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Edited Transcript of GRUMAB.MX earnings conference call or presentation 23-Jul-20 3:30pm GMT

·41 min read

Q2 2020 Gruma SAB de CV Earnings Call San Pedro Aug 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Gruma SAB de CV earnings conference call or presentation Thursday, July 23, 2020 at 3:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lilia Gómez Gruma, S.A.B. de C.V. - Executive * Raúl Cavazos Morales Gruma, S.A.B. de C.V. - CFO * Rogelio Sánchez Martínez Gruma, S.A.B. de C.V. - Vice-president of Corporate Finance ================================================================================ Conference Call Participants ================================================================================ * Álvaro García Banco BTG Pactual S.A., Research Division - Research Analyst * Barbara Virginia Guimaraes Halberstadt JPMorgan Chase & Co, Research Division - Research Analyst * Benjamin M. Theurer Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director * Felipe Ucros Nunez Scotiabank Global Banking and Markets, Research Division - Analyst * Isabella Simonato BofA Merrill Lynch, Research Division - VP * Lucas Ferreira JPMorgan Chase & Co, Research Division - Analyst * 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 2020 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, sir. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [2] -------------------------------------------------------------------------------- Thanks, Laura. Good morning, everyone, and thank you for joining us today. We are pleased to discuss our second quarter 2020 performance review. First of all, we hope everybody is safe and having no major effects from the COVID-19 pandemic. In Gruma, we have a major responsibility as a global provider of food staples. Our top priority continues to be the health and safety of our people and products and the continuity of our production lines and working market systems. We are glad to report that despite the disruption of the coronavirus pandemic, in the case of Gruma, our second quarter results continued showing the strength of the company in all its metrics: volume, sales, profitability and liquidity. The defensive nature of our products as well as the regional diversification of our markets led to volume growth of 4% in the period. This, coupled with our better product mix and an important part of our revenues coming from foreign operations, allowed us to report a 25% net sales increase. Volume growth and better sales mix also resulted in a significant 25% improvement in our consolidated EBITDA with an EBITDA margin of 16.7%, not only 20 basis points higher than last year but a record level of the company. It is important to mention that the EBITDA figure reported was achieved despite having absorbed about MXN 370 million in cost and expenses related to COVID-19. Net comprehensive financing cost was MXN 84 million less than last year, primarily in connection with lower interest expenses due to lower market rates and a lower proportion of peso-dominated debt. Income taxes were 5% (sic) [50%] higher, driven by a higher pretax income. The effective tax rate was 34.2%. Majority net income rose 38% due to better operating performance and the benefit of the peso weakness. In terms of CapEx, we invested $28 million for capacity expansion mainly in Dallas, Mexico and Spain. Gruma's debt rose $90 million during the quarter to $1.5 billion. Our net debt-to-EBITDA ratio was 1.9x. Now talking about our main subsidiaries. Let's start with Gruma Corp. Gruma USA sales volume rose 5%, while corn flour grew 5%; and tortilla, 6%. Net sales increased 14% on the back of volume growth and higher average prices, especially at our tortilla operations due to our better sales mix within the retail business and the change between channels favoring retail rather than foodservice. EBITDA rose 15%, and EBITDA margin improved 20 basis points to 19.3%. At GIMSA, sales volume rose 5%, driven mainly by higher export sales to Gruma USA and higher sales to government channels amid the coronavirus outbreak. Net sales increased 10%, reflecting price increases implemented at the end of 2019 as well as volume growth in the period. EBITDA rose 10%, driven by revenue growth. EBITDA margin improved 10 basis points to 16.3%. At Gruma Europe, sales volume decreased (sic) [increased] 9%, with a corn milling business rising a strong 33%, mostly from higher sales to snack producers. Conversely, the tortilla business showed a 32% decline in sales volume due to a sharp slowdown in the foodservice channel amid the COVID-19 pandemic. Net sales decreased 16%; EBITDA, 55%; and EBITDA margin to 4.9%. At Gruma Centroamérica, sales volume rose 18%, mostly due to consumer demand and sales to government channels and the United Nations World Food Programme amid the coronavirus outbreak. Net sales increased 33%, driven by sales volume growth and the peso weakness. EBITDA increased 41%, and EBITDA margin reached 11.5%. On the other subsidiaries and eliminations line, EBITDA improved MXN 40 million due to a better performance of the technology division and better absorption at corporate level. At this point, we are ready to take your questions. Laura, could you please help us? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from the line of Ben Theurer with Barclays. -------------------------------------------------------------------------------- Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [2] -------------------------------------------------------------------------------- So to keep it short, just to understand a little better. You've highlighted in the report, and you've just mentioned it in your prepared remarks, the approximate MXN 370 million of expenses and costs related to COVID, and you nicely gave the breakdown on a regional basis. Could you elaborate a little more on what's behind that MXN 370 million number? Are those investments in PPE? Is that into additional cleaning that's required? Just to understand a little bit the nature of those investments, how onetime they are or not, because I've done the math. And if we adjust to profitability for that cost, I mean, EBITDA margin was above 18% on an adjusted basis. Just to understand, if we were to take those costs out and how much we can take out, how strong the underlying business actually performed? That would be my first question. