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Edited Transcript of GRUMAB.MX earnings conference call or presentation 20-Jul-17 3:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Gruma SAB de CV Earnings Call

San Pedro Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Gruma SAB de CV earnings conference call or presentation Thursday, July 20, 2017 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Juan Antonio González Moreno

Gruma, S.A.B. de C.V. - Chairman and CEO

* Raúl Cavazos Morales

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

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Conference Call Participants

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* Alexander Reid Robarts

Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team

* Álvaro García

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

* Benjamin M. Theurer

Barclays PLC, Research Division - Head of the Mexico Equity Research and Director

* Felipe Ucros Nunez

Scotiabank Global Banking and Markets, Research Division - Analyst

* Fernando Olvera Espinosa de los Monteros

BofA Merrill Lynch, Research Division - Associate

* José Juan Yordán

Deutsche Bank AG, Research Division - Research Analyst

* Luca Cipiccia

Goldman Sachs Group Inc., Research Division - Research Analyst

* Luis Miranda Valenzuela

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

* Miguel Ulloa Suárez

BBVA Research SA - Research Analyst

* Miguel Mayorga Tena

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

* Pedro Leduc

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to GRUMA's Second Quarter 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to our host Mr. Raúl Cavazos, GRUMA's Chief Financial Officer. Please go ahead.

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

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Thank you. Good morning, everyone. During the second quarter, GRUMA is confirming that it is positioned to continue expanding its margins, especially in the U.S. This comes back -- of continuous sales growth in volumes in most of our subsidiaries.

More importantly, at Gruma USA and GIMSA, which is yielding results in terms of better market position and also providing economies of scales and better product mix.

In this quarter, we are glad to report that Gruma USA is achieving its highest level of EBITDA margin in history, which give us confidence that we are on the way to reach the long-term targets the company has envisioned.

In terms of volume, we grew 3% driven by all subsidiaries other than the Gruma Centroamérica and especially at GIMSA in the U.S. Net sales rose 7%, despite the effect of the recent peso appreciation on the U.S. operations and EBITDA improved 7% coming from all of our subsidiaries other than Central America.

EBITDA margin reached 16.3%, the highest level of GRUMA's history. Our net comprehensive financing cost was MXN 339 million, mainly affected by losses of GIMSA related to FX hedging of corn procurements as the peso has appreciated recently.

Income taxes reflected a positive effect as GRUMA Holding used tax-loss-carryforward by receiving dividends from Gruma USA. There was an additional benefit because this dividend payment was made at the peak of exchange rate during the quarter. As a result, the effective tax rate for this quarter was 26.2%. Majority net income was MXN 1.4 billion or 1% higher affected by the FX hedging losses at GIMSA.

Our financial structure remains sound, our debt increased by $72 million in connection with the cyclical working capital requirements. Dividend payments, capital expenditures and the effect of the peso appreciation during the quarter on peso dominated debt when measured in dollar terms. Our net debt-to-EBITDA ratio was 1x.

Now talking about our main subsidiaries. At Gruma USA, our volume increased 3%, out of which 2% came from corn flour, and 4% came from tortilla business. Without other tortilla business derived from both channels. The Food service channel benefit from the recovery of volumes lost last year in connection with the SKU rationalization process and from better performance at some large restaurant chains.

In retail, volume continue to rise largely driven by our Super Soft wheat flour tortilla, the nationwide launch of our Street Taco tortilla, the expansion of gluten-free tortillas, new distribution and products at club formats and increased shelf space for corn chips at some retailers.

Our sales volume trend confirms the tortillas are growing category in the U.S. food industry and that we have been able to capture that growth while continuing to gain market share. The most recent A.C. Nielsen report indicates that during this quarter, the tortilla category rose 2% while GRUMA growth was 4%.

Net sales increased 5% resulting from volume growth and a change in sales mix. EBITDA in the U.S. increased 8% and EBITDA margin improved to 17.6%, the highest ever, which resulted mostly, again, from a change in the sales mix and lower raw material cost.

