Industrias Bachoco, S.A.B. de C.V.
Q1 2022 Earnings Call Transcript

Published: 29 Apr 2022

[Operator:]

Good morning. My name is Hilda and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2022 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 will now turn the call over to Maria Jaquez. Maria, you may begin.

[Maria Jaquez:]

Thank you. Good morning, and welcome to Bachoco’s first quarter 2022 conference call. We released our financials today before the market open. If you need a copy of the release, please visit our website or request it from our Investor Relations department. This earnings call contains certain information that could be considered forward-looking statements regarding anticipated events and performance. The 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 statements 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. Lastly, unless otherwise indicated, the amounts mentioned in this conference will be figures of 2022 with comparative figures for the same period of 2021 in Mexican Pesos. As a reference, the exchange rates as of March 31, 2022, was Mex$18.89 – Mex$19.89 per U.S. dollar. Here with me, are our CEO, Mr. Rodolfo Ramos; and our CFO, Mr. Daniel Salazar. Now, I will give the call to Mr. Ramos.

[Rodolfo Ramos:]

Thank you, Maria, and good morning, everyone. The first quarter of the year was full of challenges and uncertainties, particularly related to corn and soybean meal markets, which has a negative impact in our cost of sales increasing it by 27% versus the same period of 2021. In that regard, we kept working on the things that we can control, which allowed us to compete better under those conditions. During the quarter, we were very focused on operational efficiencies, sales mix improvement, increasing our market share, and the integration of RYC Alimentos. It terms of operational efficiencies while we were – we are constantly looking for opportunities in our Mexican operation, it is worth to highlight the results of our U.S. team. In 2021, we share with you the negative operating impact of labor shortages in this geography. In this regard, our team worked very diligently or on attracting and retaining talent. This has been key for us to bring back our facilities to competitive level. While we consider that there is a still of room for improvement, we are a certain and we are heading toward the right direction. In terms of the first quarter of 2022 net sales not only we observe good pricing levels both in the United States and in Mexico, but also we integrated RYC Alimentos to our mix. This is a company dedicated to multi-protein processing and marketing with the production centers in the state of Puebla, Mexico as well as approximately 21 stores located across Puebla, Oaxaca, Veracruz and Tlaxcala. With this acquisition, not only we are adding to our portfolio product of higher value, but also entering the segment of properly owned stores. We are looking forward to captures and they identified synergies as a result of the actions implementing that and mention about our total sales increased 25.9% when compared to the first quarter of 2021, which was not enough to offset the 27.1% increase in cost of sales. At the end, that pressure our EBITDA margin, which was 14.4% in the first quarter of 2022 compared to the 15.1% reporter in the first quarter of 2021. At this early – in early in our press release, we remain committed to our world strategy. In that end, we reported a CapEx of $915.2 million for the quarter, which compared to the $555.7 million for the same period of 2021. We are certain that our financial and operating discipline would allow us to continue supporting our growth plans while facing the uncertainties and volatility of the market in which we compete. At this point are difficult to predict. Now, Daniel will join us for a discussion of the financial results.

[Daniel Salazar:]

Thank you, Rodolfo, and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company’s first quarter of 2022 net sales total $24,367 million, $5,009.4 million or 25.9% higher than the $19,357.6 million report in the first quarter of 2021. Total cost of sales for the quarter was Mex$19,240.5 million representing an increase of 27.1% when compared to the same period of 2021. The mentioned combination resulted in a gross profit of the quarter of $5,126.5 million with a gross margin of 21%. This compares to a gross profit of $4,218 and 21.8% margin reported in the same period of 2021. The total SG&A for the quarter was $1,999.1 million, representing 8.2% of total sales, which compares to the $1,637.3 million and 8.5% of total sales achieved in the first quarter of 2021. Operating margin in the first quarter of 2022 was 12.9% compared with the 13.2% risk in the same period of 2021. Our EBITDA margin was 14.4% for the quarter and increase when compared with the 15.1% in the first quarter of 2021. For the quarter, we had a net financial expenses of $235.7 million compared to the net financial income of $319.6 million for the same period of 2021. This was a result of the revelation of the Mexican peso versus the U.S. dollar at the end of the first quarters 2022. Our total taxes were 778.4 million for the quarter, slightly lower than the 803.9 million recognized in the same quarter of 2021. All the above led us to a net income of 2,128 million for the quarter resulting in an 8.7% net margin compared to the 2,074.6 million and 10.7% margin reporter in the first quarter of 2021. The net income per share was Mex$3.60 for the first quarter of 2022, compared to the Mex$3.51 for the same period of 2021. Our CapEx was 915.2 million, and increased when compared to the 555.7 million in the first quarter of 2021. Part of this increase is related to the integration of RYC Alimentos asset. In our 2022 Annual Shareholders Meeting we had last one-day the company announced the pain of cash dividend in the amount of Mex$1.64 per share or Mex$19.68 per ADR. That’s all and thank you, and I will now return the call back for final remarks to Rodolfo.