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [3] -------------------------------------------------------------------------------- Sure. Well, let me tell you that this MXN 160 million we spent during this period, part of it mainly will correspond to the first quarter, part of it would be used in the next months. Basically, if we talk a little bit about the breakdown of this, we gave some bonuses for the employees, for the plant employees worldwide, first one, and in the U.S. for the second one. That implied about $6 million. We are -- were trying to motivate the people to encourage to still go into the plant and to work with us, no matter what with this pandemic, of course, with all of the protocols of health. And in this amount, we spent about $6 million. And this, we call the hero bonuses. A second large amount, we bought about 5 million masks. These masks have been used worldwide. We have a little bit more than 32,000 employees, and we are expecting that these masks will be used. We have masks enough in a stockpile until October of this year. We bought about 45,000 liters of sanitizers. We also have dispensers and to use frequently everywhere and free where -- any kind of location. We increased something about employee transportation because we wanted to ensure the distancing between the employees who are being transported in order to avoid any kind of contamination. We invested in thermal cameras, in thermometers, in all these kind of things. We invested -- we spent in gloves. We spent in kind of suits according to these similar things. And of course, we also spent in sanitization of all the facilities more frequently, all the locations more frequently in order to avoid any kind of cross contamination. Any single, let's say, person, once he would be infected, we stop the line, and we make the cleaning -- cleaning the line in order to assure that everything will be okay. And generally speaking, this -- we are not investing in nothing. We are not buying anything, any assets. All of the deals -- all of this will be consumed by the company throughout the time. Then what we can expect for the second half of the year? Let's say, we will still have some kind of expenses. But certainly, it will be substantially lower. We are not expecting to pay any additional bonuses for the rest of the year. We have already invested in these couple of bonuses during the first half. And we think that, that is going to be okay. Really, as I can tell you, the masks, we have inventories until October. Maybe we will invest some additional amount on masks, but this is going to be by the fourth quarter maybe. And this will be -- it will depend a lot how this pandemic is performing. And then certainly, I can tell you, we're going to have some additional expenses. But also certainly, it will be substantially lower than we reflected within this quarter. -------------------------------------------------------------------------------- Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [4] -------------------------------------------------------------------------------- Okay. Okay. Perfect. All right. So that was very clear. And I mean, obviously, the bonus spend, that's a big, bug chunk of it. Now one question, and I have to focus on the business that's not the 2 biggest one. But obviously, you've been investing there and growing in Europe. Could you elaborate a little more on the dynamics between the different business lines and why, ultimately, profitability was so much under pressure? Was it a function of just a shift mix, lower value product, that ultimately explained the decline in EBITDA margin? Because, I mean, volume was still coming in very nicely. It's just sales -- it seems like it was in a kind of a loss operating leverage. So just to understand a little bit of the dynamics in Europe. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [5] -------------------------------------------------------------------------------- Yes. What you've seen in Europe this quarter was a broader reported growth in volume because of the wheat flour, corn flour and by-products of, let's say, the corn milling facility. These products are substantially lower in prices than the tortilla. In the tortilla side -- and of course, we have a good profitability in this business. But again, the price of the products is substantially lower -- or are substantially lower than the prices of wraps and all the products that we make in the, let's say, the tortilla division in Europe. In the tortilla division, we have a tremendous slowdown on the foodservice, QSR and institutional markets. It has been reducing a lot because of the lockdown on the operations there. And even we take -- we took advantage to enter into the supermarkets everywhere in the Continental Europe, in the U.K. as well as in Russia. And we introduced our brand in some countries we were not participating. And this was because some of our competitors were not able to provide the demand for tortilla. We took advantage of that. The volume we lost in -- revenues in the foodservice, institutional and QSR was too much that the other side, the retail business, even they grew in this channel, it was not enough. This was one thing. The prices are better. We are participating with travel networks for some supermarkets. But also, again, we have reintroduced in France, in Germany, Belgium, Netherlands, in Poland our Mission brand. We -- the U.K. was quite reluctant to use our brand, the Mission brand, in the supermarkets and the convenience stores. We already introduced that. We are providing them their own private label, but we already start to sell our brand as well as in Russia. Of course, in this particular case, implied a little bit more expensive because we launched our brand there. And that's why the result was also a little bit better. But the price of the tortilla is improving because the -- let's say, the relationship between