U.S. Markets closed

Edited Transcript of GRUMAB.MX earnings conference call or presentation 25-Jul-19 3:30pm GMT

Q2 2019 Gruma SAB de CV Earnings Call

San Pedro Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Gruma SAB de CV earnings conference call or presentation Thursday, July 25, 2019 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Raúl Cavazos Morales

Gruma, S.A.B. de C.V. - CFO

================================================================================

Conference Call Participants

================================================================================

* Álvaro García

Banco BTG Pactual S.A., Research Division - Research Analyst

* Fernando Olvera Espinosa de los Monteros

BofA Merrill Lynch, Research Division - Associate

* Luis Miranda Valenzuela

Santander Investment Securities Inc., Research Division - Head of Food and Beverage

* Miguel Angel Tortolero

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, thank you for standing by. Welcome to GRUMA's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Raul Cavazos, GRUMA's Chief Financial Officer. Please go ahead.

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone, and thank you for joining us today.

We are pleased to discuss our second quarter 2019 performance with you. Second quarter results have shown an important improvement as compared to the beginning of the year, especially in the U.S., where through internal initiatives, we have been able to offset most cost pressures, giving us some margin expansions while assuming higher growth rate.

In the case of GIMSA in Mexico, after a weaker start of the year, second quarter reflected a volume increase of 12% versus first quarter 2018 while EBITDA margin was similar.

Gruma Europe has also achieved an important margin expansion versus the beginning of the year. And other subsidiaries and eliminations also reflected improvements. As compared to the second quarter of last year, sales volume was 1% lower, reflecting 3% growth at Gruma USA, that was offset by a 3% decline at GIMSA. Compared to the first quarter, consolidated sales rose 4% indicating a strong growth in both the U.S. and Mexico.

Net sales rose 2%, driven by 4% growth of Gruma USA and 5% at GIMSA. Our sales from non-Mexican operations represented 73% of consolidated figures. The strength of the Mexican peso versus the U.S. dollar delivers consolidated growth in peso term. EBITDA rose 3% and EBITDA margin improved 10 basis points with the adoption of IFRS 16. As compared to first quarter 2018, EBITDA rose 11% and EBITDA margin improved 100 basis points to 16.5%.

Net comprehensive financing cost increased MXN 118 million primarily from a MXN 50 million impact from the adoption of IFRS 16 and a higher proportion of peso and nominated debt. Income taxes were 29% lower due mainly to a lower effective tax rate, which decreased to 32.3% primarily because of lower inflation rate in Mexico, which reduced inflationary gains on GRUMA's debt. Income taxes also declined in part because of lower foreign exchange losses related to intercompany loans from foreign subsidiaries.

On a sequential basis, the affected total rate was also significantly lower than the 36.7% rate in the first quarter. Majority net income declined 3% due to higher SG&A and net comprehensive financing cost, which was...

[Technical Difficulty]

Sorry. Sorry for the interruption. Net -- majority net income declined 3% due to higher SG&A and net comprehensive financing cost, which was mostly offset by lower tax rate. As compared to the first quarter, majority net income increased 23% due to better operational performance of Gruma USA and lower taxes.

In terms of CapEx, we invested $20 million for capacity expansions at tortilla plants in Malaysia, Central Mexico and Northwestern Mexico. GRUMA's debt rose $90 million and cash balances were $50 million higher during the quarter in connection with working capital mix related to higher cost and sales. And the share buyback program, where we invested $32 million. Our net-debt-to-EBITDA ratio is 1.8x considering the adoption of IFRS 16.

Now let's talk about the results from foreign subsidiaries. Our Gruma USA, sales volume rose 3% versus last year and 6% versus the first quarter driven mainly by the corn flour operations. Net sales increased 4% versus last year and first quarter due to volume growth and higher average prices of the tortilla business derived from a better sales mix. EBITDA rose 10% and EBITDA margin improved 100 basis points to 19.1% versus last year. As compared to first quarter where there is no benefit from IFRS 16, EBITDA surged 12% and EBITDA margin improved 130 basis points. This shows we have been able to offset cost pressure through a better sales mix and efficiencies in production and logistics.

At GIMSA, sales volume fell 3%, driven mainly by lower sales to wholesalers. However, as compared to first quarter, we saw a 4% increase. We expect volumes will show an upward trend for the rest of the year. Net sales climbed 5% primarily reflecting price increases implemented in January of this year and in August of last year. EBITDA increased 7%, in connection with net sales growth and EBITDA margin improved 20 basis points to 16.2%.