Additionally, there were some non-recurring insurance reimbursements that offset the higher cost related to the new plant in Dallas.

At GIMSA, sales volume rose 4%, driven mainly by wholesalers; exports to our U.S. operations; and higher demand from the largest snack producers in Mexico.

Net sales grew 10% due to volume growth and price increases implemented to reflect higher input costs. EBITDA increased 5% driven by the sales volume growth. EBITDA margin declined to 16.5% from 17.3% due to (inaudible) income in the second quarter 2016, and they are (inaudible) effect of a larger base of sales with similar EBITDA per ton.

GRUMA Europe sales volume rose 2%, which came from growth in the tortilla business and the corn flour milling operations. We have been strengthening our redecision in Spain and gaining market share in Russia. Net sales decreased 1%, due mainly to the weakness of the British pound and the EBITDA margin improved 70 basis points to 9.1%, derived primarily from production efficiencies at the tortilla business, which resulted in lower cost of raw materials, labor and packaging.

At Gruma Centroamérica, sales volume declined 1%, due mainly to lower corn flour sales to the United Nations World Food Program. Net sales were flat, as aforementioned, in corn flour was offset by a change in sales mix toward hearts of palm and snacks.

EBITDA decreased 9% and EBITDA margin fell to 10.5% due to higher energy and raw material costs.

On the other Subsidiaries and Elimination line, EBITDA rose MXN 34 million, resulting mostly from the peso remix effect.

On the other matters, you may be aware that GRUMA is conducting an offer to buy the 14.5% public stake of GIMSA at MXN 25 per share. Tomorrow Friday 21, is the deadline for the offer. In this transaction -- if this transaction is successful, we expect to delist the company from the market. The rationale for this transaction is to try to concentrate the liquidity of the stock in GRUMA. Since GIMSA shares do not provide enough liquidity and we are not seeking GIMSA in the need to access the capital markets in the future. With this we conclude our remarks for this morning. So at this point, we will turn the call over to Yvonne for the Q&A session. Yvonne, could you help us please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Fernando Olvera with Bank of America.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [2]

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Raul. I want to -- I have 2 questions. The first one is regarding the margins in the U.S., I don't know if you could give us an idea what would have been the EBITDA margin if you exclude the cost related to the new plant in Dallas and the insurance savings?

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

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Yes. Well in this regard, it's going to be basically the same because as usual, we have additional reimbursements on insurance. But we also have some expenses on the Dellas plant, which is basically upset. Then if we exclude both figures, it's basically what you see on the report. Basically flat.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [4]

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Okay. And my second question is regarding your hedges. I don't know if you can give us an update about the level of your hedges in corn and wheat for this and next year?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [5]

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Well, talking about hedges. Let me tell you that as of today, this morning, we have about 50% of the hedges for the corn that we will use in the U.S. for 2018. We -- let me tell you that if -- we are in the process to hedge a little bit more. So we feel that the prices of corn will be a little bit higher in the next weeks. But we have a very good -- we have a good price, a very good price with this 50%. And in this other case, certainly the price of the corn will be lower than the average of the market throughout the year, which will be good for us. In terms of wheat, currently we have hedged about 85%, 80% of our requirements. The price of the wheat is about $5.16 or $5.17 per bushel -- no, excuse me, $5.02. And then it's going to be lower by about, let's say, something about $0.14 or $0.15 lower than the average price we had last year. And let me correct you, it's going to be -- we have only 60% of our requirements for 2018, not 80%. 60%.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [6]

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Sorry, can you repeat that?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [7]

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Yes, 60% on wheat at 5.02%. 60%. 6-0. Sorry.