retail and foodservice is improving because we are growing on the retail sector. We are investing in Europe because we have no production capacity currently in our facilities, particularly the Spain facility we have, we have a space there. We have room for growth, and that's why we are extending -- we are investing to extend our operations. We want to have some additional production lines. And once these production lines will be working, we're going to be basically working if not at full, maybe at about 75%, 80% because we already have the customers for this product. We also invested in the U.K. with an additional production line because the market, while it used to be supplied by our Netherlands facility, we are now -- are being supplied now by the U.K. and Russia. And when we import from Russia, we have a couple of important additional expenses. One of them is import tariffs for the products. And the other is, of course, the transportation of our products. Now what we want to do, we already have in place this new production line in the U.K., and we will avoid these transportation expenses and these import tariffs from Russia. And we will provide this market from the U.K. Then even we have not any -- at this point in time, we are not quite clear how will be the performance in the foodservice, QSR and institutional for the rest of the year because of this pandemic. We feel comfortable that from now on, the results of the company will improve a little bit, maybe not as much as the last year because it would be gradually. But we will improve because of this, let's say, savings that we will have as well as the better price of our retail business that we are growing there. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from the line of Barbara Halberstadt with JPMorgan. -------------------------------------------------------------------------------- Barbara Virginia Guimaraes Halberstadt, JPMorgan Chase & Co, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- I just wanted to follow up on the investment plan. I didn't hear quite well if you have an updated guidance for the year. So if you could comment on that, if that's the case, or if you're just referring to the guidance? And then also, if there is any changes in terms of expectations for dividends and share buybacks. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [8] -------------------------------------------------------------------------------- Sure. Of course. While talking a little bit about our guidance for the full year, we want to change a little bit the guidance we did -- we gave you at the beginning of the year. Now once we have half of the year passed and during this July, the Gruma Corp. performance in terms of sales, particularly on retail, has been really well as well as the improvement on the foodservice channel also. We are expecting that volumes from Gruma Corp. for the full year, we are expecting to be something in between 4% and 5% growth compared with last year. That will imply something about, in terms of net sales, growth of about 8% to 10%. And EBITDA, we are expecting to have an improvement of about 50 to 70 basis points, plus the savings we can make on the expenses we already have related with the COVID-19. Let's say, 200 -- from this MXN 350 million we spent during the first half, about MXN 260 million were applied in Gruma Corp. We are expecting that this is going to be substantially lower, substantially lower because the most important part of the hero bonuses were paid in the States as well as some more expenses. Then we are expecting to improve a little more than that but in the conservative side, at least 50 to 70 basis points. Talking about GIMSA. In terms of volumes, keep in mind that during this first half of the year, GIMSA has been supporting a lot to Gruma Corp. because the excessive demand for corn flour was huge. And then we were supporting from our facilities in Mexicali, in Monterrey as well as in Mexico City area. Then for the rest of the year -- or for the full year, excuse me, we are expecting to grow instead of 1% to 2%, it's going to be 3% to 4% compared with 2019. That will result in something between 6% to 8% on net sales. And EBITDA margin, as we have been discussed before, it will be something between 16% and 16.5%. We feel quite comfortable with this EBITDA margin. In Europe, I want to reserve the guidance because, of course, we need to wait just to see how they will improve, the QSR, foodservice and institutional markets, if you allow us, just to see -- to help kind of frame maybe this quarter. Maybe next, we would be -- maybe not too much useful for you because we want to be basically by the end of the year. But I don't want to expect too much or give you some of those expectations. Being that we are recovering, we're going to have a better performance. We're going to have better sales volumes. However, in terms of, say, to tell you how much it will be, I don't feel comfortable at this point in time to tell you something about. In Centroamérica, we are expecting to have 8% to 10% volume growth. In terms of net sales, it will be something between 18% to 20%, and EBITDA margin also will be 20% to 30% -- 20 to 30 basis points better than the margin we reached during 2019. If we talk about the consolidated, what we can expect on a consolidated basis will be something, in volume, something about 3% to 4%, something about 20% higher on sales, on net sales. Taking into consideration the exchange rate, we will be basically at the same basic level that we already have and an improvement of 30 to 40 basis points on EBITDA, then also, plus the improvement that we will have with the expenses we don't want to have on that's related to COVID-19 during the second half of the year. Then all of these will be also -- will improve and maybe better -- a little bit better the EBITDA margin and the EBITDA [unit] ratio on a consolidated basis. Now this is about the guidance. Talking about dividends, what I can tell you is that at this point in time, we want to keep the same dividend we have already announced and we have already approved by the shareholders' meeting. It was what we needed to do just to go through the year. And if we have more cash available will be maybe used to some additional dividend or some additional -- the purchase of shares. As of today, year-to-date, we've been investing about $103 million on the purchase of shares of the company. We will continue throughout the year. And also, as I was telling you during the last conference call, what we want to do is try to take a little bit of cash generation to pay down debt a little bit. That's why we cannot give you too much info on that. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question comes from the line of Isabella Simonato with Bank of America. -------------------------------------------------------------------------------- Isabella Simonato, BofA Merrill Lynch, Research Division - VP [10] -------------------------------------------------------------------------------- Can you give us a little bit more detail how you're thinking about pricing mainly in Mexico and in the U.S. in the second half of the year? And how are you hedged on corn and wheat in the U.S. for this year and next? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [11] -------------------------------------------------------------------------------- Sure. Well, for the year, in both Mexico and the U.S., all the corn is hedged. All the corn that we are using currently is already hedged. And also, we are expecting to hedge inventories throughout the rest of the year, particularly for Mexico, in order to try to make some benefit. Let me tell you that we have some savings on Mexico compared with the corn that we bought. The last corn harvest in Mexico, we have about $0.40 improvement in terms of cost. But we already have the corn, and we already have the hedge for this corn in Mexico. In the States, we have, at the same level. We usually hedge the full year on corn for this year. And for the next, we have about 30% of the corn that we will use in 2021 at $3.3 per bushel. This compares about 4% lower -- no, no, it's not, no, compared with $3.6 per bushel that is the average of the market. But also, this is about $0.70 or a little bit more, $0.72, lower than the cost of the corn that we have currently within the -- in Gruma Corp. Also in Mexico for the next year, we have not, at this point of time, anything hedged. We want to take advantage of the -- we are expecting a very good corn harvest in the States. And yes, we are trying to take advantage of this extraordinary corn harvest, which we expect to take a little bit -- to hedge prices of corn lower than currently are. As of today, we have about $3.33 per bushel, and we expect that it's going to be a little bit better. In terms of wheat for the U.S., we already have about 27% already hedged for 2021. The wheat for this year is already hedged, and the hedge for 2021 is about -- something about $4.75 or something around that, which would mean about 4% lower than the cost of the wheat we have -- we currently have. That's what -- that we currently have. But maybe in September, October, we will reinforce our dynamics to hedge the rest of the corn, maybe, again, September, October and November. -------------------------------------------------------------------------------- Isabella Simonato, BofA Merrill Lynch, Research Division - VP [12] -------------------------------------------------------------------------------- That's clear. And in light of the -- sure. In light of those lower costs, do you plan to increase prices in the second half? How are you thinking about prices? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [13] -------------------------------------------------------------------------------- Let me tell you, in Mexico, we are not expecting to increase prices during the second half of the year. Let's say, as of today, we are around at the same price we already implemented last December. We don't want to reduce prices, but we don't want to increase prices. It will depend about how will be the cost of the corn for the mid-year in order to make a decision of what are we going to do for 2021. In the States, our agreement with our customers is basically, we put -- we announce the price increase or decrease according to the moving average price of the corn throughout the year. In other words, as of today, the average price of the corn for this 2020 in the States is about $3.6. That's going to be -- we will decrease prices of corn flour, but our hedge currently is $3.3. Then, we're going to have a confirmation on that, if you would like. Of course, it will depend a lot what will be the performance of the price of the corn for the next 1.5 months. By the end, we usually set the average at the end of August. And basically, during September, we announced the price movement. This year, we will need to decrease a little bit the prices. However, we would take a little benefit because of this -- the difference in between the corn cost we have hedged and the current cost or the average price of the corn in the market. In tortilla, we never decrease prices. The only thing that -- We cannot increase, and we are not expecting to increase. But we will take advantage of these benefits on the hedge of the wheat. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from the line of Miguel Tortolero with GBM. -------------------------------------------------------------------------------- Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Congrats on the results. As you mentioned, we have seen the COVID-19 disruptions benefiting the performance in the U.S. How do you see the trends in the region? I mean, would you say that the changing consumption habits we're witnessing is something temporary? Or is there something that you absolutely believe it's not temporary, at least in the States? And then I'll come up with a second question. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [16] -------------------------------------------------------------------------------- Right. You are talking about the trend on the consumption in the States because of this pandemic, isn't it? Because I hear a little bit distortion. -------------------------------------------------------------------------------- Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Yes. I'm talking about the increase in volumes in the retail channel due to stay-at-home consumption? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [18] -------------------------------------------------------------------------------- Yes. Well, let me tell you that we feel that we are now back into some kind of a new normality. And this new normality implies more consumption at home than in foodservice because as has been reflected even during this month, we have a very good delay in terms of sales on the retail. And even we've been improving the sales of foodservice, retail sales have been higher than pre-COVID-19. This is going to be a trend that we see that is going to be for the future. That's why we are increasing our guidance for the rest of the year. And retail sales, we are expecting to be much better than we have in last year, let's say, during the second half. This new normality is much better for us than the momentum we had before COVID. And again, our reported sales says that. Even let me tell you that we are now increasing production capacity in our existing plants. And that's why we are now building a new facility. We are starting to build a facility in -- on the Midwest because if at this point in time, I have more production capacity, this capacity will be result in sales to the market. The market absorbs literally all the tortillas that we could make. We are taking advantage of that, of course. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Our next question comes from the line of Lucas Ferreira with JPMorgan. -------------------------------------------------------------------------------- Lucas Ferreira, JPMorgan Chase & Co, Research Division - Analyst [20] -------------------------------------------------------------------------------- Raúl, my question is along these lines on a new normal. I want to understand a bit better the food categories, so if you can talk about what are the products and how much more value-added they are that you're selling, sustaining your profitability. So can you give us a bit more insights on the -- what is actually sustaining this profitability when you look at your subcategories, especially within tortillas? If the consumer is looking for more convenience, what's driving that? And my second question, also along those lines, is something we've seen in the past, which is the retail channels absorbing part of these gains, if you think that this kind of -- these channels now will allow you to keep a part of this improvement, let's say, in this -- or in this trend or this value generated by these new habits of the consumers. So in other words, do you expect that this is also a new normal in your profitability, especially in the U.S. market? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [21] -------------------------------------------------------------------------------- Yes. Sure. Well, let me tell you -- so you're talking about the growth in the category. Of course, we've been having better sales on the retail, but also not only on the retail, which favor the company because of the lower prices, but also the consumption of the more value-added products has been growing and has been sustaining. And we see it's going to be sustainable for the rest of the year and the coming years. Now this is a trend in the market, which is carb balance, whole wheat, gluten-free, super soft tortilla. All of these categories, all of these products are on that better for you and, of course, will have more profitability for us. It's those -- this category of products is fast -- is even growing much better than the rest of the products. Then this is quite sustainable not only for the year but for the coming years. The second question, can you -- I cannot understand you. Can you repeat me please the second question? -------------------------------------------------------------------------------- Lucas Ferreira, JPMorgan Chase & Co, Research Division - Analyst [22] -------------------------------------------------------------------------------- Yes. Sure. If you expected to keep how this margin gain to these profitabilities and not then let them in the hands of the retailers, let's put it this way, so your ability to negotiate with them, how do you see that happening after the pandemic? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [23] -------------------------------------------------------------------------------- Yes. We feel that these margins are really good. And within that, if this new normal will continue, it could be -- if not too much improvement, it could be sustainable for the coming months and for the coming years because, again, the focus for us is promoting and encourage the market to consume the value-added products, which are substantially more profitable for us than some other. Then we think that maybe these margins could be sustained for the -- after the COVID-19 pandemic in the U.S., particularly. -------------------------------------------------------------------------------- Lucas Ferreira, JPMorgan Chase & Co, Research Division - Analyst [24] -------------------------------------------------------------------------------- Just a very quick follow-up. Then I would also assume, obviously, that the on-premise and foodservice channels will be reopening gradually. So -- but since you're very comfortable about your margin expansion, is it also a kind of decision of the company to maybe rationalize the amount of sales to these channels and to kind of rework on your portfolio of clients there? And because I assume with the on-premise expanding once again, that would be negative to your margin. Of course, a positive to volumes, but I would say, negatively impacting our margins. So can I assume that the on-premise growth will also be impacting the overall margins? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [25] -------------------------------------------------------------------------------- Not at all. We do not limit the sales on the foodservice. We are not constraining anything. We are operating -- we are participating with the main food chains in the States, providing the full amount of tortilla they were asking for. In some cases, of course, we have some kind of contract with them. When they launch kind of promotion of the products, we already have some kind of sales, and they ask for more. We have some kind of buffer, but they ask for amounts beyond that. And in -- so the case, on a weekly basis, we sell how much more we can provide them because of our capacity. And of course, our focus is on retail. But we always -- be in full compliance about the amounts that they are asking for. That is going to be the case in the future. We don't offer everything about the constraint with margin because of lower returns of foodservice. They also improve our absorption of fixed expenses. They are also collaborating for us in terms of good returns. Not as much as the retail, but everything is part of this, I would say, formula. If we continue growth on the retail and continue growth on the value-added products, we don't see any kind of change on the margins for Gruma Corp. in the near future. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Felipe Ucros with Scotiabank. -------------------------------------------------------------------------------- Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [27] -------------------------------------------------------------------------------- Congrats on the results. They were fantastic. I had one follow-up question on innovation and then another question on capacity. So the first one is on innovation. We've been focusing a lot on that on recent calls, and I wanted to see if you could give us some quantification around the innovation efforts. Do you know how much of a -- if you can give us what percentage of the total sales in the U.S. are coming from innovation right now? And maybe if you can tell us how much faster that category is growing versus the traditional product. And then on capacity, obviously, you must be running short on capacity in the U.S. if the Mexican operation is having to help. So I was wondering if you can give us some color in terms of how long will capacity be constrained. And when do you expect the new lines to come in? Because I expect -- I imagine that the margins on exports from Mexico are lower due to the transportation expenses. So if you could give us some color on that, that would be great. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [28] -------------------------------------------------------------------------------- Yes. Yes, Felipe, of course. Well, talking about the rhythm of product development for the company, particularly, of course, related to the premium products, we are all continually doing that. Actually, we are quite close to launch a couple of premium products for the market. We've been working with some grocery chain to provide this kind of product to them as well as in the -- on the retail. The retail, they are expecting these newer products. And we are always continue doing that, and that's going to be the trend. The trend for this kind of product -- the value-added products already for us, with health care products for the consumer, it's growing and growing and growing, and it's going to be the trend for the next maybe 3 years. I don't know. The new generation are asking for these kind of better products, and they are willing to pay a little more in order to have a healthy product. This is something important to tell you. And we are continually doing that. And again, mainly in the next couple of months, we will launch a couple of premium products, all of them in the category growth for you, in terms of the new premium products for us. In terms of capacity constraint, we have some kind of constraint currently. But we are now making some co-packing just to -- we will start to do some co-packing while we increase the production capacity in the States. We don't want to take or to lose the opportunity to expand our presence in the market in the U.S. We are implementing or we are starting new production lines in our Dallas facility. We will -- we are now also increasing production capacity in our plant in Panorama, California. We are also improving production capacity with additional lines on Lakeland, Florida. And we are expecting by the -- maybe by the end of first quarter or beginning in the second quarter of the year, we will start the production on our new facility that will be located in Indiana with -- so again, at about 75%, 80% production capacity, because of this demand of growth ongoing in the States and everywhere. In Mexico, production capacity, we are basically working at about 98% production capacity. We are now in the process to increase our production capacity by adding an operation unit on the Río Bravo, close to the one in Tamaulipas facility at (inaudible). We will have a new production unit of corn flour, and this is going to be able to satisfy the growing demand in the local area, plus the support of tech companies in the States to satisfy the demand of corn flour also in the States. We don't have any kind of concern at this point in time. We are working on that. We have working at full capacity in our technology division. We follow up on a weekly basis the status of our new production lines. We have all the plants in the picture. We are adding capacity to Spain, to Malaysia, to the States, in Mexico, in Mission Food Mexico, et cetera. Everywhere, we are expanding production capacity. We will be able to supply this excess of demand that we already have. We don't see any kind of issue in this case of production capacity constraints at this point of time. -------------------------------------------------------------------------------- Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [29] -------------------------------------------------------------------------------- And in terms of the innovation, if I can follow up, any chance you could give us a percentage of sales in the U.S. that comes from those categories? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [30] -------------------------------------------------------------------------------- Well, no, have not figured at this point of time. But let me tell you that currently, for example, the last information we have for this month of July, super soft tortilla is growing about -- at about 32%; carb balance, about 60 -- 76%; gluten-free, 47%; minis (inaudible), 32%; and (inaudible), 13%. As you can see, this -- all of these are in the category of better for you. We are growing in a very good -- with a very good rate. In all the supermarkets, all the sales are growing also a lot. We are increasing our products very well, but particularly in this value-added products. Actually, also in our production facilities, we are now focusing on these kind of products, which will add value for us. In terms of -- yes, in terms of total volume, if you don't mind, maybe we can make a call with Rogelio or Lilia. Or guys, I don't know. Rogelio, are you there? Do you have this information about how much the value-added products represent, but maybe something about 25% for sales in the States and something about it? I don't know. I'm not sure. No, I have no information at this point of time. -------------------------------------------------------------------------------- Rogelio Sánchez Martínez, Gruma, S.A.B. de C.V. - Vice-president of Corporate Finance [31] -------------------------------------------------------------------------------- Let me check the number, and I'll call you back. -------------------------------------------------------------------------------- Lilia Gómez, Gruma, S.A.B. de C.V. - Executive [32] -------------------------------------------------------------------------------- Total U.S.A. is around 20 -- around 10%. -------------------------------------------------------------------------------- Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [33] -------------------------------------------------------------------------------- 10%? -------------------------------------------------------------------------------- Lilia Gómez, Gruma, S.A.B. de C.V. - Executive [34] -------------------------------------------------------------------------------- Of sales. -------------------------------------------------------------------------------- Rogelio Sánchez Martínez, Gruma, S.A.B. de C.V. - Vice-president of Corporate Finance [35] -------------------------------------------------------------------------------- Of sales. -------------------------------------------------------------------------------- Lilia Gómez, Gruma, S.A.B. de C.V. - Executive [36] -------------------------------------------------------------------------------- The premium tortilla product, it's around 10% of total Gruma U.S.A. volumes. -------------------------------------------------------------------------------- Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [37] -------------------------------------------------------------------------------- Gruma Corporation, Gruma on -- the whole Gruma? -------------------------------------------------------------------------------- Lilia Gómez, Gruma, S.A.B. de C.V. - Executive [38] -------------------------------------------------------------------------------- Yes. Gruma U.S.A. -------------------------------------------------------------------------------- Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [39] -------------------------------------------------------------------------------- You mentioned that -- the whole Gruma Corporation, okay, yes. -------------------------------------------------------------------------------- Lilia Gómez, Gruma, S.A.B. de C.V. - Executive [40] -------------------------------------------------------------------------------- The addition of them all should be around 12%. And tortilla is even more. I mean, retail tortilla is even more. It's like -- it should be like 15% or something. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Our next question comes from the line of Miguel Tortolero with GBM. -------------------------------------------------------------------------------- Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [42] -------------------------------------------------------------------------------- Sorry, I got disconnected during my previous question. Can you hear me well now? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [43] -------------------------------------------------------------------------------- Yes. Can you repeat your question? (inaudible) -------------------------------------------------------------------------------- Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Yes, yes, yes. So this is my follow-up question, and I hope you haven't answered it yet. It's that the price/mix improvement was quite impressive in the U.S., and I understand that many things aligned during the quarter. But could you give some sense at least directionally of how much of the improvement were actually explained by the change towards retail and how much by the change -- by the improvement within retail? And a quick follow-up, considering the boom we have seen in the snacking industry that actually helped your volumes in Europe, would you consider the possibility of M&A in this segment? I mean, from this side, it makes a lot of sense in terms of integration and growth perspective. What would you be your comments? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [45] -------------------------------------------------------------------------------- Yes. Sure, Miguel. Well, talking about this, the trend of the products, we've been growing in a very good shape. And we are expecting this trend would continue to grow in the same level, the same trend, for the rest of the year and for the coming years. And even though -- even we are expecting to grow this category. Maybe I was telling minutes ago, we were now talking about 12%. And then we are expecting that this trend eventually will represent something about 30% or 35%, 30% of our sales in Gruma Corp., the value-added products. And that's a trend consistently that we are seeing everywhere, not only in the States but also in the whole world. And we think that this is going to be really very good for us and very sustainable in the future, that trend of consumption of these value-added products as well as, as I was telling you, on the retail. We see a very good