Industrias Bachoco, S.A.B. de C.V.
Q4 2019 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Good morning. My name is Sylvia and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2019 Industrias Bachoco Earnings Conference call. All lines have been muted 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 fourth quarter 2019 conference call. We released our financials yesterday after markets 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.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 2019 with comparative figures for the same period of 2018 in Mexican pesos. As a reference the exchange rate as of December 31st, 2019 was MXN18.89 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:]

And good morning everyone. As we mentioned in our press release issued yesterday, we faced the fourth quarter with challenging conditions in poultry while the rest of our segments remain in good shape.In poultry, we offset pressure in prices in Mexico due to the softer demand mainly as a result of slow economic growth leading to oversupply conditions. According to the last information released by Banco de Mexico, economic growth in Mexico is expected to be close to zero for the year.In the U.S., we observed an improvement in prices particularly for linked quarter; however, adjustment in our sales mix result in lower volume sold which in combination with the appreciation of the Mexican pesos versus the dollar offset the improvement in prices in peso terms.As a reference, on average, the appreciation of the Mexican peso was around 3% when compared to the fourth quarter of 2018. Under the condition mentioned above, we reached net sales of MXN15,138 million for the fourth quarter of 2019 which is 1.8% lower when compared to the same period of 2018.Sales in our poultry segment decreased 2.2% with respect to the fourth quarter of 2018. Our other segment, on the other hand, increased 2% versus the fourth quarter of 2018, mainly as a result of higher volumes sold in balance feed.For the full year, our sales totaled MXN61,658.6 million, 1% higher than the total sales reported for 2018. Regarding our cost of sales, efficiencies in live production and processing plants allow us to keep our total costs under control for both the quarter and the full year when compared to 2018.Our SG&A was MXN1,571.6 million for the quarter which is 10.4% of total sales, lower than compared to the MXN1,650.7 million and 10.7% of total sales for the fourth quarter of 2018.For the full year, we managed to keep our SG&A at 9.9% of total sales compared with 2018. This is a result of being very focused on capturing efficiencies across all our processes, particularly in our distribution network. We consider that being efficient is what allow us to be in better position for being competitive under uncertainties and volatility that comes along with our industry. The aforementioned condition allow us to reach an operating income of MXN242.1 million for the quarter and MXN3,922.8 million for the year, which compared to MXN489.6 million and MXN3,708 million for the same period of 2018 respectively.With that we reached an EBITDA of MXN571.5 million for the fourth quarter of 2019, a 3.8% margin, which compares to an EBITDA margin of 5.3% for the fourth quarter of 2018. As for the full year of 2019, we reported an EBITDA of MXN5,215.6 million at 8.5% margin versus an 8.2% margin of 2018.Our balance should remain strong as we reach a net cash level of MXN14,254.3 million, which enable us to continue supporting our growth plan. CapEx for 2019 was MXN2,025.1 million, an increase of 2.1% when compared to 2018, which reinforces our growth strategy commitment.Part of our strategy was the announcement we made at the end of the year increase -- we share the plan of investing in the company Sonora Agropecuaria, a swine processor and distributor here in Mexico. We consider that this vertical integration combined with our live swine operation will allow us to accelerate our rhythm of growth and to continue to move forward in the diversification process toward other animal proteins. We are working to fulfill compliance requirement by the Mexican authorities in order to move forward with the integration process and start to capitalize the benefits.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 fourth quarter 2019 net sales totaled MXN15,138 million, MXN283 million or 1.8% lower than the MXN18,421 million reported in the fourth quarter of 2018. This decrease was a result of lower prices in our main business lines and lower volumes sold in poultry.Regarding the full year of 2019, we reported net sales of MXN61,658.6 million, which is 1% higher than the net sales of 2018. In the quarter, sales of our U.S. operations represented a 27.9% of total sales, which compared to the 28.7% we reported in the same quarter of 2018. This was a result of our other sales in our Mexican operations. Cost of sales in the fourth quarter of 2019 was MXN13,171.4 million and MXN51,558.1 million for the full year. This represents a reduction of 0.8% for the quarter and an increase of 0.3% for the year.Gross profit for the quarter was MXN19,66.6 million and gross margin of 13%, which compares with a gross profit of MXN2,148.3 million and 13.9% margin reported in the fourth quarter of 2018. For the year, we reached a gross profit of MXN10,100 million with a margin of 16.4%. This amount compares to the MXN9,629.7 million and a 15.8% margin for 2018.Total SG&A for the fourth quarter of 2019 was MXN1,571.6 million, 4.8% lower than the MXN1,650.7 million reported in the fourth quarter of 2018. For the full year, SG&A totaled MXN6,094.4 million or 9.9% of total sales, compared to MXN6,024.4 million and 9.9% of total sales of 2018. This is a result of our efforts to continue being competitive and efficient. Operating income for the last quarter of 2019 totaled MXN242.1 million with an operating margin of 1.6% versus an operating income of MXN489.6 million with a margin of 3.2% reached in the same quarter of 2018. The operating income for 2019 was MXN3,922.8 million, an operating margin of 6.4% higher than the MXN3,708 million and a 6.1% margin reached in 2018.The EBITDA margin for the fourth quarter was 3.8%, compared to 5.3% reached in the fourth quarter of 2018. For the full year of 2019, EBITDA margin was 8.5% higher than the 8.2% reached in 2018.In the fourth quarter for 2019, we reported a net financial loss of MXN210 million, compared to a net financial income of MXN403.8 million in the fourth quarter of 2018. This decrease was mainly attributed to a lower exchange rate gains as the Mexican peso appreciated versus 2018. For the full year, our net financial income was MXN363.2 million versus the MXN808.6 million for the 2018 year.Our total taxes for the quarter were a credit of MXN128.8 million, compared to income taxes of MXN182 million for the same quarter of 2018. For the full year, our total taxes were MXN1,117.7 million, MXN33.3 million lower than the income taxes of 2018.All the above, led us a net income of MXN160.8 million for the quarter with a net margin of 1.1%. This income compares to a net income of MXN711.4 million, up 4.6% margin in the fourth quarter of 2018.For 2019, net income totaled MXN3,168.4 million with a net margin of 5.1%, which is lower than the net income of MXN3,361.6 million and a net margin of 5.5% of 2018. Net income per share was MXN0.26 for quarter and MXN5.26 for the year compared to an income per share of MXN1.18 and MXN5.58 for the same period of 2018, respectively.Going into our balance sheet. We kept a healthy financial structure with an increase in total assets of 5.5% when compared to 2018. Our net cash was MXN14,254.3 million at the end of the year, higher than our net cash level of MXN13,420.9 million at the beginning of the year. Our CapEx was MXN2,025.1 million as we keep investing projects to 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 remarks.