[Rodolfo Ramos:]

Thank you, Daniel. As we enter in the second quarter uncertain condition of the commodities market remain. So far we have been able to offset part of that negative impact through our hedge strategy, operating efficiencies, sales mix and pricing both in the Mexican and in the U.S. market. However, we are aware that the benefits related to our hedging strategy at some point will be reduced. In that regard our operating and financial discipline will be a key not only for food better space that under certainties of our industry, but to be able to road with profitability under a volatile landscape. With that we will now take your questions.

[Operator:]

Thank you. We have a question from Luis Willard from GBM.

[Luis Willard:]

High level for Daniel. Good morning, thanks for taking my question. Can you hear me?

[Daniel Salazar:]

Yes

[Rodolfo Ramos:]

Yes, go ahead.

[Luis Willard:]

Perfect. Thank you. So thank you for the question. So I mean the current circumstances

[Daniel Salazar:]

Well, it’s very complicated to predict what is going to happen in the future because the volatility that we have been seen in the commodity market has been huge. So it is very difficult to predict how it’s going to be the – those commodities. But in terms of the market, I’ve been seeing stability in terms of the balance between demand and offer. So that can give us some color about the pricing. The problem is to predict the cost. So I can tell you that the pricing is going to be strong, but I really don’t know how it’s going to be the raw materials, mainly grains and soybeans in the new feature.

[Luis Willard:]

Correct. So, I mean, yes, the short-term is complicated, but thinking long-term, do you see your EBITDA margins and especially the growth of the industry and yourselves to be faster than what we are seeing maybe faster even than GDP growth?

[Rodolfo Ramos:]

Well we are expecting in the long-term to maintain our EBITDA very close to what we had in the past. All those increases in the cost, in the mid-terms we are going to be able to translate those cost that cost to the pricing. So in that regards we are seeing normalized EBITDA.

[Luis Willard:]

Thank you, Rodolfo. That was great.

[Rodolfo Ramos:]

Thank you.

[Operator:]

Thank you. Our next question comes from Juan Ponce from Bradesco BBI.

[Juan Ponce:]

Hi Rodolfo, Daniel, thank you for taking my question. We have seen you actively pass down the pressure, the cost pressure and this is very challenging environment which led to really strong top line growth. Do you see any demand being impacted in the near future or what should we expect from the plant to control inflation and how could it impact Bachoco?

[Rodolfo Ramos:]

Well, obviously with higher prices the demand can be reduced, but the advantage is with chicken. Chicken is – at the moment the cheapest protein. So we are expecting to maintain the demand on this protein in the new future. And even we are seeing it mainly in the United States a very tight supply of meat because of the hatchability of the breeders and that’s causing a reduction in the availability to find baby checks. So the market is going to be tighter. The supply is going to be tight. So we are not expecting problem with the balance between offer and demand, which can tell us that we can have normalized results in terms of the margins.

[Juan Ponce:]

Got it. Thank you very much.

[Operator:]

Thank you. Our next question comes from Ulises Argote from JPMorgan.

[Ulises Argote:]

I guess. Thanks for squeezing my questions. A couple here from my side, so I think the first one there was on the new slower couple of days ago, this outbreak of bird flu I think in the state of coil. So anything relevant there that we should have – we should have been mining in terms of precisely that that kind of supply output that you are – that you were commenting?

[Rodolfo Ramos:]

Well, right now we have just knowledge of this outbreak in the state of and we have some farms around there, but right now we type our biosecurity measures in order to prevent any problem in that area. Right now we are just sampling all of our farms in order to be aware if there are any problem. At this moment the results have been negative, but it’s can be a big challenge in that area. We are not so exposed with our farms because as you know, our footprint is in all the country. We have farms in every location, in every geography into the country and we have at this moment around 30% of our hatching egg supply is coming from the states. So at this moment we feel very comfortable with our sourcing of hatching eggs to maintain our production in Mexico, even in the states.