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Operator [8]

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The next question comes from Luca Cipiccia with Goldman Sachs.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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I wanted to ask more generally about the U.S. in terms of growth outlook for the rest of the year or going forward where we think that this volume growth delivery that seems to have returned in the second quarter, is something I think you'll be able to sustain as well as the process of SKUs rationalization and reduction. Is it all done or is it an ongoing sort of prodding that you continue to do? Where do you feel you stand today relative to before and how do you expect them to impact the performance going forward?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [10]

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Yes, sure, Luca. Well, in terms of the growth of Gruma Corp for the rest of the year, what we can tell you is that there's going to be sustainable volume that you are currently seeing. We are expecting to grow at 3% to 4% throughout the year. And according to that, we are also expecting to be -- to grow even a little bit higher than the category is going. The category currently according to Nielsen is going at 2%. And we are seeing -- we are thinking that the category will grow at the same rate at 2%. But we are expecting to grow something between 3% to 4%. Now in the other -- in terms of the SKU rationalization program, what I can tell you is that this is going to be on ongoing basis. But for this year, we are basically there, we are basically done. We always have a viewing only for SKUs and try to see what we can do in order to try to improve resources to be focused on more popular products. But as of today, for the yield, we think that we are there given we relaunched some of our products last April. Organic particularly, and then also we are expecting that that will support our sales throughout the year. But again, SKU rationalization for this year is basically there.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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And just to clarify, thanks for that answer. But just to clarify on this point. Is it wrong to assume that the rationalization that you did should lead to an average -- a higher average price per kilo because we don't -- I'm not sure what that comes across from the data or is rather price point doesn't necessarily have much to do with it on average, it's rather profitability or the type of SKUs that we don't -- we want to -- we don't want to have. Is that any consideration to be made on top of the pricing impact or the price mix impact of this changes in the portfolio that you have put through?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [12]

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Yes, well, in terms of prices, of course, SKUs rationalization have been benefiting the company because we've been focused on more profitable products. But also the products we have been launching into the market, the Street Tacos we launched last year, the gluten-free tortilla as well as the organic products we launched in this April. We have a -- we've seen kind of success with this product, with very good sales. And of course, prices are higher as well as more contribution margin and more profitable for us. Then what you can see in the rest of the year is that basically prices will be there, but it is going to be because of the combination of both the SKUs rationalization we did in the past as well as that there's no products, as well as, as I told you throughout the conference, through our remarks, Super Soft flour tortillas, it had a very good contribution, a very good price and it's one of the larger products which is growing in a very good way.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Research Analyst [13]

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And lastly, if I can ask a very small one. But just on a tax -- on effective tax rate, which was again, a bit lower this quarter. If you can just update on what you expect for the rest of the year?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [14]

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Well, in terms of the tax effective rate. What I can tell you that we still continue to see this exchange rate at the current levels, while we can see it's going to be for the rest of the year, the second, the third and fourth quarter, maybe something about 26%, 25% -- 26%, 27%. But been a little bit conservative, maybe because what we can do is -- what we can say is that throughout the year, our effective tax rate is going to be something in between 28% and 29%. But this is going to a little bit conservative. I think that we can improve a little bit more this effective rate for the full year.

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Operator [15]

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The next question comes from Pedro Leduc with JPMorgan.

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Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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In Mexico, 2 quick ones please. First, we saw this quarter that gross margin contraction halted, after a while being down. And I recall that in earlier in the year you discussed about in this call 50 bps of lowering EBITDA margins for Mexico for the full year. Seems like the peso strength and maybe this quarter's gross margin trajectory are being a positive surprise would you say? Meaning that the -- how do you stand currently for the outlook for Mexico's margins? And in that regard, if you could tell us a bit on the local corn harvest, the upcoming one, how you expect COGS per kilo to evolve versus last year's?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [17]

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Sure. Well, talking about the margins, the gross margin for GIMSA for the full year. What we can tell you is that we will keep our guidance we did at the beginning of the year. Even we have been a little bit lower. What I can tell you is that in the second half of the year, we will improve sales, we are not expecting to introduce or to decrease our current prices of the corn flour. Actually, we are increasing prices a little bit for our 1 kilo packaged corn flour presentation. We are increasing MXN 450 per ton for this corn flour for the production. Of course, we are talking about maybe something about 15% of our sales. And in the bulk presentation, we have not introducing prices. Then, it seems we already have the corn, and the corn is a little bit lower -- the cost for this second half than we had in the past. We are expecting to have a little benefit on the gross margins throughout the third and fourth quarter. And that's why we are expecting to keep these margins for the year. We will keep in the guidance.

