Industrias Bachoco, S.A.B. de C.V.
Q2 2017 Earnings Call Transcript

Published: 29 Jul 2017

[Operator:]

Welcome to the second quarter 2017 Industrias Bachoco earnings conference call. My name is Hilda and I will be your operator for today's call. [Operator Instructions] Ms. Guadalupe Jaquez will begin the conference today. Ms. Jaquez, you may begin your conference.

[Guadalupe Jaquez:]

Thank you, and good morning, everyone. Welcome to Bachoco's second quarter 2017 conference call. We released our financials yesterday after the market closed. If you need a copy of the release, please see our website or request it from our investor relations department. Before we continue, I will read the cautionary statement regarding forward-looking statements. This morning's call contains certain information that could be considered forward-looking statements regarding anticipated future 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 of 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 statement, whether as a result of new information, future events or otherwise. Lastly, unless otherwise indicated, the amounts mentioned in this conference call will be figures of 2017 with comparisons to years for the same period of 2016 in Mexican pesos. As a reference, the exchange rate as of June 30, 2017 was MXN18.14 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. The second quarter began in accordance with the usual seasonal [Indiscernible] of the poultry industry as it is typically determined over the years. In Mexico, given that we continue with relatively high retention rates, the economy continued growing. During the quarter, the Mexican peso depreciated 2.7% when compared to the equivalent period of 2016. When compared to the end of the second quarter of 2017 versus the end of 2016, the Mexican peso strengthened versus US dollars continued appreciating around 12%. The poultry industry conditions were very similar in the market we participate in Mexico and the US. We continued observing good [Indiscernible] of the main portfolio products in all the commercial [Indiscernible] in which we compete. There was balance between supply and demand as we estimate and wrote around 2% to 3% in the next [Indiscernible] and [Indiscernible] around 1% to 2% in the U.S. industry. According to the information reported by USDA, chicken poised in the U.S. poultry industry grew at the level of 2% to 3% in the quarter. [Indiscernible] that's observed by our markets we didn't see neither over supply conditions or high inventories in the industry in general. We observed and discovering chicken prices in both markets, compared with the equivalent period of 2016. We continued the table egg industry, recently observing over supply conditions. According to the USDA imports of chicken from the United States into Mexico are not increasing and we don't see [indiscernible] imports increasing either. In regard to our company, we increased our sales volumes across most of our main product line. These volumes and price recoveries allow us to increase our total sales for the quarter by 13.1% when compared to the first quarter of 2016. We also want to mention the performance of our U.S. operations. We increased our total sales in U.S. dollar terms and continued delivering solid positive results as we are reducing our exposure to commodity markets. The conditions mentioned before and keeping our SG&A under 10% of our total sales had allowed us to reach an EBITDA of 2,596.8 million in the quarter. This represents an increase of 11.5% versus the EBITDA reported in the same period of 2016. The largest amount to upward in our history. Our EBITDA margin was 17.2%, which is very close to the 17.4% we reached in the second quarter of 2016. We continue working towards our financial growth both organically and to business regimens. In July, we announced the acquisition of La Perla, a pet food company located in the state of Queretaro in Mexico. This is a strategic step. I think that will allow us to bigger divide our sales mix with increasing significantly our pet food capacity. Also, on July 17, we announced the acquisition of Albertville Quality Foods, a further process company located in Alabama. With this acquisition, we will continue entering into the further processed products segment, while continuing to diversify from the commodity markets. Our balance sheet continues to be strong, which will enable us to continue supporting our new plant. 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 took second quarter net sales increased 17.1% in the quarter as compared with 2016. This increase in terms of more volume sold and larger covering our main product lines during the quarter. This led us to an increase in sales of 14.2% for the first half of the year and as compared with the same period of 2016. In the quarter, sales of our U.S. operations represented a 24.7% of total sales, an increase from the 24.3% we reported in the equivalent quarter of 2016. The cost of sales in the second quarter was 11,502.1 million and 22,995.4 million for the first half of the year. This represents an increase of 14.1% for the quarter and 14.5% for the year. These are the results of increases in volumes sold and higher raw material costs in Mexican peso terms. From this increase about 8.9% was due to the consolidation of our U.S. operation from dollars to Mexican pesos and about 4% due to volume growth. The remaining was due to a higher billing cost in peso terms, due in part to the depreciation of the Mexican peso and as we move away from commodities in our U.S. operations. Gross profit for the quarter was 3,614.2 million with a gross margin of 23.9%, an increase of 10.1% over the gross profit reported in the second quarter of 2016. For the first half of the year, we reached a gross profit of $5,805.8 million, with a margin of 20.2%. This amount is 17.6% higher than the gross profit reached in the first half of 2016. Total SG&A for the second quarter of 2017 was $1,297.6 million and $2,558.6 million for the first half of the year, representing an increase of 9.5% and 10.9% when compared to the same period of the previous year respectively. We will be working to keep these expenses the same level as the percentage of the total [indiscernible]. Income for the second quarter of 2017 totaled $2,330 million, an operating margin of 15.4%, slightly lower than the 15.7% margin reported, reaching the second quarter of 2016. The operating income for the first semester of 2017 was $3,259.8 million, an operating margin of 11.3%, slightly higher than the operating margin of 11.1% reached in the same period of 2016. The margin for the second quarter was 17.2%, very close to the EBITDA margin of the second quarter of 2016. For the first half of the year, the EBITDA margin was 17.2%, an improvement when compared with the 12.9% [indiscernible] in the same period of 2016. In the second quarter of 2017, the net financial income was $96.8 million and $27 million in the first half of the year, both lower than those for the same period of 2016. Those decreases are mainly attributed to lower exchange rate gains as the Mexican peso recovered versus the US dollar. Our total taxes were $703.9 million for the quarter, slightly lower when compared to the total taxes reported in the same period of 2016. For the first half of 2017, our income taxes were $911.2 million, which is lower than the income taxes for the same period 2016. All of the above led us to a net income of $1,722.8 million for the quarter, with a net margin of 11.4%. This income is 9% higher than the net income reached in the second quarter of 2016. For the first half of 2017, the net income totaled $2,375.7 million with a net margin of 8.2%. The net income per share was 2.87 pesos for the quarter and 3.96 pesos in the first half of 2017. Going into our balance sheet, we keep a healthy financial structure with an increase in total assets of 3.3% when compared to the year-end of 2016. Our net cash was $13,056.3 million at the end of the quarter. Our CapEx was $1,092.9 million, similar to the previous year and just mainly supporting our organic growth and maintain our facilities at high levels of productivity. Thank you and I will return the call back to Rodolfo for final comments.

