Industrias Bachoco, S.A.B. de C.V.
Q2 2019 Earnings Call Transcript

Published: 24 Jul 2019

[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 Second Quarter 2019 Industrias Bachoco Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ 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 second quarter 2019 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 risk and uncertainties, including those described in our Annual Report Form 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 statement, 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 2019 with comparative figures of the same period of 2018 in Mexican pesos. As a reference, the exchange rate as of Jan 30, 2019 was MXN19.20 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. In our business, the second quarter usually is the strongest one, and this one is not the exception. In Mexico, some of the volatility conditions we observed in the second half of 2018 remains, and GDP expectations for 2019 continued to deteriorate. Despite of that, we observed improvements in demand and our Company has been able to capitalize that improvement. As a result, we managed to grow our volume sold across our main business segments, particularly in our balanced feed business line, which had improved the most year-over-year.In the U.S., we observed a better balance between supply and demand. However, we observed white meat still at a low part of the range when compared to the last five years historically. The condition mentioned above, allow us to reach a net sales of MXN16,888.1 million, which is 4.1% higher when compared to the same period of 2018. As of the first half of the year, our sales totaled MXN31,207.7 million, which is nearly the same that the total sales reported in the same period of 2018. On the side of the cost, we observed fairly stable raw material prices during most of the quarter, which in combination with some efficiencies captured in our process, allow us to report a lower total cost when compared to both the quarter and the first half of 2018.Regarding our SG&A, as a result of the effort of keeping these lines under control, the second quarter was -- we managed to maintain the same level of expenses as a percentage of the total sales when compared to the same period of 2018, despite of the increase in energy and fuel prices we observed compared to the same -- for the second quarter of 2018. The aforementioned condition allow us to reach an operating income of MXN2,163.8 million, which is 30.6% higher than the MXN1,656.4 million reported in the second quarter of 2018, with an operating margin of 12.8% and 10.2%, respectively. This translates into an operating income of MXN2,488.9 million for the first half of 2019 and MXN3,478.9 million for the first half of 2018.With that, we reached an EBITDA of MXN2,483.3 million for the second quarter of 2019, which is 25.7% higher than the MXN1,976 million for the second quarter of 2018, with an EBITDA margin of 14.7% and 12.2% respectively. As of the first half of the 2019, we reported an EBITDA of MXN3,138.2 million, which covers 76.7% of the EBITDA of the same period of the last year. At the bottom line, we reached earnings per share of MXN2.65 for the quarter, an improvement when compared to MXN2.62 we reached in the same period of 2018. Our balance sheet remains strong as we reach a net cash level of MXN13,560 million, which will enable us to continue supporting our growth plans.At this point, I will turn the call over to Daniel 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 two quarter -- second quarter of 2019 net sales totaled MXN16,884.1 million, MXN670.5 million or 4.1% higher than the MXN16,213.6 million reported in the second quarter of 2018. This increase was mainly as a result of higher prices in our poultry segment and higher volume sold in both poultry and our balanced feed business lines.Regarding the first half of 2019, we reported net sales of MXN31,207.7 million, which is 1% lower than the net sales of the same period of 2018. In the quarter, sales of our U.S. operations represented 25.8% of total sales, which is lower than the 28.7% we reported in the same quarter of 2018. This quarter result of higher volume sold in our Mexican operation, particularly in our balanced feed business line. Cost of sales in the second quarter was MXN13,164.5 million and MXN25,680.2 million in the first half of the year. This represents an increase of 0.4% for the quarter and 1.9% for the year. This increase was due to a higher volume sold since our total unit cost was lower than 3.8% and 0.9% when compared to the second quarter and first half of 2018, respectively.Gross profit for the quarter was MXN3,719.6 million, with a gross margin of 22%, an increase of 19.8% over the gross profit reported in the second quarter of 2018. For the first half of the year, we reached a gross profit of MXN5,527.5 million, with a margin of 17.7%. This amount is 12.6% lower than the gross profit reached in the first half of 2018, since the first quarter of the year was the strongest. Total SG&A for the second quarter of 2019 was MXN1,550.8 million or 9.2% of total sales compared to the MXN1,489.1 million and 9.2% of total sales for the second quarter of 2018. For the first half of 2019, SG&A totaled MXN3,025.2 million or 9.7% of total sales, compared to the MXN2,874.6 million and 9.1% of total sales in the first half of 2018.Operating income for the second quarter of 2019 totaled MXN2,163.8 million and operating margin of 12.8%, higher than the MXN1,656.4 million and higher than the 10.2% margin reached in the second quarter of 2018. The operating income for the first semester of 2018 was MXN2,498.9 million and operating margin of 8% lower than the MXN3,478.9 million and lower than the 11% margin reached in the same period of 2018.The EBITDA margin for the second quarter was 14.7% higher than the 12.2% EBITDA margin of 2018. For the first half of the year, the EBITDA margin was 10.1% lower than the 13% rate in the same period of 2018. In the second quarter of 2019, net financial income was MXN91.6 million and MXN167.6 million in the first half of 2019, both lower than those for the same period of 2018. The decreasing is mainly attributed to lower exchange rate gains as the Mexican peso appreciated versus the previous year.Our total taxes were MXN663.4 million for the quarter, MXN21.6 million higher when compared to the total taxes, as reported in the same period of 2018. For the first half of 2019, our total taxes were MXN772.1 million, MXN337.6 million lower than the income taxes for the same period of 2018. All the above led us to a net income of MXN1,591.9 million for the quarter, what is a net margin of 9.4%. This income is 1% higher than the net income reached in the second quarter of 2018. For the first half of 2019, the net income totaled MXN1,894.4 million with a net margin of 6.1%, which is lower than the net margin of 9% of the first half of 2018. The net income per share was MXN2.65 for the quarter and MXN3.15 for the first half of 2019 compared to a net income per share MXN2.62 and MXN4.72 for the same period of 2018 respectively.Going into our balance sheet, we kept a healthy financial structure, with an increase of total asset of 3.7% when compared to year-end 2018. Our net cash was MXN13,560 million for the end of the quarter as on the – our net cash level of MXN13,420.9 million at the beginning of the year. Our CapEx was MXN824.6 million and we kept our plans of spending around MXN110 million by the end of the year. These projects will – this will support our organic growth and maintain our facilities at high level of productivity.Well, that is all. Thank you. And I will turn the call back to Rodolfo for final comments.

