Industrias Bachoco, S.A.B. de C.V.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Welcome to the Fourth Quarter and Full year 2014 Industrias Bachoco Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Rodolfo Ramos, Chief Executive Officer. Mr. Ramos, you may begin.

[Rodolfo Ramos:]

Good morning, everyone, and thank you for joining Industrias Bachoco fourth and full 2014 year earnings call. Our financial results were released yesterday after the market closed, and if you need a copy of the release please visit our website or request from our Investor Relation Department. Before we continue, I will ask Daniel Salazar, our CFO, to read the cautionary statement regarding forward-looking statements.

[Daniel Salazar:]

Thank you, Rodolfo, and good morning, everyone. This morning call contains certain information that could not be considered forward-looking statements concerning anticipated future events and performance. These statement reflect management's current belief based on information currently available, and are not guarantees of future performance and based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our annual report in 20-F, which could make our current results differ materially from the forward-looking statements discussed in this call. Except as required by the applicable law, Industrias Bachoco undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future event or otherwise. Lastly, unless otherwise indicated, the amounts mentioned in this conference will be figures of 2014 with comparative figures for the same period of 2015 in Mexican pesos. As a reference, the exchange right of December 31, 2014 was 14.71 pesos per U.S. dollar. Now I will turn the call back to Rodolfo.

[Rodolfo Ramos:]

Thanks, Daniel. The fourth quarter of 2014 which ended very well the average condition were present during the whole year in the market in which we participate. In Mexican industry, a balance between supply and demand was present for the quarter with strong demand between the holiday seasons. According to estimate we have, it is expected that chicken industry grew 3% and the egg industry about 3.5% in 2014 which we consider a normal growth rate. In the U.S. market in which we participate, we experience similar condition for the whole year, but the fourth quarter was particularly strong. If we take the Georgia dock as a reference in the U.S., prices of boneless skinless breasts as well as whole chicken prices were about prices of 2013 most of the year while prices for like quarter on the average were similar. It is estimated that the 1.7% growth in 2014 in the chicken industry in United States. It is worth noting but our balanced food business as well as our [indiscernible] value added products showed volume growth during 2014. In particular, our pet food products after a year of operation of our own feed mill are grown in line with our projected plan. Talking about our production cost, after very good crops in Mexico and in United States, which represent lower prices of our main raw material, we were able to further reduce our unit cost in most of our main business line. At the end of the quarter, we saw futures of corn around $3.5 to $4 per bushel and around $350 to $400 per short ton in the case of soybean meal. Both of them below 2013 year-end prices. Condition described before along with the continuous effort to improving productivity on every day to improve the standards of service to our customers allow us to reach at EBITDA of $1,630 million in the quarter, nearly three times the EBITDA we reported in the same quarter of 2013. Earnings per share totaled $1.77, $21.2 per ADR. Regarding fiscal 2014, we have reached historical sales and EBITDA in particular we saw an historical amount of chicken volume in our Mexican operations. Net sales grew 5.2% for the year with an EBITDA margin of 14.9% and an earnings per share of $6.56 or $78.72 per ADR. In particular, the annual result of our U.S. operation was up. We reached historical levels of EBITDA even when see this operation in good shape we consider it we can get even better results, so we are working on that. Our financial results pattern has strengthened our balance sheet, a condition that will enable us to support our growth plan at the same time the company remain as a leader of poultry industry in Mexico and an important place worldwide with a solid and trusted brand. Our capital expenditure in 2014 increased to $1,212.7 million with project mainly allocated to alleviating some bottlenecks in our processes as well as productivity improvement. We expect to keep that level of CapEx for the next couple of years. The company's shares and ADRs had a positive performance in 2014 with profitability above the markets in which we participate. This had a consequence of the positive result we post and the confidence the investor community has placed in our company. We finished the year with a team of more than 24,800 people that work hard to reach efficiencies across all of our processes and get even closer to our customers. The nature of this industry is volatile and demand high level of commitment. We will continue working to capture the opportunities we have for the upcoming year. 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 again. Our financial performance during the fourth quarter and full year of 2014 showed in general improvements when compared to the same period of 2013[sic] as a result of favorable condition that Rodolfo just mentioned. The company's net sales totaled at $10,899.3 million in the quarter, 11.9% above the $9,738.3 million reported in 2013 as a result of an increase in the total volume sold as well as increases in prices in both of our markets. Net sales in 2014[sic] were $41,766.5 million pesos, an increase of 5.2% when compared with 2013 mainly due to increases in volume sold in our Mexican operation and better prices in our main business line. As Rodolfo mentioned before, we reached historical chicken volumes sold in Mexico. In 2014, sales of our U.S. operation represented 20.1% of net sales. Cost of sales totaled $32,520.4 million for the year, 2% lower than $33,176.6 million reported in 2013. The decrease in cost of sales is mainly attributed to a reduction in the unit cost of sales partially compensated by an increase in total volume sold. The reduction in unit cost was a consequence of a decline in the cost of our main raw materials as well as productivity improvement. For the year 2014, total SG&A were $3,775.2 million. That represented a 9% of our total sales, a 14.7% increase when compared with the previous year. The increase in SG&A was a consequence of increases in the volume sold and additional expenses due to projects that we put in place to further improve our service and flexibility to customers. Some of the improvements shown in net sales, cost and in the operating result are a consequence of this project. Furthermore, we should be capturing more of these benefits in upcoming years. EBITDA in the quarter totaled at $1,630 million or 15% in margin, and for the whole year we made $6,223.2 million with 14.9% of margin. As Rodolfo mentioned, it was an historical amount of EBITDA for the company. Net financial income for 2014 totaled $232.2 million compared with income of $118.4 million in 2013 due to our strong position in cash and high investment levels of most part of the year. Talking about income taxes, our main subsidiary is subject to a simplified regime with 30% of income tax rate, a higher rate when compared with the 21% income tax rate that was as of December 31, 2013. Deferred total taxes were $1,650 million in 2014, a 23.1% increase over 2013 resulting from a higher income tax rate and better financial results. For the quarter, the company recorded a net income of $1,076.2 million representing earnings per share of $1.77. Net income in 2014 totaled at $3,939.9 million, a 9.4% of net margin and nearly twice the $2,041.8 million of net income in 2015. Going into our balance sheet, we get a healthy financial structure with an increase in total assets of $6,020.8 million when compared to the year end of 2013. It is mainly attributed to increases in the cash and cash equivalent of $4,231 million. Our total liabilities increased by $1,786.8 million mainly due to an increase in accounts payable at the end of the year. Our cash equivalent totaled at $11,952 million with net cash of $9,501.5 million as of the year end of 2014. In 2014, we spent $1,212.7 million capital expenditure above the $575.4 million expenditure in 2013. Our derivatives position is healthy, in particular, talking about exchange rate derivatives we have now in position at the end of the year. Thank you. And I turn the call back to Rodolfo for final comments.

