Industrias Bachoco, S.A.B. de C.V.
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Welcome to the First Quarter 2021 Industrias Bachoco Earnings Conference Call. My Name is Richard and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Maria Jaquez, Investor Relations. You may begin.

[Maria Jaquez:]

Thank you. Good morning and welcome to Bachoco's first 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 statements discussed in this call.

[Rodolfo Ramos:]

Thank you, Maria and good morning everyone. Despite remaining challenging condition in the market, we managed to close the quarter with a very good result in terms of profitability. For that I would like to thank the Bachoco team for the effort and commitment in making this possible. In terms of the industry, both Mexico and the U.S. are being challenged by significant increase in corn and soybean meal prices, which are already impacting our cost of sales. In this regard, we are working very hard on absorbing part of those increases with efficiencies in our production processes and by being cultures with our hedge strategy. On the other hand, volumes saw in both geographies experienced are difficult comparison versus the first quarter of the last year when the industry was showing important growth rates. As a reference according to the USDA, volume production for the first quarter is experienced to the decrease of 3% versus the same period of 2020 in the United States. About our operations in Mexico, a better balance between supply and demand, in combination with an improved sales mix allow us to transfer the increasing costs to our sales price. This has also been shown in the behavior or the main commodity prices in the United States. We continue with the process of integrating SASA to our operation, since its integration in June, 2020. Our volume sold and revenues in this segment has shown a consistent sequential growth. In addition, we are focused on increasing our live swine capacity in order to be less dependent on the outside market in this business line. As a result of the conditions above our total sales and cost of sales increase 23% and 11.7% respectively when compared to the first quarter of 2020. We reported an EBITDA of MXN2913.4 million, with a margin of 15.1% on earnings per share of 350 for the quarter. The company remained in a healthy financial condition as we reached a net cash level of MXN17,208.1 million, which allow us to continue to support our growth plan as we reported a CapEx of MXN555.7 million for the first quarter of '21.

[Daniel Salazar:]

Thank you, Rodolfo and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company's first quarter of '21 net sales totaled MXN19,357.6 million MXN3619.2 million or 23% higher than the MXN15,738.4 million reported in the last - in the first quarter of the last year. This increase was mainly a result of higher prices across our main business lines, as a result of our better sales mix and the better selection of the effects of higher raw materials costs. Total cost of sales for the quarter was MXN15,139.6 million, representing an increase of 11.7% when compared to the same period of 2020. Almost 17% of the increase was a result of higher unit costs result, for perform direct increase in grain and soybean meal prices. That increase was partially offset by lower volumes sold quarter-over-quarter. A combination resulted in a gross profit for the quarter of MXN4218 million, with a world with a gross margin of 21.8% higher when compared with MXN2181.1 million and 13.9% reported in the same period of 2020. Total G&A for the quarter was MXN1637.3 million representing an 8.5% for our total sales, which compares to the MXN1572.7 million 10% of total sales achieved in the first quarter of the last year. Operating margin in the first quarter of the last year was 13.2% compared to 3.8% risk in the same period of 2020. Our EBITDA margin was 15.1% for the quarter, an increase when compared with the 6% in the first quarter of '20. For the quarter, we had a net financial income of MXN319.6 million compared to the net financial income of MXN2426.5 million for the same period of 2020. This was a result of unimportant FX valuation effects observed in the 2020 as a result of the strong depreciation of the Mexican peso in that quarter. Our total taxes were MXN803.9 million for the quarter, lower than the MXN860.3 million recognized in the same quarter of 2020. This decrease was due to lower profit before taxes. Other DevOps led us to a positive net income of MXN2074.6 million for the quarter, resulting in a 10.7% net margin compared to the MXN2170.2 million and 13.8% margin reported in the first quarter of '21. The net income per share was 3.5 basis for the quarter.

[Rodolfo Ramos:]

Thanks, Daniel. We are entering the second quarter of 2021 under very different conditions when compared to the same period of 2020. Well, we think that this year, the balance between supply and demand is better than the last year, raw material prices remain to be the challenge to beat. That is why is the key not to lose focus on operational efficiencies and improvements in sales mix across our processes. Particularly regarding the COVID-19, we think it is difficult to forecast the duration of its effects, as those are linked to the effectiveness of responsive actions that we and others have taken, including the impact of vaccination programs, coverage and immunity achieved the severity and duration of the outbreak, and the actions by national and international government authorities to contain the pandemic and minimize its impact. We consider that the lessons learned in 2020 made us stronger, and proved that our team has what is needed to face any challenges that may come. With that we will now take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. And our first question on line comes from Emiliano Hernández from GBM. Please go ahead.