[Rodolfo Ramos:]

Thank you, Daniel. We are satisfied with the growth achieved in the quarter. We are entering the third quarter of the year, which is historically the weakest quarter of the year. We expect the main raw materials to be [indiscernible] in productivity, but then remember it will determine the costs in the United States and Mexico. We have been following closely to make the proper decisions. We expect the poultry industry to continue to get that normalized growth late in both markets in which we participate. We expect to continue with our CapEx above maintenance level while keeping an eye on the Mexican micro economy generally. We will work to integrate quickly our two recent acquisitions in our normal operations and begin to capitalize the benefits from them. We will continue focusing on both things we can control and managing the other one as best as we can, depending on the market condition in our industries. With that, we will now take your questions.

[Operator:]

[Operator Instructions] And your first question will come from Pedro Leduc from JP Morgan.

[Pedro Leduc:]

Two quick ones from me. Starting in Mexico we saw that where overall COGS are still humming, pressured by higher grain costs this second quarter, now as we understand, Mexico's corn harvest has ended. And so looking to understand from you how you're purchasing this, how are COGS per kilo for this upcoming harvest different, if at all, from the one that you were consuming in the first half of the year? Really just trying to understand this if thanks the harvest the COGS will be a lesser pressure in the second half of the year.

[Rodolfo Ramos:]

The price of the corn for the second quarter is more or less in line with the first quarter because the harvest here in Mexico starts at the end of the quarter. So the impact is going to be in the third and fourth quarters. More than it is the prices than we acquired the harvest here in Mexico for a little bit cheaper than it takes with the program of [Indiscernible] contractor than we use here in order to acquire the grain that we need in terms of our operations. So we are expecting not very relativity in the corn price for the Mexican operations than depends with the domestic grain.

[Pedro Leduc:]

Okay, understood. So slightly better than for the second half. And the lines are maybe should be as bad, so you guys maybe stay closer in this [Indiscernible] or it's just my line. I'll go back in line for a follow up. Thank you.

[Operator:]

The next question comes from Pablo Carrillo from [Indiscernible].

[Unidentified Analyst:]

I have three questions. If you could give us maybe a little bit more color on what you're expecting the operating margins are going to be in facing 2018. Also, if you have any information regarding the sale of assets in the UK and the JNS Brazil. And also maybe if you could provide a little most information and color on the synergies of the recent acquisitions.

[Daniel Ferrer:]

On your first question, it is difficult to predict the margin for the next year, but we expect probably slightly more pressure in terms of the production type. So with the impact, the margins for the next year probably would be lower than the one that we are expecting for this year.

[Rodolfo Ramos:]

It's probably accurate to say that probably no more than 1 percentage point below the margins that we are expecting for the year. Regarding your second question, well it's too early to predict the final synergies that we can get from our acquisitions, but, oh this is the third part. Can you take the second one?

[Pablo Carrillo:]

Yes, the second was the sale of assets, the UK and the JNS in Brazil. Thank you.

[Daniel Salazar:]

We are now focused on the Americas. We are not interested in acquiring assets in Brazil, neither in UK. So we are very focused in expanding our operations in Mexico and the U.S. And probably second priority in Latin America.

[Pablo Carrillo:]

And my third question was if you expect any synergies from the?