At Gruma Europe, sales volume increased 6% driven by both lines of business, most notably by the tortilla business, which grew 10%. New retail customers and expanded distribution, coupled with new program launches, helped revenue growth. In terms of net sales, volume growth was offset by lower average prices due to foreign exchange rate fluctuations rising to 2%. EBITDA was 4% lower and EBITDA margin was 92%. Gruma Europe is also showing sequential improvement in results, more than doubling its operating income and growing EBITDA by 53% versus first quarter.

On Gruma Centroamérica, sales volume increased 2% mainly from higher sales in Guatemala and lack of corn in the field. Net sales in EBITDA declined 4% and 5% respectively due to negative impacts from the FX fluctuations when figures are measured in peso term.

On other eliminations line, EBITDA declined MXN 100 million to MXN 31 million due to information technology projects, severance payments and higher marketing and freight expenses at Gruma Asia-Oceania and the tortilla business in Mexico. As compared to first quarter, EBITDA was MXN 36 million higher.

At this point, we are ready to take your questions. Shandra, could you please help us?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Miguel Tortolero, GBM.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I just would like to get more color on how much we should expect in this extraordinary severance payment through increased sales in the coming quarters, and if you have any measure of the benefit you would be getting out of these initiatives? And the second one, could you give us an update on the pricing scenario that you're facing in the corn, tortilla retail channel in the U.S.?

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [3]

--------------------------------------------------------------------------------

Yes, Miguel, thank you. Talking about the severance payments, we basically finished during the second quarter of the year. We are not expecting to have any additional severance payments for the rest of the year since we already basically finalized this process. Talking about the benefit that we are expecting to have from this restructuring plant, we are expecting to have, for the full year, $16 million from savings. These are going to be, of course, annualized, and we will have some benefits for the rest of the year but the full $16 million will be from 2020 and on.

And now, talking about the retail targets in the U.S., let me tell you that we have not been able to increase prices. Actually, we're already expecting to not have any kind of price increase for the rest of the year. Price increases will be, by the end of the year, applicable for the new year.

And this is because, of course, as you may know, the main price increase is inclusive of market. And then we will have the full conclusive justifications to increase prices. But at this point in time, we are not doing -- we are not expecting to increase price. Then what we basically did is we are negotiating the launch of new products, new value-added products, particularly in Gruma Corp.

We are launching organic products, gluten-free, non-GMO and some SKUs. The price, they were limited, our price for those items or for those SKUs. We've been increasing the volumes of these SKUs. And also we are making or we implemented some initiatives in the U.S., just to reiterate, were efficient. Then as you can see in the results basically, we were able to avoid this -- the lack of price increases through our regional volumes and this new SKUs launched by the company.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

You next question comes from Luis Miranda, Santander Bank.

--------------------------------------------------------------------------------

Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [5]

--------------------------------------------------------------------------------

A couple of questions. The first one is with regards to Mexico. How concerned are you with the decline in volume on the wholesale channel? And the question was also in terms of if you're seeing more competition, how is your market share? And if there is any outlook for this volume to recover in the second half? And the second question is in the U.S. With the current environment with better volume and slightly improvement in sales mix, do you think you can defend your margins, excluding the effect of IFRS in the medium term to have some visibility on margins ex IFRS?

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [6]

--------------------------------------------------------------------------------

Sure, Luis. Thank you. While talking about the -- Luis, excuse me. We are talking about if we are worried about the performance of the wholesalers, we are not worried about that. Actually, our market share is basically at the same stand we have. We are doing quite well. These wholesalers were basically providing some 1-kilo packets of MASECA to companies which we're supplying, kind of, bottled with basic products to the government and this product was already canceled. That's why we are not there. But in the rest of the wholesalers, we're doing quite well, we are going up. And in the tortilla industry in Mexico, we have -- we feel quite comfortable on that.

In terms of the market shares, I was telling you, we are basically at the same percentage of market share. We're still promoting the conversion in Central Mexico by the mixing of corn flour with the traditional method.

We are doing well on that. And again, we -- even we have some kind of competition or regional competition in the regions of the country. We've been able to compete with them with better prices than them because of the quality and because of the service of the company.

We do not see any kind of issue on that. That tortilla consumption in Mexico has been stable, even it's going up a little bit. Then we have not any kind of issue on that. For the rest of the year, we are expecting to be in this level, of course, as I was telling you the last conference call. Because of this product was already canceled by the government, we are expecting that we're going to be -- basically, the volume will be, basically, flat for the full year. But in terms of profitability, we will be okay and margins will be basically also similar to the last year. In terms of the U.S., your question was about, sorry?

--------------------------------------------------------------------------------

Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [7]

--------------------------------------------------------------------------------

The margins. The expansion in margins is basically explained by the adoption of IFRS 16. I was wondering if you strip out the effect and looking forward, do you think we can see stable margins or do you foresee that -- any improvement from current levels?

