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Edited Transcript of BACHOCOB.MX earnings conference call or presentation 5-Feb-20 3:00pm GMT

Q4 2019 Industrias Bachoco SAB de CV Earnings Call

Celaya, Guanajuato, Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Industrias Bachoco SAB de CV earnings conference call or presentation Wednesday, February 5, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Salazar Ferrer

Industrias Bachoco, S.A.B. de C.V. - CFO

* Maria Guadalupe Jaquez

Industrias Bachoco, S.A.B. de C.V. - IR Officer

* Rodolfo Ramos Arvizu

Industrias Bachoco, S.A.B. de C.V. - CEO

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Conference Call Participants

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* Héctor Manuel Maya López

Santander Investment Securities Inc., Research Division - Research Analyst

* Miguel Angel Tortolero

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Ulises Argote Bolio

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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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. (Operator Instructions) Thank you for your attention.

I will now turn the call over to Maria Jaquez. Maria, you may begin.

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Maria Guadalupe Jaquez, Industrias Bachoco, S.A.B. de C.V. - IR Officer [2]

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Thank you. Good morning, and welcome to Bachoco's Fourth Quarter 2019 Conference Call. We released our financials yesterday after market close. 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 31, 2019 was MXN 18.89 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.

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [3]

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Thank you, Maria, 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 0 for the year. In the U.S., we observed an improvement in prices, particularly for leg quarters, 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 were around 3% when compared to the fourth quarter of '18.

Under the condition mentioned above, we reached net sales of MXN 15,138 million for the fourth quarter of '19, 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 '18. Our other segment, on the other hand, increased 2% versus the fourth quarter of '18, mainly as a result of higher volumes sold in balance feed. For the full year, our sales totaled MXN 61,658.6 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 full year when compared to 2018. Our SG&A was MXN 1,571.6 million for the quarter which is 10.4% of total sales, lower than compared to the MXN 1,650.7 million and 10.7% of total sales for the fourth quarter of '18.

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 MXN 242.1 million for the quarter and MXN 3,922.8 million for the year, which compared to MXN 489.6 million and MXN 3,708 million for the same period of 2018, respectively.

With that, we reached an EBITDA of MXN 571.5 million for the fourth quarter of '19, a 3.8% margin, which compares to an EBITDA margin of 5.3% for the fourth quarter of '18. As for the full year of 2019, we reported an EBITDA of MXN 5,215.6 million a 8.5% margin versus an 8.2% margin of 2018.

Our balance sheet remain strong as we reach a net cash level of MXN 14,254.3 million, which enable us to continue supporting our growth plan. CapEx for 2019 was MXN 2,025.1 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 shared 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 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.

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [4]

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Thank you, Rodolfo, and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company's fourth quarter '19 net sales totaled MXN 15,138 million, MXN 283 million or 1.8% lower than the MXN 15,421 million reported in the fourth quarter of '18. 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 MXN 61,658.6 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 higher sales in our Mexican operations. Cost of sales in the fourth quarter of '19 was MXN 13,171.4 million and MXN 51,558.1 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 MXN 1,966.6 million and gross margin of 13%, which compares with a gross profit of MXN 2,148.3 million and 13.9% margin reported in the fourth quarter of 2018. For the year, we reached a gross profit of MXN 10,100 million with a margin of 16.4%. This amount compares to the MXN 9,629.7 million and a 15.8% margin for 2018.

Total SG&A for the fourth quarter of '19 was MXN 1,571.6 million, 4.8% lower than the MXN 1,650.7 million reported in the fourth quarter of '18. For the full year, SG&A totaled MXN 6,094.4 million or 9.9% of total sales compared to MXN 6,024.4 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 MXN 242.1 million with an operating margin of 1.6% versus an operating income of MXN 489.6 million, with a margin of 3.2% reached in the same quarter of 2018. The operating income for 2019 was MXN 3,922.8 million, an operating margin of 6.4%, higher than the MXN 3,708 million and 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 '18. For the full year of '19, 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 MXN 210 million compared to a net financial income of MXN 403.8 million in the fourth quarter of '18. 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 MXN 363.2 million versus the MXN 808.6 million for the 2018 year.

Our total taxes for the quarter were a credit of MXN 128.8 million compared to income taxes of MXN 182 million for the same quarter of 2018. For the full year, our total taxes were MXN 1,117.7 million, MXN 33.3 million lower than the income taxes of 2018. All the above led us to a net income of MXN 160.8 million for the quarter, with a net margin of 1.1%. This income compares to a net income of MXN 711.4 million, up 4.6% margin in the fourth quarter of '18. For 2019, net income totaled MXN 3,168.4 million, with a net margin of 5.1% which is lower than the net income of MXN 3,361.6 million and a net margin of 5.5% of 2018. Net income per share was MXN 0.26 for quarter and MXN 5.26 for the year compared to an income per share of MXN 1.18 and MXN 5.58 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 MXN 14,254.3 million at the end of the year, higher than our net cash level of MXN 13,420.9 million at the beginning of the year. Our CapEx was MXN 2,025.1 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.

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [5]

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Thank you, Daniel. Entering 2020, we are still observing some pricing pressures as we observed in the fourth quarter of '19, 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Miguel Tortolero from GBM.

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [2]

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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 can 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 are a bit complicated to follow chicken prices 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?

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [3]

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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 heading 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 life ban to -- export to China. So prices in leg quarters are better than a year ago. Breast meat is -- boneless breast meat is a little bit 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.

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Operator [4]

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Our next question comes from Hector Maya from Santander.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [5]

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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.

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [6]

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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 and -- all the year -- all 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.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [7]

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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?

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [8]

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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.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [9]

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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 U.S. down overall?

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [10]

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Yes. And compared 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 '19 (sic) ['18]. 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.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [11]

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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?

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [12]

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

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [13]

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

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [14]

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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.

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [15]

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But on the other hand, Hector, we are very confident that in this year, 2020, we can recover the share because we are growing in our contract 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.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [16]

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

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [17]

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That's correct.

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [18]

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For the fourth quarter, yes.

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [19]

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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.

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [20]

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And the other important thing is because our 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.

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [21]

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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.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [22]

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Got it. And sorry to take so much time, but just one more, sorry. 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 and you can find suitable acquisitions in the short term?

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [23]

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Well, right now, we're -- first, our priority is to continue growing organically. Because it's -- with our -- with the full 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.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [24]

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

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [25]

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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 the per capita consumption here in Mexico. And in the United States, the per capita consumption has been going up too in 2018 and 2019.

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Operator [26]

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Our next question comes from Ulises Argote from JPMorgan.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [27]

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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?

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [28]

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Okay. Okay. I'm going to answer the first question and Daniel 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 better balance between supply and demand. That's the main drive of the market prices.

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [29]

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Okay. Now talking about the write-off that we disclosed for -- in our intangible asset. What I can tell you, Ulises, is this came from our last acquisition of Albertville Quality Foods. When we acquired that company, we recognized in that moment, 2 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 2 customers -- 2 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.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [30]

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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?

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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO [31]

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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 what the market is going -- is behaving in terms of pricing, but we don't have official or public information to follow the market.

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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [32]

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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 live market is very important and is located mostly in the south part of the country.

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Operator [33]

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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.