[Rodolfo Ramos:]

Thank you, Daniel. We expect the poultry industry to continue with a normalized growth rate in both the market in which we participate. As we are entering the third quarter, which is usually the weakest, we are observing some of the favorable conditions of the second quarter prevailing at the beginning of the third quarter. Even when we expect to observe some seasonal adjustments in prices, we expect our margin to improve when compared to the same period of the last year.On the other hand, we expect that the increase in raw material cost seen by the end of the second quarter may have some effects in the result of the third quarter. However, we expect to offset part of those increases through efficiencies in our processes. Regarding raw material prices, currently, we are observing volatile conditions typical of the season which could potentially pressure our cost of sales. Also, we are observing some external uncertainties related to commercial trading and ASF that could potentially affect the dynamics of the market in which we compete. In that regard, we are following these conditions closely to make proper decision. We will continue to focus in attending to our markets, keeping a healthy financial position and invest in our CapEx above maintenance levels in order to grow and to be close to our customers.With that, we'll now take your questions.

[Operator:]

Thank you. [Operator Instructions] We have a question from Luis Miranda from Santanders.

[Luis Miranda:]

Yeah. Hello, can you hear me?

[Rodolfo Ramos:]

Yes.

[Luis Miranda:]

Yes, thank you. Good morning. A couple of questions, and the first one was regarding, Rodolfo, your closing remark, regarding the outlook for the second half and especially in the top line. When we take a look at your results and the pricing and volumes, it seems to be a bit surprising that very good results, considering what we have seen in Mexico with the slowdown in other – for other companies in the consumer space. I don't know if – in terms of the – you mentioned the supply demand, but I don't know if you could elaborate a little bit more and also if you have some additional color of what has been the impact, or if any, of the African swine fever?And the second question is for Daniel, if you could help us to understand the impact of the IFRS 16 on what would be the adjusted margin or the impact of IFRS 16 on the margin for the second quarter. Thank you.

[Rodolfo Ramos:]

Okay. Thank you, Luis. Normally, this second quarter is the best of the year and we saw a seasonality effect in terms of the demand. Swine or pork meat has been very expensive during the quarter, so that help us to increase the prices in chicken too. So the effect of the – it's around 10% of the cost of the swine. We can see a price increase of 10% year-over-year in the pork meat.So it does help us to increase the prices in chicken. But this year, in particular, the efficiencies of the industry were just below the last year, so we can – I can say that we have more or less the same offer than the last year. So with market growing and with the demand for the season and the prices of the other proteins, we saw very good prices in the chicken industry in general.So I can say that for some reason, the African swine fever is affecting just 10% of the price. If I compare it year-over-year and I can say then the poultry industry capitalize that price too. And with a strong demand that we have in the quarter, I think that was the result of the quarter.