[Rodolfo Ramos:]

Thank you, Daniel. Entering 2020, we are still observing some pricing pressures as we observed in the fourth quarter of 2019 particularly in Mexico. We are working on efficiencies as well as improving our sales mix in order to offset some of those effects. In the U.S., we have seen important improvement in labor prices year-over-year, which is having a positive impact in the results of our U.S. operation. We continue monitoring uncertainties related to the commercial trading and African swine fever effects, which could potentially have an impact in our business.Regarding raw materials, prices for corn and soybean meal have shown a stable behavior so far. Nonetheless, we keep a close watch on the movement and continue with our discipline in our hedging strategy.We will continue to focus on -- in attending to our markets, keeping a healthy financial position and investing in CapEx above maintenance levels in order to grow and be close to our customers.With that, we will now take your questions.

[Operator:]

Thank you. [Operator Instructions] And the first question comes from Miguel Tortolero from GBM.

[Miguel Tortolero:]

Hi. Good morning, Rodolfo, Daniel and Guadalupe. Thanks a lot for questions. I got a couple. The first one is regarding the U.S. You mentioned on your press that you started to see some price recovery by the end of the quarter. So could you elaborate further on this? And, in general, the present price dynamics that you're seeing in this market.And the second one is regarding Mexico. Given that the results also are a bit complicated to follow chicken prices due to the live chicken component; could you give us some color on how you're seeing prices behaving at the start of this year? Is it fair to assume that the weakness in – at the end of 2019 has remained during January? Thank you.

[Rodolfo Ramos:]

Well, thank you, Miguel. And the second question about the Mexican market. January, we observed the same trend at the last part of the year. But at the end of the month and the first week of February, we are seeing an improvement in the prices. So we expect that we are going to have a better month of February. And we are getting to the second quarter, which normally is the best quarter of the year. And I think we are going to arrive in a good position.And the U.S. market, the price increase was mainly in the leg quarters and wings, wings because of the Super Bowl. And leg quarters because of the China list ban to export to China. So prices in leg quarters are better than a year ago. Breast meat is -- boneless breast meat is a tough. The price right now is lower than a year ago. But we are going to start in the time -- with the seasonality, we normally see prices increase in boneless breast.

[Miguel Tortolero:]

Perfect. That’s great. Very clear. Thank you very much.

[Rodolfo Ramos:]

Thank you, Miguel.

[Operator:]

Our next question comes from Héctor Maya from Santander.