[Rodolfo Ramos:]

Thanks, Daniel. Now, looking forward, we expect the Mexican economy to grow. According to analysts, it is expected to grow between 2% to 3% in 2015. After the record crops reported in the U.S. and Mexico in 2014, we expect less volatile pricing in corn and soybean meal. According with current trends in hatching eggs produced, we expect a disciplined growth in the poultry industry in Mexico and in U.S. for the first half of the year, but probably we will see higher growth rate in the second half of the year. We will continue our old plan keeping our CapEx between $130 million and $150 million for 2015. We will be monitoring our SG&A to keep them under control by taking advantage of our information technology assets, while we obtain the benefit of the project we implemented in 2014. We experienced volatility in the Mexican exchange rate at the end of the year around the manageable [indiscernible] year-over-year. In our perception, we expect to see an exchange rate in the same level in short term , following high strength for the year. We will continue with our growth plan, focus on those things we can confront and control, manage the older one, our debts has retained depending on the market condition in our existence. With that, we will now take your questions. Thank you.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Miguel Mayorga from GBM.

[Miguel Mayorga:]

Hello, Rodolfo and Daniel. Congratulations for the strong results. I have two questions. The first is related to the related to the profitability of the business. We have seen two consecutive years of double-digit margins; this year close to the levels of 15%, while chicken prices as far as I know remains strong year-to-date. My question then would be, which level of margin should we be expecting to be sustainable, and given your view on chicken prices as well as on corn prices? And the second question is related -- could you give us some color regarding your M&A pipeline or about your plans for your net cash position? Thank you and congratulations again.