[Daniel Salazar:]

Okay. Now in the second question, Luis, about the impact of IFRS 16, I could say that there is no significant impact from this application. In our case, we estimate that a recognition of the assets, or as such our leasing contract is no more than MXN950 million. So the consequence in the P&L is un-material and the EBITDA margin is not significant at all, this impact.

[Luis Miranda:]

Okay. Perfect. Thank you, Daniel. Thank you, Rodolfo, very clear.

[Rodolfo Ramos:]

You're welcome.

[Operator:]

The next question comes from Miguel Tortolero from GBM.

[Miguel Tortolero:]

Hi, good morning, Rodolfo, Daniel and Guadalupe. Thanks for the question and congratulations on the results. The first one is regarding EBITDA margin. Just would like to know how do you feel about reaching the low part of the range in terms of EBITDA margin for 2019, now with the results of the first half on hand?And the second one regarding the U.S., we still saw a weak quarter in terms of top line. So if you would like to – could you give a bit more color on what you're seeing in this region and your expectations going forward? Thank you.

[Daniel Salazar:]

Well, in terms of the EBITDA, I think we are going to be in the range of the last year. Up to now, the seventh month for the year, I can tell you then we are just in line with – we expect to be in line with the results of the last year. So seeing that, we just almost offset the regard we had in the first quarter.In our U.S. operation the first quarter, we saw very weak prices of our boneless meat and with a rebound for the season. And right now, we are seeing a reduction just because of the season. And I'm seeing a little bit more offer, but I'm still seeing a very good balance between offer and demand.So we are expecting a normalized year here. The challenge then we are going to have here and in our Mexico operation is the cost of the raw materials, and we are doing some things in order to minimize the effect of the raw materials.

[Miguel Tortolero:]

Okay. Thank you very much.

[Operator:]

[Operator Instructions] The next question comes from Ulises Argote from JPMorgan.

[Ulises Argote:]

Hi, guys, congratulations on the results. Just a couple of questions here on my side, I was wondering if you could give us some color on how hedges are looking for you guys toward the end of the year, particularly when compared to the recent price spike we have seen in corn? And maybe if you can comment and give us a bit more color on the operating efficiencies that you comment for, for this quarter, where are these coming from, are they sustainable and can we expect similar trends on this side going forward? Thank you, guys.

[Rodolfo Ramos:]

Sure. Our hedge policy is just to hedge the amount of corn and soybeans and foreign currency for the contracts that we have in the long-term with our customers. And other than that, we have no more than two or three months of inventory. So, at this moment, I can tell you we have hedged all our soybeans to the end of the year, but in corn, we have two more months according to our policy, plus the contracts that we have fixed price. That is our policy and we stick on it.And the efficiencies that we are capturing, is in both areas in live production and in our processing plant in terms of yields, in terms of cost. And another efficiency that we are capturing right now is we acquire normally in this time of the year, our domestic harvest in Mexico. And right now, we have, with the increases here in the area, in the States, we have a better position in – our grain position in Mexico is very good. So we, right now, offset a little bit different in cost from here to our Mexican operation. So I can say that we are in a good shape in our inventory there.

[Daniel Salazar:]

I would like to add a brief comment. On the SG&A side, we also had an important improvement because even as Rodolfo mentioned, we are maintaining the percentage of sales of SG&A. In terms of volume, we have a small reduction in unitary cost, so that means that we have compensated somehow the increases that we faced in the last year in terms of oil and energy cost with some efficiencies in our performance.

[Ulises Argote:]

Great guys. Thank you so much for the color. Just a follow-up there, can you share with us if the kind of the contracts that you have for the corn hedges are below the current spot prices, or are they more or less in line with what we have been seeing over the last couple of weeks?

[Rodolfo Ramos:]

Yes, what we have up to the end of the year are below the market value. So we have a good position there and our – each composition is very good.

[Ulises Argote:]

Okay. That's perfect. Thank you very much.

[Rodolfo Ramos:]

Both corn and soybeans, so we have a very good position there.

[Ulises Argote:]

Perfect. Thanks so much guys.

[Rodolfo Ramos:]

Thank you.

[Operator:]

Next we have a follow-up question from Luis Miranda from Santander.