[Héctor Maya:]

Hi. Thanks for taking the questions. The first one would be regarding Mexico. Where is this poultry oversupply you mentioned here in Mexico coming from? Is it from imports from the U.S.? If you help me understand that, it would be great. That would be the first question.And second question is, I understand that volumes in the U.S. fell 2%. And you mentioned that leg quarters and wings had improvements in price. So just help me understand how the entire or the average price that you had in the U.S. was also presenting price improvements? Because I'm not seeing it that way. If you could help me understand that, I would also appreciate that.

[Rodolfo Ramos:]

Sure. About Mexico, Mexico is mainly oversupply of the domestic production and mainly in the live segment of the market. As you know, the Mexican market, 37% of the market is live chicken. So it's -- we saw an oversupply in that particular business line. So it's domestic, the oversupply.On the other hand, in the U.S., the commodity side of the industry it's -- mainly leg quarters are having that price recovery. But our company there depends mainly in the food service sector, which has more stable prices all the year round. So in terms of pricing, I think, that the -- we're going to start in the commodity side to see the recovery of the boneless breast as normally occurs in the first quarter of the year and the rest of our mix is going to be stable because of our structure of pricing.

[Héctor Maya:]

So, if I'm understanding correctly, pricing like seeing entirely in the U.S., as an average price all of the U.S. was affected by food service, pricing in food service? The mix was bad there?

[Rodolfo Ramos:]

No not for the industry. That's our mix – our company mix. We don't depend in a high percentage in the commodity side because we are more oriented to the food service business or segment of the market. But the commodity, the large part of this – the fourth quarter in particular the commodity prices were very, very depressed or low.So right now we saw a recovery in leg quarters and wings. And breast meat still – commodity boneless breast meat is still very low. And our sales in the United States were a little bit lower in terms of pesos because the appreciation of the peso against the U.S. dollar. That's the main cause and we were short in terms of total sales.

[Héctor Maya:]

So what was the overall pricing in U.S. dollar terms for your entire portfolio in the U.S.? Was the pricing in dollar terms for that in the U.S. down overall?

[Rodolfo Ramos:]

Yes. And compare the quarter-by-quarter yes, because leg quarters were a little bit lower than the fourth quarter of 2018 and even boneless breast meat. Both of them were cheaper in the fourth quarter of 2019 compared with the fourth quarter of 2019. But at the end of the quarter and beginning of this – the first quarter of 2020, we are seeing an improvement in leg quarters and wings.And we are still below a year ago in boneless breast meat and we are expecting to start seeing an improvement in that particular product because of the seasonality of this product.

[Héctor Maya:]

Got it. And do you think price and volume trends in the U.S. reflect industry trends? Or are you losing or gaining share? How is that?

[Rodolfo Ramos:]

About pricing or market share? What do you mean with that?

[Héctor Maya:]

Yes I mean with these comments are you losing or gaining market share in the U.S.?

[Rodolfo Ramos:]

Well, because our growth was negative, we lose some market share because the industry grew around 3%, which is a little bit higher than normal.

[Daniel Salazar:]

But on the other hand Hector, we are very confident that in this year 2020, we can recover this year because we are growing in our contracts that we are now closing with our customer. We have seen an important increase in volume. So we are very confident to be capable to recover that volume for this year.

[Héctor Maya:]

Right. So just to wrap up this part is so if I understood this correctly, prices in the U.S. sales for you and the entire portfolio you lose – you lost share but you are planning on recovering it right?

[Daniel Salazar:]

That's correct.

[Héctor Maya:]

You lost market share and prices for you in the U.S. fell?

[Rodolfo Ramos:]

For the fourth quarter, yes.

[Daniel Salazar:]

For the fourth quarter yes. But for this year we have seen as Rodolfo mentioned a recovery in the whole price mix because the leg quarters represents an important part of our portfolio. So with this increase in leg quarters and wings in spite of that the breast meat remains stable, the overall price is increasing compared with the fourth quarter right now.

[Rodolfo Ramos:]

And the other important thing is because we're mixed in our operation in other deals we are buyers of commodity products. So right now we are -- we have a very good position to acquire lower prices and boneless breast meat because we are net buyers of that product. So right now we are having a good time in that facility.

[Daniel Ferrer:]

Yes. We are buying breast meat at good prices and selling leg quarters and commodity products in a good price. So in the mix we are improving.

[Héctor Maya:]

Got it. And sorry to take so much time, but just one more sorry.

[Daniel Ferrer:]

Not at all…

[Héctor Maya:]

Talking about capital deployment, what would you prefer to increase investments to integrate forward in Mexico towards more value-added products or acquisitions in the U.S. what are the main criteria for the acquisitions you are looking for in general terms? Would you be considering increasing dividends between finding the suitable acquisitions in this term?