[Rodolfo Ramos:]

Thank you, Miguel. The first question is, we are expecting a first half of the year with performance more or less similar to the 2014. But in the second half of the year we are expecting more normalized EBITDA, which is around 7% to 10% margin. So we are expecting a strong first half and normalized second half. And that's going to affect the prices in second half but with the cost of the raw materials where we expect is stable prices for the whole year we are expecting normal results for the end of the year. And the second question is about the M&A. We are going to continue to see closely opportunities in South America and Latin America in general and in the U.S. But at this time, with strong results of most of the poultry companies it's -- I think it's not a good moment for buyers, it's more a moment for sellers. And - but we are going to keep we’re looking closely for any opportunity. And in terms of growth, our main strategy right now is to expand the operation organically, mainly in our core business, which is poultry and eggs. And we are looking for some opportunities in other croppings like swine and beef. I don't know if it answered your question, Miguel.

[Miguel Mayorga:]

Yes. Thank you, Rodolfo.

[Rodolfo Ramos:]

Okay. Go ahead.

[Operator:]

The next question comes from Pedro Leduc from JPMorgan.

[Pedro Leduc:]

Hello, everyone, thank you for taking the question and also congratulations on the results. And the question would be also on the same direction. First, I would like to hear from you what is sustaining that the poultry places in Mexico high as they are in January this seem to be rising one again in line with what you mentioned there, but should be a good first half of the year. And then the second part of the question is how much are you planning in terms of volume grow for Mexico poultry in 2015, and if there is another round of potential factory efficiencies to help you profitability like it did now in the end of this year? Thank you.

[Rodolfo Ramos:]

The first question was about the prices. There is some stability of prices largely because the prices of the other cropping like swine and beef. This is still getting higher and higher and more expensive and the problem is there's no availability of beef. So it's the main -- the best alternative is chicken. Even when the growth of the GDP of the country was below the expectation at the beginning of the year, poultry was the best option and the industry growth in a normal rate even with a lower GDP. So for this year, we expect that the first half of the year it’s going to be remain the same situation mainly because the production of fertile eggs or hatching eggs is stable and we are not seeing an increase in the chicken production. This is the first question. The second one is about the efficiencies. During the '14, we implement some projects; I can say three main projects. First, unique business, second, supply chain project and go-to market project. Those projects allow us to capture some efficiencies in our operations, and because of that we can service better our customers and we have more flexibly to obtain them. I think this is going to -- we have some improvements to capture for 2015 because at the end of the year we implemented in some areas of the country. So we are expecting to capture those benefits in 2015.

[Operator:]

Our next question comes from Mauricio Martinez from GBM.

[Mauricio Martinez:]

Hi, good morning, everyone. Congratulations on the results and again thank you for taking the question. I would like to ask if you can share with us your expectations and corn prices for the year if you expect price increases or not. And also if you have -- if you expect to increase your dividend payment for the year with all these cash you have right now, so that will be my two questions.

[Rodolfo Ramos:]

About our main raw material market which is corn and soybean, it is very difficult to forecast about commodities, but we expect corn futures about $3.50 to $4 per bushel and soybean on $350 and $400 per short ton. Of course, it will depend on several facts

[Daniel Salazar:]

Well, currently, we don't have certainty about cost where is the amount of the shareholders meeting these thinking on, but of course there would be a dividend payment. It is difficult to say how much we haven’t seen yet.

[Operator:]

The next question comes Brett Hundley from BB&T Capital Markets.

[Brett Hundley:]

Thank you. Good morning, gentlemen, I appreciate your taking my questions and allow me to congratulate you on a very strong year as well. My first question there is evidence that we’ve seen industry players across North America have been setting pullets in the United States and then sending hatching eggs to Mexico just given that there has still been some bird flu in certain operation there, and we’ve noticed hatching egg exports to Mexico pick-up in recent months from the United States. I’m just curious if you guys have a read on this and if you expect this activity to continue.

[Rodolfo Ramos:]

Yes, last year when we had the outbreak of Avian influenza we tried to import eggs from the States. We acquired an operation in Arkansas and another one in Georgia to supply our fertile eggs out of the States. We did that because we wanted to dilute the risk of having all our breeders here in Mexico. So, right now, we have around one-third of our production of fertile eggs out of the States. But you see the imports of fertile eggs to Mexico mainly are mature eggs. And other companies are importing eggs to cover the shortage of fertile eggs. But that is to supply the domestic production and was affected was reduced because of the outbreak of the 2013 mainly.

[Brett Hundley:]

Okay. And so does Bachoco expect to continue that practice during 2015?