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Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Okay. And the local harvest for corn, it's coming up well? Do you believe it's at a different price than what's yours or up or down?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [19]

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It's coming very well. Actually, we are already -- basically finished the Mexico harvest and prices of the corn for this harvest is a little bit lower than the past harvest here in Mexico. But basically marginal a little bit lower, not too much. And we already purchased basically all of the second quarter.

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Operator [20]

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The next question from Álvaro García with BTG.

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Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [21]

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Two quick questions on my end. The first question is, if you could potentially share what percentage of MASECA shareholders have tendered their shares throughout the process yet. Or if you can give any color with regard to that? And my second question is with regard to pricing dynamics in the U.S. So we've seen a 2017 where -- at least this quarter, we were able to see your costs per unit increase -- decrease, excuse me, a lot less than your price per unit. Should we expect a similar dynamic heading into next year where your corn prices are -- should tend to be a little flattish. Should we expect a similar dynamic where you will continue to bring pricing down or how are you guys thinking about pricing heading into 2018?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [22]

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Yes. Well let me tell you that talking about the purchase of the stake of GIMSA, we have not too much color at this point of time. Given the deadline is tomorrow, we have indication that some amounts of the investors have been taking this offer and they are participating. But we have some others that they are still thinking or not and that's going to be maybe, you and I, we can talk about that this coming Monday, when we can give you the right color of this transaction and not state something different. But in any case, what I can tell you is that we will purchase all the shares that we subscribed on this offer. The company will keep the strategy -- the same strategy to eventually delist in the market -- from the (inaudible) kind of this year. In terms of prices and costs for 2018, Gruma Corp, let me tell you that maybe the corn flour is going to be a little bit more expensive. Corn throughout the year has been a little bit higher than in the past year, the cost of the corn during the year. Maybe we will exceed a little bit, don't want to read too much but we are expecting it to increase a little bit maybe. And the -- it will depend about how will be the performance of the corn from now to the end of, let's say, August. But this was the case, it's going to be a very small increase. In terms of wheat flour, we are expecting the cost is going to be a little bit lower. A little bit lower, not too much as -- not as much as this year than in the past. It's going to be lower but we are -- the hedges, we are already have for that. Wheat flour for 2018 is presenting us about $2 million or something like that in benefits. But we are not expecting to also introduce prices but taking this kind of benefit to of cost of wheat flour.

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Operator [23]

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The next question comes from Alex Robarts with City Bank.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [24]

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I actually had 2, and I wanted to start with the trend that you're seeing in the United States with tortillas. It sounded like you said that Nielsen suggests in the quarter there was a 2% growth of the category. I just wanted to understand was that volume or sales, the Nielsen numbers?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [25]

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It's all the sales.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [26]

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It's the sales number, okay.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [27]

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And I mean, I can't remember the last time you guys were 2x the sales growth. So I mean it sounds like you were doing some interesting things in the quarter. And I wanted to understand, your 4% tortilla sales growth versus the category's 2%, how much of that out performance is the base effect really of kind of lapping a bit of the SKU rationalization? And how much of it is perhaps initiatives around your innovation or your go to market? And who do you think you have sourced that the market share gained from? Any color around that would be great.

Thank you, well. The growth we are expecting for this year is 3% to 4% is coming from, and as I was telling you before, and basically for the new launching of our new products. We have been successful in that with a very good consumption in the market, that was received from the consumers. The three packets of tortilla and corn and wheat and gluten free distribution. So in the course of these both. Now there organic cheap as well as they're running corn tortillas and blue chips organic also. We have a very good performance at this point in time. But also a Super Soft flour tortilla is doing quite well in the market, is going very well. That's why we're expecting that the growth will come from this kind of products. The SKUs rationalization we did in the past in both retail and full service, we have for this year basically there. As I was saying that, we are not expecting to reduce any additional SKU at this point in time. But we are everywhere in all the areas and all the regions we are participating, we are growing and growing even faster than our competitors, which means that we are now taking market share from some others. Also, particularly, against some private labels, we're also taking some market share. And that's what I can tell you on that.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [28]