[Emiliano Hernández:]

Hi Rodolfo and Daniel. Congrats on the results. Very impressive and thanks for the space for questions. Two questions on my side if I may. My first question is, how should we think about the second half of the year, considering the pressure you might see in the cost side, given the level of grain prices? And then the second one is, how have you seen volumes in April? Just to understand the supply and demand balances and the potential for any price?

[Daniel Salazar:]

Well, in terms of pricing we have a very good increase year-over-year. But with the raw materials, as you mentioned the cost is going to keep increasing as well? So what we need to see if we can translate that cost is going to be a very tough challenge to keep moving in that direction. Because we need to see and to maintain the balance between the supply and demand. And in the other hand, we need to look very close closely our market to and to see if the economic growth, particularly in Mexico go back to the normal situation. That if we don't have that recover in the - in the salaries or the power of the salary, it's going to be very difficult to maintain or translate that price increases according to the cost of the raw material.

[Operator:]

And thank you. Our next question line comes from a Hector Maya from Santander. Please go ahead.

[Hector Maya:]

Hi, thank you very much for taking my questions are and congratulations for the results. First one, could you give us an update on how the foodservice channel is doing particularly in Mexico? And the second one, you also are mentioning right now better supply and demand balance. Just wanted to know how that brought oversupply as you mentioned you talked about at the beginning of the year progressed during the quarter? And how are inflection point? And after these two, I have couple of follow-ups? Thank you.

[Rodolfo Ramos:]

Well, the first about the rotisserie and that channel. The performance of that market is very good. I think the pandemic affect at the beginning. But at the end, in the next month or after the pandemic hit the outbreak here in Mexico, that chat channel did very well. Right now the volumes in that particular channel are better than the last year even in the pre-COVID period. So they are doing very well. The only channel that is below the pre-pandemic is the food service, mainly dining, restaurants and hotels and the touristic destinations is the only market that has been below the pre-pandemic period. But it is moving up, but very, very slow. I think the recovery is going to be better for the second half of the years in that particular channel. What is the second question, Hector?

[Hector Maya:]

Yeah, about the supply and demand balance. You mentioned now that it's better than before. And just remembering that in the beginning of the year, you have said or have mentioned that you were facing an oversupply. So wanted to know when was inflection point and how can we expect this going forward? Well,

[Rodolfo Ramos:]

Well, I mentioned before, in terms of increased production of volume, we need to be very cautious about this in order to keep that good balance. And that's going to depend on the economic and the economic recovery of the other country. If the per capita income doesn't grow, it's going to be very difficult to translate that the price or the increase in cost to the market.

[Hector Maya:]

So in terms of price increases, I mean, you wouldn't say that you are very confident that these are going to be sustainable. You prefer to have a more conservative approach. Right?

[Rodolfo Ramos:]

Well, it's very difficult to predict that. Because if the industry maintains their discipline, well it can be fluctuating or we don't know exactly.

[Hector Maya:]

Thank you. And the last one, your account cash balance is over 40% of your market cap. So could you remind us with your possible M&A priorities per region? And how soon could we be expecting an announcement of this nature if any?

[Daniel Salazar:]

As you know, we're now in the process of - have the authorization of the last M&A activity that we reported in the last year the acquisition of RYC Alimentos. But besides that, we are also working in expanding our capacity in the swine business, as we already mentioned. So part of the money that we have, we're going to be to - for those projects, growth points in the swine business as well. And on the other hand, we're looking for an expansion as well in the other products. We're looking in not only Mexico, but also in Latin America for - try to make an arrangement with producers in Latin American countries. We are now actively looking in that right now.

[Hector Maya:]

Perfect, very clear. Thank you very much.

[Daniel Salazar:]

Thank you, Hector.

[Operator:]

Thank you. Our next question on line comes from from Bradesco. Please go ahead.

[Unidentified Analyst:]

Hi, Rodolfo, Daniel. Thanks for taking my question. The Mexican Congress recently passed a bill that will prohibit outsourcing and insourcing except for what qualifies as specialized labor. What do you think could be the impact on by Bachoco's operating expenses, if any?