[Ulises Argote:]

Okay. Thank you. That’s – yes, that’s super. Super helpful. And then the other one, maybe a follow-up to the previous – to the previous question on that plan that the government is set to announce on controlling inflation. Checking obviously has been one of the items that has been named there on that on that basket of products. So anything that you can share with us in terms of that, any expectations that would be very helpful as well?

[Rodolfo Ramos:]

Yes. They – the government is trying to establish a program to control the inflation, and they include 24 goods, among those 24 goods whole chicken is eggs, is beef and some parts of pork. Those among others is there are 24 products, but those are the products and affect us. They said there’s not going to be price control, which is very important. And there’s going to be some help for the distribution including the reduction on the taxes of the gasoline and diesel and there’s some actions to improve the efficiencies in the transportation of the goods. So there’s some areas then they are working in order to reduce the cost, reduce the transportation cost and the margins in the sales of the products and the retails or traditional – in the traditional market. So there’s some actions that next week there’s going to be a – the follow through meeting to see what action can work. They announced, and they are the SAGARPAs are there in this case, they are presenting us a program to increase the domestic production of a corn, which is very good. But it’s not going to be – the effect is not going to be immediately, it’s a long-term action, which is very good, but the effect is not going to be here. So we are going to be very close to this initiative in order to see what can we do? And we are going to do our best in terms of inflation control.

[Ulises Argote:]

Okay. No, that is perfect. Thank you so much for the details there. And just maybe the final one, any updates that, that you can provide or any updated timeline on the share acquisition of for that that was announced a couple of weeks back. Thank you.

[Rodolfo Ramos:]

Well, Daniel?

[Daniel Salazar:]

No, Ulises. At this point, we don’t have any additional information a part of what the announcement that we provide once of course we have additional information we will share with all you guys.

[Ulises Argote:]

Okay, perfect. Thank you very much.

[Daniel Salazar:]

Thank you.

[Operator:]

Thank you. Our next question comes from Alan Alanis from Santander.

[Alan Alanis:]

Thank you so much for taking my question. Good morning and congratulations on the results, pretty impressive results. I want to follow-up on the previous question regarding the scenarios in terms of, I mean, there’s an elephant in the room, right? We’re talking about operations for a company that might not be public in a few months. So I mean, this where making results in the stocks not moving. So I guess, the way to frame the question is what are the scenarios and what are the – what the timing for that potential tender offer from the majority shareholders and how does it affect or not the operations of the company in the foreseeable future?

[Daniel Salazar:]

We cannot answer that question, Alan, because we don’t have additional information when the family will make the file into the authorities. But what we can share with you is that the companies operating in the same way, we haven’t had and we neither foresee any additional changes in the operation of the company. So we are very focused on and working on giving the results of – as we usually have delivered for the company. So at this point, we don’t have any additional information.

[Alan Alanis:]

Got it. And that’s very useful already, Daniel. So basically if and when this family makes the filing, that filing will – what’s the procedure there. I mean, the Board will receive an notice that the family has made a tender offer. The price has been already made public, right, almost Mex$82. Then what happens next? I mean, would you call for a shareholder’s meeting? How long does that take? I just want to get a sense of the whole timing of how this evolves, once this – the catalyst is triggered by the filing of the official tender offer by this family.

[Daniel Salazar:]

Well, as far as once the family, once the authorities authorized the tender offer, the Board of the company will give an opinion on the price in the 10 following days, once the offer is have to rise. It’s the only thing that I know that the company at the Board company should do. But as I said before, the company in this process is natural. So this is an externality for us actually.

[Alan Alanis:]

Yes, understood, understood. And this is something among the shareholders, not for management to you. I mean, but basically just to understand better, because you’re closer to the whole situation to that any of us, basically, if, and when the family files then the Board will give an opinion. If they think it’s fair or not an unfair and they’ll give their reasons, but then you have to go to a shareholder’s meeting, right?

[Rodolfo Ramos:]

Yes.

[Alan Alanis:]

Okay. Got it. Now, okay. Well again, congratulations on the results and best of luck with other process, which I think right now it’s everybody’s mind and that’s what controlling the price of the stock in any case. Thank you.

[Rodolfo Ramos:]

Thank you, Alan.