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Okay, got it. And so it's really the sales growth in GRUMA tortillas is volume and no price. I guess, if I heard you correctly?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [29]

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Yes, it's a combination of both volumes and price. Because of this and the mix, we intend to more profitable products at higher priced products.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [30]

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Okay. But you stated that the volume growth just in tortillas was 4% in the quarter, correct?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [31]

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Yes.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [32]

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Okay, so if the sales growth...

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [33]

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What I said is basically that if we're up for the full year, it will be something between 3% to 4% in tortilla, in volumes.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [34]

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In volumes? Okay, okay, that's helpful. I wanted just to go to the second question, which is somewhat related, but you've told us that you're keen to aim for about 50 basis points of margin expansion this year at Gruma USA. So we see this first half at a flat margin, right? First half versus first half last year. And I'm wondering to hit this guidance, you need to get 100 basis points at least in the second half and for Gruma USA, do you feel confident about that? And would the 100 basis points of margin expansion perhaps be related to some initiatives you might look for on the cost side or is it really something perhaps you can drive from the topline?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [35]

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Absolutely. We feel quite confident that we will reach in the second half of the year, better margins with improvements that will allow us to improve by about 50 basis points the whole year of Gruma Corp. Now just the market (inaudible) in the last question, talking about the markets and about volumes and about mix and our Gruma Corp, what I can tell you is this. This is the category growth 2%, Gruma Corp's grew 4%, our internal figures said for retail growth for 6%. Okay?

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [36]

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Okay.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [37]

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And again, we are absolutely quite confident that we will improve our margins in Gruma Corp.in the second half of the year. Just to reach the guidance, we did of about 50 basis points for the full year, on Gruma Corp.

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Operator [38]

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The next question comes from Luis Miranda with Santander.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [39]

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Just a couple of questions. First, Raúl if you could elaborate a little bit more on your efforts in Europe about of the entrance into the modern trade channel and how it's -- how is your outlooking in the short to medium-term? And in the U.S. also, when -- do you expect any extraordinary charges from the Dallas plant to still impact the second half of the year or charges are over? And I will wait for the last one.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [40]

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Yes, well, thanks Luis and good morning. Talking about European operations, as you have been -- have seen in the past, we've been really fortunate with our restructuring there. Our sales force, with the higher quality people with a very good relationships, which are strengthening in a -- we have a very good presence in terms of supermarkets. And then what I can tell you is that we already have some important, not prospect, but we already gain some Phase II supermarkets as to change the fast food chains as well as we are now entering into firms, which in the past, it was very quite complicated for us to enter in this particular market and we are now in couple of supermarkets. We're expecting for -- to enter into the most important one by may be the fourth quarter of this year. Then talking about it from now to the future of Europe, we're expecting a growth on sales, which will be make us more sustainable including margins or even implement in the midterm. In terms of the USA, your question was about...

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Benjamin M. Theurer, Barclays PLC, Research Division - Head of the Mexico Equity Research and Director [41]

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The Dallas plant.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [42]

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The Dallas, right. Let me see what i can tell you, is that maybe it's going to be some solid charges from now to maybe first quarter next year. Once we're expecting this facility will be operating by the end of this year, which it will be maybe November or even beginning December. That means that eventually it could operate a couple of plants together at the same time and that the all Dallas Plant will be shut down during the first quarter 2018 and then we will stop all the charges related with the oil plant. But then for the rest of the year, you are going to see maybe some similar charges.

