay, thank you very much for all the, for joining us this morning. If you have any further questions, please contact our Investor Relation area, who will be glad to assist you. Thank you very much.

[Maria Jaquez:]

Thank you.

[Operator:]

This concludes today’s conference call. You may now disconnect.