[Daniel Salazar:]

Thank you, Alan.

[Operator:]

Thank you. The next question comes from Jay Hill from Tweedy, Browne.

[Jay Hill:]

Hi, Rodolfo. Hi, Daniel. Good morning.

[Rodolfo Ramos:]

Good morning.

[Daniel Salazar:]

Good morning.

[Jay Hill:]

Guys. So in the context of this proposed tender offer by the controlling shareholders, I want to ask you a hypothetical question. So hypothetically, if, if Tyson’s chicken or some other strategic buyer offered Mex$81.6 pesos per share for a 100% of all 600 million shares, I want to know how would you as the management team of Bachoco, the CEO and the CFO advise the Board on the fairness of that hypothetical offer price.

[Rodolfo Ramos:]

Jay, I cannot answer an hypothetical. I can give you any hypothetical answer to, for an hypothetical question. Actually, the company cannot have an opinion in this tender offer. So is this – it is unfair to try to answer that question.

[Jay Hill:]

Well, I mean, Daniel, I mean look, book value is now basically Mex$50 billion it’s Mex$83 per share. The tender offer price of Mex$81.66 per share is now below even book value. So, I want to make that point. And then, Daniel, can you tell me, so when the formal tender offer documents come, you said within 10 days, the Board is going to opine on the fairness of the offer. Is it the entire Board of all 12 members that are going to opine on the fairness, or is it the only four independent directors that are non-conflicted that are going to opine on the fairness of the offer price?

[Daniel Salazar:]

As far as I know that the Board is the one that should shared opinion based on the directors that I completely independent. So the…

[Jay Hill:]

So just the independent directors you would expect the four independent directors will be the one opining on the fairness of the price.

[Daniel Salazar:]

That’s right. That’s right.

[Jay Hill:]

Okay. And I guess just the final other point, I mean, if you look at all of the precedent, mergers and acquisitions of companies that are similar to Shoko and you evaluate the tender offer price and the EV to sales, price to book, EV to EBITDA, EV to normalized EBITDA, I can tell you that, that the price looks extremely low relative to all others similar transactions and so I guess as a shareholder of course I think you guys have put together a terrific results here but we’re counting on the independent directors to fulfill their fiduciary duty of negotiating on behalf of minority shareholders with the controlling shareholder in this situation.

[Daniel Salazar:]

I cannot answer that Jay, as far as I know the only duty that this independent director is to have an opinion on the foreigners of the bright but not to negotiate any tender offer with the investment community and it’s up to them to analyze.

[Jay Hill:]

Yes, with the independent directors that are going to opine would they hire completely Independent Investment Bank to do a proper fairness appraisal of the value….

[Daniel Salazar:]

Yes, I think they should do that way.

[Jay Hill:]

Okay, terrific. I appreciate it. Thank you, Daniel.

[Daniel Salazar:]

Thank you, Jay.

[Rodolfo Ramos:]

Thank you, Jay.

[Operator:]

Thank you. Our next question comes from Don Noone from VN Capital Management.

[Unidentified Analyst:]

Hi, good morning or good afternoon gentlemen. Just to follow up on that last point, can we assume that the board or the independent directors have already hired a financial institution to give them a fairness opinion because I guess 10 days is clearly not of time to receive the tender offer and turn around a fairness opinion I don’t think so can we assume there’s currently a financial institution retained by independent directors.

[Daniel Salazar:]

Well I cannot answer that question because I don’t know if they have to find someone else But what I can say is that according with the terms of the authorities taking for out tries a tender offer. This will take probably more for weeks once the family members filing or started filing to electorate. This will a cure in the next two months at least I think.

[Unidentified Analyst:]

Okay so the 10 days is not really a real number it’s going to take long.

[Daniel Salazar:]

Yes but because the 10 day start once the authority authorized the tender offer So if the family I haven’t started the filing the authorities will take as I mentioned more than a month analyzing the documentation in order to approve the tender. So it will take place in the next month or two months at least.

[Unidentified Analyst:]

Okay thank you.

[Daniel Salazar:]

Thank you.

[Rodolfo Ramos:]

Thank you, Don.

[Operator:]

Thank you. At this moment we have no further questions. I would like to turn the call over to Mr. Ramos for closing remarks.

[Rodolfo Ramos:]

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

[Operator:]

Thank you. This concludes today’s conference call. We thank you for participating. You may now disconnect.