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Benjamin M. Theurer, Barclays PLC, Research Division - Head of the Mexico Equity Research and Director [43]

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Perfect. And just a follow up, can you disclose the price at what you have hedged the corn for 2018? You mentioned 50%, but I didn't get the number?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [44]

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Yes, 50%. And the corn price is about Ps 575 -- Ps 375, excuse me, per bushel. But let me tell you that we said the full corn we would require at the current prices, the pricing of the corn will be something about Ps 382 or something about that. But again, we only have hedged as of last night, we have only 50%. We have indications to construct about some more 25% in order to expand our hedges to 75%. I'm not sure because I've been here how the market is doing in, we already did it on that, but we are now in the way to hedge the full corn.

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Operator [45]

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The next question comes from José Yordán with Deutsche Bank.

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José Juan Yordán, Deutsche Bank AG, Research Division - Research Analyst [46]

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Just getting back to the guidance on U.S. margins again, I mean, I see easy comps in the second half and probably not much difficulty in reaching the guidance for this year. But I guess given your earlier comments about reaching the end of the benefits from SKU rationalization, et cetera. I think at some point you had talked about 18%, 19% margins in the U.S. and just long-term, I mean how should we think about 18% and 19% now that the main initiatives are over? How should we think of a normalized margin for this business?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [47]

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Well, we've been talking about that throughout this conference. Of course, because of the new products and more profitable SKUs. And Super Soft is a better sales margins. Of course, but it is a mix. Yes, you're absolutely right. We're expecting by the fourth quarter to get maybe something about 19% EBITDA margin from Gruma Corp maybe 18%. On the longer term, we're expecting solid 18%. But keep in mind that fourth quarter for Gruma Corp always is the best quarter, that's normal business in Gruma Corp. Within that we feel comfort and as far as I can tell you is, we've been discussing a lot very deeply that's also Gruma Corp. what we can expect for that, like forecasting in the rest of the year. And yes, we are expecting to be close to 18%. Just to acquire, may be not sustainable because even as we sell fourth quarter is the best, first quarter is the worst. Then that's kind of your concern always first quarter because you'll see margins going down and then throughout the year going up and up and up and up. But always better, but talking about the full year, we feel quite comfortable because this balance is mix, we have in Gruma Corp. to reach those -- this kind of margins.

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Juan Antonio González Moreno, Gruma, S.A.B. de C.V. - Chairman and CEO [48]

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In the medium or long term, you're right, we almost are wrong with the SKU rationalization. However, we're still having a lot of room to continue changing the mix of our products for a better mix in terms of margins. That's will continue being the main driver of our improvements that we're expecting in the EBITDA for the medium or long-term in order to reach the 19%.

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José Juan Yordán, Deutsche Bank AG, Research Division - Research Analyst [49]

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Right. And I guess if I can just follow up because I mean, obviously, in Europe, your margin is sort of mid-single-digit now. And if you could give us an upside of what you expect? I know there have been some marketing investments and things that led to lower margins in the last few quarters. But how -- where are we on that and when do we expect to harvest those investments so any sort of short and longer-term outlook for Europe would also help?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [50]

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Well, as I said some time ago, our targets in Europe is to reach something around 12% to 14% EBITDA margin. But it's going to be -- that's going to last to get that, we will last maybe a couple of years. It’s going to be -- we're working on that and we have expected maybe couple of years more to be there, but not in the short-term.

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Operator [51]

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The next question comes from Miguel Mayorga with GBM.

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Miguel Mayorga Tena, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [52]

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My question is regarding Mexico. We have seen that you have been quite active in terms of pricing and a bit more aggressive when compared to competition. My question is if you've seen any change in the corn flour business market share in Mexico?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [53]

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No. What we are basically doing is we are gaining market share from our -- from the Asian metal. Seems we are enforcing of sales in the central -- in west region of the country, which have been more reluctant to the change. So the use of corn flour, we've been kind of successful in that. And not to convert them to the use of only -- to use only corn flour but also and they are mixing that corn flour with the Asian metal just to improve the quality of the tortilla. The average price policy in the corn flour that not at all we think that this is why to say priority in the market, that it's reflective on our sales. Of course, is a very sensible issue the price of the corn flour. We are beyond and our competitors are even beyond the raw corn. They will switch to the use of corn flour -- they will switch to using corn flour to use raw corn or even to use some more competitor, we -- even higher prices against our competitors because of service, because of quality, because of yields, because of everything. And we feel quite comfortable on that. This is part of the study here in Mexico, that's why you see those kind of things while we are basically doing, we are more focused on not increased prices, not decrease prices is not an issue for us unless the price of corn in the market be sustainably lower.