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [8]

--------------------------------------------------------------------------------

Yes. Well, let me tell you that from current levels, at this point in time for the year, we feel comfortable. We will be there basically. But if you see the trend of the second quarter is going up and they're going to be the same for the year. We feel that we want to be, basically, at that level. And then in terms of margin for the full year for Gruma Corp., we will be something around [19%].

For midyear, once we implement price increases, if we launch additional products, maybe the company is expecting to still expand the margins for Gruma Corp. on this year not as much as we were in the past but increasing on a good way.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Álvaro García, BTG Pactual.

--------------------------------------------------------------------------------

Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

I have two questions. My first question is on your balance sheet. If we look at your debt profile, 44% of your debt is in Mexican pesos, while only 28% of your EBITDA comes from Mexico. So given where interest rates have gone in the U.S. and Europe, I was just wondering if there are any plans to perhaps increase your share of dollar or euro debt? That's my first question.

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [11]

--------------------------------------------------------------------------------

Yes. Well, Álvaro, we are expecting to increase the mix of our debt to more dollars but what we want to do is also to take advantage of kind of depreciation of the peso because we think that the economy is quite strong. And we don't want to incur any regional losses. But in some point in time, we used to convert part of this peso debt into dollar debt.

--------------------------------------------------------------------------------

Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

Great. That's clear. And then my second question is on your tortilla business and the retail channel in the U.S. Last quarter on the call, you mentioned that, as part of your negotiations with big retailers that they gave you more space, so sort of the opportunity to introduce more SKUs at the retail channel. And my question is, this quarter, you guys mentioned you saw flat volume growth in tortilla. And I was just wondering if we've seen those dynamics yet or is it something that we'll see in the second half of the year. If that's really incremental volume or if it's replacing other types of SKUs?

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [13]

--------------------------------------------------------------------------------

Yes. Let me tell you that for the second quarter, the -- most of the benefit came from that mix of our sales related to value-added products. But in terms of the negotiations we did with the retailers, we have a little more space in tortilla tables in the stores. And then from now on, maybe we will see little increases on volumes for the company. But the benefit came basically from sales mix.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

You next question comes from Fernando Olvera, Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [15]

--------------------------------------------------------------------------------

I have two, if I may. The first one, some comment that you did in the -- in your press release. You highlighted the sequential recovery and mentioned that this trend would continue throughout the year. So I would like to know if this -- if we should expect this sequential recovery across all divisions or not? And also at this point, if you feel comfortable with your annual guidance or you would make some changes? That's my first question. The second one is related to Mexico. I mean with the strong pricing in the last 4 months. So given the Mexican assumption is relatively weak and corn prices increased significantly recently, can you bend your pricing strategy going forward?

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [16]

--------------------------------------------------------------------------------

Yes, Fernando. Well, talking about the volumes in the U.S. We are expecting to implement some volumes on basically all the divisions of the company, particularly we are expecting to increase volumes in the U.S. Mexico will be a little bit more basically at the same level you see currently. And Central America is doing well, and we are expecting also to have a little increase because the second quarter was affected because of kind of political issues in Honduras and Costa Rica, but it also increased.

In terms of Europe, also we are doing quite well. We are increasing our volumes, and we are expecting for the rest of the year volume increases in the European operations as well as in Asia-Oceania volume growth. There, of course, we are not expecting spectacular growth, but because of that, talking out of guidance, what we do -- basically want to do is even if we had very good performance in the second quarter, we are expecting a better performance or good performance for the rest of the year.

We prefer at this point in time to keep the same guidance we did during the last call. And maybe in the third quarter, when we have more color on volumes, we can change a little bit. But at this point in time, let us keep the same figures we gave you in this guidance. Related to the second -- yes, Fernando?

--------------------------------------------------------------------------------

Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [17]

--------------------------------------------------------------------------------

I mean regarding the sequential recovery, I mean you highlight volumes but what about margins? I mean can we expect sequential growth in margins?

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [18]

--------------------------------------------------------------------------------

Margin will be there. Margin will be there. The strategy in the pricing for the second half of the year in Mexico, we are basically -- we're already cautious of the whole corn for the year. We were able to hedge the salaries to not have a cost increase in the corn. Then we are not expecting to increase prices for the second half. But because of that, and because of Europe, [some efficiencies], we expect it to be basically at the same level, so margins for Mexico for the rest of the year.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

We have no further questions at this time. I will hand back to Raúl to conclude your call.

--------------------------------------------------------------------------------

Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [20]

--------------------------------------------------------------------------------

Well, once again, thank you very much for hearing us today. And as always, please feel free to call us and to contact us if you have any additional questions or queries that you may have. And we will be available for you guys to raise any kind of questions that you may have. Thank you very much, and have a nice day. Bye-bye.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes GRUMA's second quarter 2019 earnings conference call. Thank you for your participation. You may now disconnect.