[Rodolfo Ramos:]

Yes, yes because we had acquired the operation of Arkansas and we are just acquiring some other -- from other suppliers in the contract supplier of fertile eggs. So, 2015 we are going to continue to import fertile eggs from the state.

[Daniel Salazar:]

I think not necessarily means that there will be another supply. It means there is a shift in the supply process.

[Rodolfo Ramos:]

Right now, we have our fertile eggs program. It's 70% coming from Mexico from different places in Mexico and 30% from the States, and this is going to be in a long term structure.

[Brett Hundley:]

Okay. And so, in your opinion, in the back half of the year in Mexico, do you see, you see surprise building a little bit more but you still see very strong demand locally and as while you see margins coming back to a more normalized level that you talked about in the back half of the year, you still expect relative supply, demand balance in the back half of the year. In other words, you're not expecting supplies to overwhelm demand in the back half of this year?

[Rodolfo Ramos:]

Yes, that’s right, that’s going to be -- the demand I think going to remain strong.

[Brett Hundley:]

Okay. And then just my last question, can you give us an update on where, on what bird flu conditions look like within Mexico? We have read that conditions have got, have been a lot better that the industry has made good progress on eradicating bird flu, but I would just be curious to get your update on where you think Mexico is with bird flu? Thank you.

[Rodolfo Ramos:]

Okay. The situation with the Avian flu in Mexico in particular in our facilities it's under control, but in the country it did not get eradicated. That means that even when we don’t have any problems right now, you cannot say that the situation in the future breakage there. So right now, it's under control. The Mexican authorities and the industry is doing a good job in eradicating the problem, but according to the authorities it’s not eradicated yet.

[Daniel Salazar:]

Did that answer your question? Hello.

[Brett Hundley:]

Yes, thank you.

[Rodolfo Ramos:]

Any other questions, Brett? Okay.

[Operator:]

The next question comes from Jerónimo Contreras from GBM.

[Jerónimo Contreras:]

Hello, everyone, congratulations on the results again. Thank you for taking my question. And my question is regarding the situation with the trade agreement with the U.S., I know it remains in political discussions and it’s hard to get an idea on the timing on which you may begin exporting to the U.S. But could you give us a, I don’t know, more color regarding timeline on when can we expect this to happen?

[Rodolfo Ramos:]

The free trade agreement with U.S. is open; since 2003 we have the borders open -- and free trade. The only thing that remain in the quarter and that lowered in the tax was leg orders and that ended in 2008. Since then the imports have been growing. Right now it depends 12% to 14% of our market of the Mexican market on consumption depends on the States. The last year -- the last couple of years rose from 10% to 13%, 14%, more or less 3% in three years, but otherwise because of the supply of the Mexican industry with outbreak of Avian influenza in 2013. So, at this moment we are totally open and with NAFTA.

[Operator:]

The next question comes from Raúl Ochoa from Interacciones.

[Raúl Ochoa:]

Good morning, Daniel and Rodolfo. I have two quick questions, one is regarding the merger of Tyson and Pilgrim's in Mexico. What do you think about the competitive environment in with this more strong competition? And the other is, what is the difference between the productivity of your best farm compared with the worst? I guess you have around 1,000 farms, is that right?

[Daniel Salazar:]

Yes, you're right.

[Rodolfo Ramos:]

Okay, the first question is having this we know the merger has not been authorized yet. So the effects have been limited till now. On one side, we will have a stronger competitor but on the other side we expect a more orderly market, we see an opportunity and continue leading the further processed chicken rather significant. So that’s what can I say about the merger of Tyson and Pilgrim's. And in the other hand we participate in every step. So we benchmark on our performance compared with the U.S. industry and other industries all over the world. So I can tell you that in multiple of complexes we have our results better than the average of that benchmark. And in a couple complexes we are better even than the 25% of the average that figures. So our productivity is comparable worldwide.

[Operator:]

The next question comes from Kia Lee from Tiger Veda Management.

[Aneesh Oberoi:]

Hi, guys. This is Aneesh Oberoi. Thank you for taking the question. Rodolfo, I had a quick one. Given the stable input cost and the supply demand environment, I was curious if you enunciate why you think there is going to be a decline in margin in the second half?

[Rodolfo Ramos:]

Okay. Because the supply is going to be higher, so it's in terms of supply/demand. The demand is going to be stronger but it's for sure the supply is going to be higher than the last year. So we are expecting more pressure on prices that's because we are expecting normalized results the second half of the year.