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Operator [54]

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(Operator Instructions) The next question comes from Felipe Ucros with Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [55]

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My question surrounds recent top line growth outside of Mexico. And then I have a follow-up on cash generation, which has been great for the company. When I look at the sales in US dollars in the United States, so not looking at it with the translation -- with the convenience translation that you guys do but looking at it in dollars, it looks like sales have been contracting quite a bit recently. Actually it looks like 4 out of the last 5 quarters, could've been a negative territory. And then Central America, is kind of in a similar situation if you do same -- the same operation. What's driving this trend? It seems to be mostly from the pricing side because volumes are clearly on the positive side and I wanted to see if you could comment on that? And then my follow up on cash generation. So even if sales hasn't looked great in local currency terms, it looks like the company has managed to maintain or expand margins, the cash generation is still very high. So it seems like the company is confronted with low growth, but high cash generation. Do you -- going forward, what does the company intend to do with the cash that is being generated? Clearly, you just did the hints of transactions are? Going forward, are you more inclined to increase dividends? To do a little more M&A or what are you looking to do with all the cash that's being generated?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [56]

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Well, talking about the sales in Gruma Corp I think you have a mistake. We've been growing also in terms of dollars, on a yearly basis. Maybe you have some kind of confusion. We have lower sales maybe on the wheat flour because we've been introducing prices because of lower cost of corn -- corn flour because of the lower cost of corn. But in the tortilla we've been growing consistently in dollar terms. Then when you translate to pesos, maybe it’s a little bit lower. But in dollar terms, we are higher in volume and growing and growing and growing on a quarterly basis. In Central America, it's a little bit more complicated because in Central America we're facing kind of a very low cost -- a very low price competitor located in Salvador. And also the -- we used to provide to the World Food Program from the United Nations about 3.5000 tons of corn flour per year in Honduras. In this year, the funding of this program has been filled and we are not provided basically maybe 20% for the full year of this product. And was even the proof -- and they have a proof that supplier of this 3500 or 4000 tons of corn because they have no money and maybe it will be delayed for by the end of the year or maybe next. And then there are going to see we're competing with a flanker. We're competing with a flanker to this competitor and that means this flanker had a lower price and then why you see maybe lower prices in Central America because some volume of corn flour now is being provided or is being supplied through this flanker. Then this is talking about the U.S. and Central America. Talking about the cash flows for the company. At this point in time, we have not have any information about the position of GIMSA and we already pushed some minority interest from the different -- in Mexico. We invest something about maybe $35 million, $40 million to push us back all the minority interest in different areas performance. Particularly, we have some minority interest there. And those minority were from 10% to 22% to 23% and we are positioning back on those procedures and we're investing this amount on that. We still have opened the APO offer for the purchase of the GIMSA church. We are not sure what will be the final results. But if, for any reason, we have not this puts us in full, this is something that we need to see maybe by the end of the year. What are we going to do? If we will reduce debt or we will finance in cash some working capital or we will make some kind of acquisitions or mark acquisition. We're contemplating, we're not expecting to build new plants not at this point in time. We're now analyzing what will be the production capacity requirement for the company for the '18 and '19. But this is going to be maybe discussed throughout for the product discussions. And then we cannot see -- we cannot tell you kind of the visual of what we are going to do with our cash flow. But it will depend largely about the results -- the final results of this purchase of (inaudible). Maybe by October, we can give you some kind of color about it.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [57]

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Okay. I understand. And that's only, I'll take the U.S growth question out and go ahead. Let’s see if we can sort out the difference that we have in numbers.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [58]

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Okay. Sure. I Appreciate that.