[Luis Miranda:]

Hi. Thank you, guys. Just a follow-up on cost. I know it is very tough to have a very clear view on the grains bought. With the information you've already seen from the harvest in Mexico and the prices in the U.S. and your contracts, the information we are receiving is that we are getting to a peak in the prices of corn during July. Or is it still too early to have a clear view in this for the third quarter? Thank you.

[Rodolfo Ramos:]

Well, both markets are connected. So if we have any cost increase in the corn market here in the States, for sure, we are going to have the same effect in Mexico, maybe with just time differentiation level or a gap in the time but at the end, both in our markets are connected. But the corn harvest in Sinaloa state was the last month. So prices were on line with the U.S. prices before the price increase, and in here – in the local market here in the States. But that allow us to buy where local corn in Mexico had a very good price. So I feel very comfortable with our grain position down in Mexico.For instance, in our operation our complexes of the Northwest recover most of the income. So most of our consumption for the year in that particular complex and very good prices. So I feel very comfortable with that. And now for the other operations, we have to import for the Gulf. All the operations at the complexes now we have at Gulf, we are importing grains to those operation at the market price.

[Luis Miranda:]

That's very helpful. Thank you for your work on this.

[Operator:]

We have a question from Thiago Albuquerque from Onyx.

[Thiago Albuquerque:]

Good morning, Rodolfo and Daniel. Thanks for the opportunity. I have a quick question on your receivables. We have seen a strong increase…

[Rodolfo Ramos:]

Can you speak a little bit – I really can't hear you. Can you speak a little bit...

[Thiago Albuquerque:]

Can you hear now?

[Rodolfo Ramos:]

Yes, better.

[Thiago Albuquerque:]

My question is on your receivables. We have seen a strong increase during the quarter. Just want to understand if you have any change in your policy and your collections, or if there was some seasonal effect in the trend for the remaining of the year? Thank you.

[Rodolfo Ramos:]

Can you…

[Daniel Salazar:]

Thiago, this is Daniel. Thank you for your question. Well, there is no change in our policy. The only reason for these increases because – there are two reasons, one is the growth in our third quarter kept out some strong collection from the retailers. But there is something common, it depends on the payment date that our customer has.But on the other side, remember that in this year the Government put a tax policy that prohibit the compensation of other taxes against the income tax. For that reason, our value-added tax increased a little bit compared with the previous year, but it doesn't mean that it’s a problem for the company. The only thing is that we will compensate this in our half-year return – tax return that we will present in this year – in this month, sorry.

[Thiago Albuquerque:]

So the parts related to the receivables from the retailers, we should see a normalization for next quarter?

[Daniel Salazar:]

Yes, that's correct. On the other side, the value added tax that is to collect, it will regularize also in the – in – as per – in the third quarter as well.

[Thiago Albuquerque:]

Great. Thank you very much.

[Daniel Salazar:]

You're welcome.

[Operator:]

We have a question from Julia Rizzo [ph] from HCI.

[Unidentified Analyst:]

Hi. Good morning, everyone. Can you hear me well?

[Rodolfo Ramos:]

Yes.

[Unidentified Analyst:]

My question is regarding the news in early July about some avian influenza in Mexico. Can you comment a little bit on how it structured Mexico from that kind or do you have operations here, any of the place you have a focus on?

[Rodolfo Ramos:]

The Mexican authorities reported several outbreaks of avian influenza in the center part of the country, but mainly in backyard birds, not in commercial operations. So at this moment, it is not a problem avian influenza in the country. The reports were just in backyard birds.

[Unidentified Analyst:]

Do you have operations near the place that we have the focus?

[Rodolfo Ramos:]

Yes. We have some operations closed, because those outbreaks were in the central part of the country, Guanajuato state and Queretaro state, and we have some operations over there. But at this moment, we don't have any issue with avian influenza.

[Unidentified Analyst:]

Okay. Thank you.

[Rodolfo Ramos:]

You're welcome.

[Operator:]

The next question comes from Ulises Argote from JPMorgan.

[Ulises Argote:]

Hey, guys. Thanks for the follow-up. Just a quick one here related to the EBITDA margin expectations for the third quarter. You say that we can expect an increase year-on-year, but here the third quarter of ‘18 was really weak. So can you provide more color there directionally on how it could look? I mean, can we still expect it to be hovering around the double-digit level, or what more or less can we expect in that sense? Thank you.

[Rodolfo Ramos:]

Okay. Do you want to answer Daniel?

[Daniel Salazar:]

Yes. Well, of course, we expect a much better result compared with the third quarter of last year, and we think – we do think that we can reach a double-digit or close to double-digit results for this quarter.

[Ulises Argote:]

Perfect. Thank you so much for the color.