[Rodolfo Ramos:]

Of course, this measurement will affect our business as everybody - everyone else. But in accordance with our calculations, this impact is not significant for our business. Of course, we will be working in some activities in order to reduce the impact. For instance, we are looking to build Shared Services Center in order to have specialized activity center to support all the business lines. And with that within to reduce significantly the possible impact that will have with this measurement.

[Unidentified Analyst:]

Okay, thank you.

[Unidentified Company Representative:]

Thank you.

[Operator:]

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

[Ulises Argote:]

Hi, Rodolfo, Daniel. Thanks for the space for questions, and congrats on the results.A couple of questions here on side. First, any update you can provide us more or less how the cost levels related to the raw materials are looking for in the second quarter? I mean, how would your hedge levels look like? And what kind of pressure can we be expecting maybe sequentially here versus the numbers that we saw in the first quarter? And kind of tied to these and I know this is really tough. But any outlook in terms of the margin that you could have for the year? How does it look like for the full year versus your long-term guidance? How more or less are you budgeting around these, given the strong numbers that you had obviously in the first quarter already?

[Rodolfo Ramos:]

I will first start. We not only hedge the contracts that we close for the year with some long-term customers. And we have a contract with them. And normally we hedge the grain that we use to produce the products for those customers. And that's it. We don't speculate with that. So normally, we have to do any health monitoring in inventory throughout the farms. So we can say it in three months, we can just reflect the actual prices of the commodities corn and soybeans. So saying that and the cost increase, well the corn is started very close to $3 per bushel, right now it's very close to 7. So it's more than 100% of increase in that regard. So soybean and corn accounts for more or less 80% of the total cost of the feed. And it is around the 65% of our total cost. So you can just figure out how is going to be the impact in terms of cost. At this moment, do we have been able to translate that cost to price, because of the balance and I mentioned between the supply and demand. And, for that reason, our main focus right now is in the efficiencies, productivity, because we need to absorb some part of that cost increase. There's some other alternatives, other strategies, and we need to look very close as the sales mix, the markets, the different markets, different regions, geographies. We have a national wide footprint, and we participate in all the channels of the industry. So we can just - we have some margin to move from one side to another side. And the second question, I want to ask Daniel, to help me do that.

[Daniel Salazar:]

Well, of course, it's very difficult to predict with a very challenging situation with the raw materials increases. If we maintain the good balance between supply and demand for the rest of the year, and we can translate these increases to the prices. I think we will have similar year in terms of profitability compared with the previous one. Of course, with an increase - a significant increase in revenues, I think the revenues probably will grow the to medium digit for the whole year. And the profit probably will be between 8.5 to 9, if everything runs okay. But as Rodolfo mentioned is very difficult to predict that the good moment will remains. Because the challenge of the raw materials increases.

[Ulises Argote:]

Agree. Perfect. Thanks, guys for the color. And then another question that I had was, maybe we have been focusing a bit on Mexico. So if you can share some of your thoughts and kind of expectations for the U.S. business? I know, Rodolfo, you mentioned some kind of expectations for volume decreases there in the U.S. and et cetera. But maybe if you can give us some color on how you're looking for those operations for the rest of the year. And maybe if you expect any change in the import dynamic therein from the U.S. and Mexico, given the strong price in Mexico? Any changes that you have been seeing there recently? Thank you.

[Rodolfo Ramos:]

Well, in the U.S. operation, as the commodity prices, the chicken prices, various meat like leg orders and wings are having a very good level. The wings are the record highs, historically. Leg orders have been going up on the commodity breast meat, it's in the univary quote. It's at the highest level for the at least for the last 12 months. It's saying that, the industry right now is showing a good balance between supply and demand. Obviously, there's differences between the different segments of the market. Right now the complex system produce big birds are in better shape than the small birds for instance, because of the commodity prices. So, with that balance - with the balance between supply and demand, the industry has been able to translate the cost increase to the price. But as you know, Bachoco USA produced - our main market is the national accounts and food service. With those companies, we have a long-term agreement. So we are just - we have in some cases we have a hedge of the raw materials with some customers. Another customers we negotiated pricing every quarter or even every month. So, I think we are in a very good situation in a very, very difficult market. And again, there is the same strategy to keep focus and in our productivity efficiencies and also the things that we can do better than we can control in order to reduce the cost or to absorb that increases in cost.

[Ulises Argote:]

That is perfect. Thank you so much guys there for the color.

[Rodolfo Ramos:]

Thank you, Ulises.

[Operator:]

At this time I'm showing we have no further questions.

[Rodolfo Ramos:]

Okay. Thank you all 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.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.