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Operator [59]

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And the next question comes from Miguel Ulloa Suárez with BBVA.

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Miguel Ulloa Suárez, BBVA Research SA - Research Analyst [60]

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As regarding GIMSA margins in particular setting them for 2017 and 2019. Could you provide some color on what you're expecting on what you're seeing ahead? And also a small question regarding ethics hedges that you had in place when they mature, what stock price please?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [61]

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Well, regarding the margins for GIMSA, we think that we're expecting to improve our margins in the second half of the year. For midyear, the ideas is to -- maybe at least to keep the same margins we already have and produce something that we need to see what we could do and what the market is, et cetera. It will depend about the cost of the corn in different levels in the market. And of course, this is something maybe we can discuss a little bit later. But while you can take into consideration is that at least we will be in the same margin levels for 2018 that we're expecting to have and we would keep the same guidance for 2017. In terms of hedges...

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Miguel Ulloa Suárez, BBVA Research SA - Research Analyst [62]

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Hedges.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [63]

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Yes the hedges. For Mexico?

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Miguel Ulloa Suárez, BBVA Research SA - Research Analyst [64]

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Yes.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [65]

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Yes, in FX. Well, we already basically mature most of the hedges we have. We contacted for this for the corn in this second half. And now it was out of $340 million to the $320 million we contracted at the beginning of the year, we only have maybe currently about $40 million to mature. But then most of the impact on those hedges are already there. Also what I can tell you is that we are now looking to make in some transactions to hedge the corn for the end of the year. In that, we are taking advantage of this voucher on the exchange rate. We hedge the corn that we will use during the first half of next year, at about $18.16. We contracted about $250 million or $260 million. That cost used for those going forward at about $17.60, $17.62, plus forward points we have an average an initial rate of Ps 18.16 per watt. With that the most important thing is that if -- so is the case and we have not done any impact or any increase in the prices of the corn in Mexico, we will be able to do not increase prices during the first half of next year, which will allow us to improve margins and to ensure that the results in terms of volumes, in terms of values, in terms of everything. This is something of course, we need to hedge the corn just to be sure that it will allow us to have better result. But at this point in time, this exchange rate is much better than we already have for the second half and then we can expect good results for next year.

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Operator [66]

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And the next question comes from Anna (inaudible) with (inaudible)

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Unidentified Analyst, [67]

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I'm sorry, if you've discussed this already, I could only join the call now. But now that the large investment you're executing are coming to an end. You’re in a net debt to EBITDA level of quite a low level and considering the amount of cash flow you're generating, would it make sense to pay shareholders more dividend? Is there a reason to continue preserving cash?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [68]

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Yes, Anna, while -- yes, we did talk a little bit about that, we cannot assure at this point of time. What we can do with the issuance of cash, it would depend on how public offer to purchase the GIMSA shares performs that will mature tomorrow and thus see what we can do. But maybe by the next conference call, we can give you a little bit more color. We're not expecting at this point in time to make us an original dividend payment during this year. Of course, we will make a dividend payment for next year. But if you're expecting to have an original dividend payment for the year, at this point in time, we are not contemplating that.

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Unidentified Analyst, [69]

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So, but then do you see additional room for growth? Growth opportunities or M&A?

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [70]

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Well, again, let me tell you that we have the pushes of GIMSA from the market and as well as we pushes in the minority interest of some of the mills in Mexico, we're investing something about in total $220 million -- to something around $220 million to $225 million and then what we can do is just to again refocus on to the debt to have some financial restructure. And then, we can maybe increase dividend payment next year, but it will depend about how will be the plans for the company.

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Operator [71]

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There are no further questions at this time.

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Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [72]

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Well, once again, thank you very much for joining us today. And if you have some additional questions, please feel free to contact me Villareal or Lilly to answer to any kind of questions you may have. Thank you very much, and have a nice day. Bye-bye.

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Operator [73]

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Ladies and gentlemen, this concludes GRUMA's Second Quarter 2017 Earnings Conference Call. Thank you for your participation. You may now disconnect.