[Aneesh Oberoi:]

Okay. What is your estimate of the supply increase in second half?

[Rodolfo Ramos:]

The industry is growing at a 3% pace. And our estimated growth for the second half is close to 5%. So we are going to grow more than others in the market. So, we are going to put some pressure on prices. And in the other hand, in the U.S. the production is growing 3% to 4%, so that is going to affect the U.S. prices and imports to Mexico.

[Aneesh Oberoi:]

Sorry, I missed the last part.

[Rodolfo Ramos:]

Sure. The last part was in the U.S. market -- that the U.S. market is growing to 3% more or less in -- we kind of grow 20% in 2015. So, if the Mexican industry is going to grow 3% and we are going to expand our operations here around 5%, so we are going to contact oversupply and the prices, we are expecting the U.S. prices are going to be a little bit lower for the second half too and that is going to affect the import to Mexico.

[Aneesh Oberoi:]

Okay.

[Rodolfo Ramos:]

That was the second part.

[Aneesh Oberoi:]

Okay. Got it, great. And can you also give us your thoughts on the table egg margin in the U.S. in 2015 and how that may trend?

[Rodolfo Ramos:]

Could you repeat please?

[Aneesh Oberoi:]

I said could you also maybe give us some color on your thought on the table egg margins in the U.S. for 2015 and how that would trend?

[Rodolfo Ramos:]

We don't participate in table eggs in United States, but we are expecting a normalized year. Even we have -- here in Mexico we are expecting a good year for table eggs. In Mexico, Bachoco has a strong brand and we are collecting a premium in table eggs, but we don't participate in the U.S. market.

[Operator:]

The next question comes from Pedro Leduc from JPMorgan.

[Pedro Leduc:]

Hi. Thank you for the follow-up. Just the quick one regarding your earlier comments about new growth possibilities and you just mentioned quickly beef and pork. We were wondering how the idea and the thought process behind that one is going, if its something that you would like to participate in the whole chain or more just on the distribution and branding part, and what the hurdle you saw for you to look into this business? Thank you.

[Rodolfo Ramos:]

Well, the answer is yes. We are interesting in participate more in the beef and the swine business. As you know that we are not fully integrated in the swine business and not integrated at all in the beef. So that is in our growth having the possibility to integrate these products into our business. And not only in the production side but also in the distribution chain because we have the capabilities to add other products in our distribution chain, you are right.

[Operator:]

We have a question from Brian Flores from Interacciones.

[Brian Flores:]

Hi, and congratulations for your results, Rodolfo and team. I have two questions. The first one is there we have read that some reports indicate that the production of swine in the U.S. will be very high this year. Do you think this could affect your productions or sales in Mexico and the United States? And the second question is that we noticed based on consolidated reports that the credit conditions for this year were more relaxed. Could you elaborate on these on how this goes hand-by-hand with sales? Thank you.

[Rodolfo Ramos:]

The first one, the mortality of -- for the rearing[ph] pigs in the States are more stable, more normalized. So we are expecting to more normal supply at the end of the year. So, in the '14 the swine decreased 2.1% compared to '13, and in the '15 we are going to grow it around 3%, and we expect that expansion of the industry at the end of the year. So I think this is not going to affect that situation in the Mexican industry. Prices, for sure, are going to be -- swine prices are going to be under pressure the last part of the year, but our participation in swine is too small. The impact for the company is going to be very, very small. I see no problem with that. About the second question?

[Daniel Salazar:]

Request the second question, please repeat.

[Brian Flores:]

Sure. That we saw the amount of credit given to clients expand. So, could you elaborate on how this goes hand-by-hand with sales?

[Daniel Salazar:]

Actually, yes, the reason for increasing our accountability level is not a collection problem, is because we are somehow tension of our meat and also the increasing sales for bulk and increasing our collectables; our collectables are under control. We are working very close with the tech people in order to be sure that we don't have an increase in the risks of collection.

[Operator:]

[Operator Instructions]. Mr. Ramos, at this moment, I'm not showing other questions. I will turn the meeting back over to you for any final remarks.

[Rodolfo Ramos:]

Okay. Thank you all, thank you all for hearing us this morning. And if you have any further questions, please contact our Investor relations aid who will be very glad to search for answer for the question. Thanks.

[Operator:]

Ladies and gentlemen, this concludes today's conference. We thank you for participation. You may now disconnect.