[Rodolfo Ramos:]

As I mentioned before, it's early to predict the total synergies that we can get, but of course there is in the case of Albertville Quality Foods, there are significant synergies because there are not [indiscernible] markets some products between the [indiscernible] foods market and other big quality foods. In that regard, we expect to consolidate the business in the very short term, probably less than a year. And with this, we do try to increase our margins in our U.S. operation. And also we expect to have some synergies coming from the [indiscernible] as well. In the case of La Perla, the most important synergy is increasing it in the capacity because with this acquisition we practically doubled the capacity that we already had in our pet foods core operation. Remember that this company was in kind of chapter 11 in [indiscernible]. So that means that the company, it's actually without any production. So we will start very quickly, probably in the next month we will start with the production. And we expect to double our current production in less than two years.

[Operator:]

We'll go to the next question. It's from Miguel Tortolero from GBM.

[Miguel Tortolero:]

Congrats on the results. I have two questions. The first one is regarding volumes in the U.S. We saw a 15% top line increase in the region, but we also know that chicken prices are growing double digit in the U.S. Could you give us any color of volumes during the quarter and whether you see them for the remainder of 2017? And the second one is on the US as well on the recent acquisition. You mentioned that you should probably start consolidating within a year. Should we assume that by the end of the year we will start seeing the numbers of the recent acquisition? And also, could you give us any color of where do you see margins for the Albertville acquisition?

[Rodolfo Ramos:]

Could you repeat the first question please?

[Miguel Tortolero:]

The first question is you're adding volumes in the US. I mean we saw a 15% increase in top line, but we also know that chicken prices have been growing double digit. So just a bit of color of the volumes in the US.

[Rodolfo Ramos:]

Well remember that in our newest operation we absolutely [indiscernible] our volumes due to the change of mix that we decided to perform in our [indiscernible] operation. So that's the reason we expect to pass into this year [indiscernible] growth [indiscernible] and 5% in terms of volume. But we will continue consolidating this strategy in order to resume our overall strategy, trying to grow above the [indiscernible]. Taking your second question, providing the outlook of the operation, we expect to have margins something in the range from 20% to 25% EBITDA margin. This is our goal once we, sorry. I'm talking about the amount. Something between $20 million to $25 million. That's probably a percent around 7% to 8% of the EBITDA margin.

[Miguel Tortolero:]

Just to make sure I didn't get it wrong, you said 17% to 18% of EBITDA margin in the Albertville business?

[Rodolfo Ramos:]

7% to 8%.

[Miguel Tortolero:]

Okay. Thank you.

[Operator:]

Our next question comes from Pedro Leduc from JP Morgan.

[Pedro Leduc:]

A follow-up, thank you. On the Alabama operating margins you just mentioned 7% to 8% EBITDA. Is that why you believe the consolidated ones will be lower for next year or is it then ongoing business which you think will be on [indiscernible]? That's just a quick follow-up on that, verification. And then the second question was really if you can comment on how the other businesses are faring in Mexico pet food that you saw investing a lot. And then also how you are foreseeing organic CapEx for the remainder of the year where you were targeted?

[Rodolfo Ramos:]

We think that we will take probably two years to reach this level of margins in the Alabama operation. And in your second question, we expect to continue having levels above $100 million per year in order to continue maintaining our activities in good shape and alleviating some bottlenecks in some part of our integration in Mexican operations.

[Operator:]

Our next question comes from Alvaro Estrada from Citibank.

[Alvaro Estrada:]

Just a follow up in Albertville, you mentioned that they have sales of up to $100 million per year. What kind of growth are you expecting for this company? And also, if you can tell us if sales are relatively stable through the year or do they have some seasonality? And the same I could ask for the margins. Thank you.

[Daniel Salazar:]

The market that this company has is very stable, that it's very focused on the full service. And we expect to increase this level of pace around 3% to 4% in the coming years.

[Operator:]

[Operator Instructions] The next question comes from Guadalupe Diaz from Credit Suisse.

[Guadalupe Diaz:]

I was also wondering about the margin because since you're acquiring a company that generates added value, I would have imagined that the margins were higher and since we are seeing a higher price in chicken prices. So that was also my question. And really my question is what kind of margins are you foreseeing in the long term for these kind of companies that generate this added value. And if you're expecting to raise the percentage of EBITDA margin that you have currently?

[Daniel Salazar:]

Actually the margins in the Alabama operation that we expect are higher than the ones that we have in the foods facilities. At least we expect to increase it two percentage points above what we already have.

[Guadalupe Diaz:]

So if you're having 7% to 8% EBITDA margin, you expect it to increase it to around 10% EBITDA margin levels?

[Daniel Salazar:]

That's right. In the long run, that's right.

[Rodolfo Ramos:]

The synergies that we are seeing and just our operation in [Indiscernible] foods and [Indiscernible]

[Guadalupe Diaz:]

That's very helpful. Thank you.

[Operator:]

There are no further questions at this time. I will turn the call back to Mr. Rodolfo Ramos.

[Rodolfo Ramos:]

Thank you, everyone, for joining us this morning. If you have any further questions, please contact our investor relation area and we'll be glad to assist you with your questions. Thank you.

[Operator:]

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