[Daniel Salazar:]

You're welcome.

[Operator:]

We have a question from Eduardo Estrada from BlackRock.

[Eduardo Estrada:]

Yes, hello. Thank you for the call. Just one question on terms of the price of poultry. Can do give us an idea of how prices were different in the U.S. and Mexico in the second quarter? It seems that in Mexico increased, I'm not so sure in the U.S., if they – were you mentioned something of the boneless, but can you explain us a little bit more on that and your expectation for the third quarter? Do you think that the situation with the pork will still benefit you for the rest of the year? Thank you.

[Rodolfo Ramos:]

Yes, the industry here – well, in the States boneless price is – I can say is the leader in price in terms of the market. In Mexico, for this time of the year, the strongest market is the live market. So we cannot compare the prices in Mexico with the prices here in the States, because we are talking about different products. So we had a very strong demand for live birds in the Southeast of the country and that made the difference. Here in the States, even on the second quarter breast meat normally is a very good quarter. This particular year we are in the lowest part of the five-year historical chart.So the prices in Mexico were slower because of the live market, the public markets and those markets made a difference. We are expecting for this quarter, prices to decline because it's – normally at this time of the year that happened. But in July, it has been by far better than the same period of the last year. So we expect a better quarter compared – comparing quarter-by-quarter. So at the end, we expect to have a EBITDA margin very close to or slightly above the two digits.

[Eduardo Estrada:]

Perfect. And just on the situation with the whole industry?

[Rodolfo Ramos:]

The whole industry, I think the price is – well, it's difficult to predict because in Mexico industry has been growing at a very high peso. So we are going to have a very important production in Mexico. But this has been offset for the outside price. Mexico has been importing around 40% of our consumption from the States. So if there is any change in the China policies to allow United States to export, pork meat or even chicken meat today to China, is going to change the dynamic of the Mexican market, but this we don't know.

[Eduardo Estrada:]

Okay. Thank you very much.

[Rodolfo Ramos:]

Sure. Thank you very much for your question.

[Operator:]

We have a follow-up question from Miguel Tortolero from GBM.

[Miguel Tortolero:]

Yes. Thanks for the follow-up. Just a quick one on the other division. Just would like to understand the dynamics playing the 16% volume growth and also what's driving the 9% sales growth even with the strong volume growth that I just mentioned? Thank you.

[Rodolfo Ramos:]

Well, the drivers – because of the balanced feed and the expansion, there is strong expansion percent in our division of balanced feed. And right now, we are very competitive in that business because of the cost of our raw material. We have been exploring higher volume than the same period over the last year.So that increase in volume is for exports and we just increased our market share in our markets, and we are increasing our pet food sales. So the increases on sales in that division; increase in pet food, which is a by far more expensive feed, so that makes us to have that strong result in our balanced feed division.

[Miguel Tortolero:]

All right. Just to understand what's driving the sales to only increase 9% in that division?

[Rodolfo Ramos:]

In what division?

[Miguel Tortolero:]

In the other division with the volume up 15%.

[Rodolfo Ramos:]

Other division is different, it’s not included in our feed business line. It's...

[Daniel Salazar:]

It's included Rodolfo.

[Rodolfo Ramos:]

But in other – let me see...

[Daniel Salazar:]

In other division, we include the beef, the balanced feed that includes also the pet food and also the swine. So as Rodolfo mentioned before, the main impact, the main increase comes from the balanced feed and also from beef. Even that it is a small part of – a small line in this division of others, the increase in the beef is more than 20%.

[Rodolfo Ramos:]

I just got it. It's – I will compensate – you're asking about our growth in pound 17% and our increase in sales is just 9.6%?

[Miguel Tortolero:]

Yes, exactly.

[Rodolfo Ramos:]

Okay. Well, we shall – we have to analyze here our mix – our sales mix, because we are increasing our sales of some raw materials, because in our position we can capitalize some of benefits of those raw materials. And from a – let's say, some not so expensive feeds, so we increase our sales, but our mix is – give us just an increase in dollars of pesos of 9.6%.

[Daniel Salazar:]

There is a reason we gave this, because the balanced feed in comparative terms is – has much lower price than the other – the core business lines. So even that you have an increase in volume but the increase in sales is less, because the unitary price.

[Miguel Tortolero:]

That's very clear now. Thank you very much, Daniel and Rodolfo.

[Rodolfo Ramos:]

You're welcome.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. I will now turn the call over to Mr. Ramos for final remarks.

[Rodolfo Ramos:]

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