[Daniel Ferrer:]

Well right now we're -- first our priority is to continue growing organically. Because it's -- we have -- with the former acquisition of -- or investment in Sonora Agropecuaria, our CapEx will increase above our normal investment that we have had in the last year. So it means that probably with this plant we will increase our CapEx around MXN 25 million above the MXN 110 million CapEx that we have had in the last years.So – secondly, we want to complete -- try to complete M&A opportunities that we are pursuing and of course we have a big space to continue looking for opportunities not only in Mexico, but also in the United States and also in Latin America. Even that we haven't concrete acquisition in these years we are actively looking for opportunities in those markets.

[Héctor Maya:]

Got it. And the very last one deceleration in Mexican consumption 2019 versus 2020 how are you seeing that?

[Rodolfo Ramos:]

Well the per capita consumption is still growing. The industry this year it's going to expand around 2%, 3% -- 2%. So the per capita consumption is going to be better. And right now because of the African swine fever, let's say prices of other meats are very expensive.So chicken is the best option. So we are going to see an increase in per capita consumption here in Mexico. And in the United States the per capita consumption has been going up too in 2018 and 2019.

[Héctor Maya:]

Right, perfect. Thank you very much. Thanks.

[Rodolfo Ramos:]

Thank you, Héctor.

[Operator:]

Our next question comes from Ulises Argote from JPMorgan.

[Ulises Argote:]

Hi guys. Good morning. Thank you for taking my questions. Just a follow-up there on the Mexico business, but I was wondering if you can help us understand a bit better what is driving this improvement you mentioned now in late January and early February.In terms of prices of Mexico, can you give us a bit more color on what's changing on the landscape or on the scenario versus what you were seeing late last year that is making you more optimistic for the price trends now in February, and especially going into the second quarter which typically is better?And the second one there, can you give us a bit more clarity on what's behind the onetime write-off there on the intangible that you're reporting on the other expenses? Thank you.

[Rodolfo Ramos:]

Okay. Okay. I'm going to answer the first question and Daniel then the second one. We are seeing an improvement in prices and the prices here in Mexico because of live chicken is the main market channel, it's supply and demand. So right now, we are seeing a more balanced supply compared to the demand.Normally the industry because of the – that kind of commodity plays more chickens for December, because normally December used to be a very good month. So this month, I think we had another supply at the end of the year. And right now, we are seeing a better balance between supply and demand. That's the main drive of the market prices.

[Daniel Salazar:]

Okay. Now talking about the write-off that we disclosed for our intangible asset, what I can tell you Ulises this came from our last acquisition of Albertville Quality Foods. When we acquired that company we recognized in that moment two different intangible assets. A goodwill derived from the price and a customer – and an intangible from customer contracts. We're a very conservative company in that regard. We never in our history recognized intangible for that concept even that we have a significant contract with our customer. But this was – caused because when we acquired the company they actually have recognized that intangible. And the write-off comes from two customers – two particular customers that we have no longer contracts with them even that we have a new contract with other customers and overall we are increasing our sales from that operation, but we are recognizing this write-off only for the customers that will stop to continue signing contract with them.

[Ulises Argote:]

Okay. Perfect. That is very clear. And just one quick follow-up on the first question there on the – let's say the more normalized price trends on the live chicken channel or maybe the kind of balance there on supply demand. But can you kind of help us understand because previously the data that we saw let's say on the components of the CPI or on the data that was reported by the economics ministry typically was closer let's say or was a better way to track kind of the overall price for Mexico and in this quarter we saw that big disconnect. And also, what changed this quarter versus previous quarters that we kind of saw that big gap in your reported prices and what we had been seeing in the market?

[Daniel Salazar:]

Well, the problem is that there is no public information that you can follow in order to see the trend in the live public market. It's a problem for everybody to follow. We follow the market through our sales people because they are in touch with our customers. So through them we realize – is going – is behaving in terms of pricing, but we don't have official or public information to follow the market.

[Rodolfo Ramos:]

And on the other hand, previously you cannot – they cannot – they don't have the ability to track the live prices in the different areas of Mexico. So sometimes the price and their reporting is a different mix. So when the live market drops like at the end of the fourth quarter, so there is a kind of disconnect or seems to be a disconnect, because it's actually tracking the overall price in the whole country. And the live market is very important and is located mostly in the south part of the country.

[Ulises Argote:]

Okay. Yeah. Perfect. That makes sense. Thank you very much guys.

[Rodolfo Ramos:]

Thank you.

[Daniel Salazar:]

Thank you, Ulises.

[Operator:]

We have no further questions at this time. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.