performance also on the retail. And as I was telling you, we have a new normality. This new normality is much better or higher in terms of volumes than we had before COVID-19. Then this trend will continue -- or we agree, this will continue to grow for the next -- not only for this year but also for the next couple of 3 years. Now that new generations are asking, like I was telling you, the products, value-added products, healthier products, and they are willing to pay a little more, we have to take -- to get this kind of healthy products for them. The second question was about, excuse me? -------------------------------------------------------------------------------- Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [46] -------------------------------------------------------------------------------- Yes. You expect some kind of possibility of a potential M&A? -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [47] -------------------------------------------------------------------------------- Yes. Acquisitions, M&A. M&A, yes. Well, let me tell you that we've been analyzing some possibilities in the executive committee. At this point in time, we have not any kind of target or, let's say, important target. We want to be focused on that because we are growing a lot. We want to take advantage of this growth on current -- core business currently. But eventually, we will do that. This is something that we've been discussing on our Steering Committee, just to try to add a new leg or business to the company that match with our core currently. But at this point of time, what we want to be is to be focused on our current business and take advantage of the growth everywhere where we are now operating. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Our next question comes from the line of Álvaro García with BTG. -------------------------------------------------------------------------------- Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [49] -------------------------------------------------------------------------------- Congrats on the results. Two very quick ones. First, if you could just clarify the CapEx guidance for the year. I'm not sure if you just weren't sure you or you didn't give that. I couldn't hear on the call. And second, with what's probably going to be a weaker labor market in the U.S., I was wondering, one of the margin pains you've had in the past has been labor and transportation expenses in the U.S. I was wondering if you think that might trend potentially downward into next year. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [50] -------------------------------------------------------------------------------- Yes. Yes, Álvaro, thank you. Well, talking about CapEx, what we want to do is just to keep the same amount that we discussed at the beginning. Even we are currently delaying it because of this COVID-19. We have not invested at the level we were expecting. But let me tell you that we are working hard in our technology division, just to add production lines in the -- to the facilities. I'm sure that we would be able to spend this $250 million, maybe not, by the end of the year because of the delays. But we want to keep this same amount because eventually, we are trying to accelerate the construction of these new production lines as well as the facility that we have -- we expect to have in the States. In terms of -- the second question was... -------------------------------------------------------------------------------- Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [51] -------------------------------------------------------------------------------- On labor and transportation expenses, they were one of the margin pains in the past, and maybe they... -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [52] -------------------------------------------------------------------------------- Yes. Well, part of the reason that we are now increasing production capacity we have through our new production facility in the Midwest is because of -- what we want to do is just try to avoid kind of transportation costs. Labor will be there. We are now automizing the packaging areas in some of our facilities. Of course, it will depend a lot how profitable it will be compared with the automation of these processes. We are implementing as much as we can. In terms of our regions, Europe, Europe and Australia are quite automated. And we have been evaluating our facilities in the States in order to see if it will be profitable for us to invest here in the automation instead of have the labor for -- through people. But in terms of distribution and transportation expenses, what we want to do is just to avoid this kind of import from distances, which include additional distribution costs. This is going to be the facility. And eventually, the next facility will be close to consumption centers in order to try to mitigate this kind of thing. Then maybe at the beginning of the year on the next, let's say, 6 months, we'll be where we are currently. But eventually, the idea is just to try to see kind of improvement on transportation expenses because of construction of new distribution centers as well as new facilities in the States and because of other markets. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn it over back to Mr. Raúl Cavazos for closing remarks. -------------------------------------------------------------------------------- Raúl Cavazos Morales, Gruma, S.A.B. de C.V. - CFO [54] -------------------------------------------------------------------------------- Well, thank you. Thank you, Laura. Well, once again, thank you. Thank you really very much for all of you guys for joining us in this conference call. Please be careful. Take care. Take care of yourself and take care of your family. This is a really hard time for all of us. We need to be quite cautious on this. Hope everybody will be good and be fine also. And if you have any kind of questions, please feel free to call us just to try to get any kind of questions you may have. Thank you very much, and have a great day. Bye-bye. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes Gruma's Second Quarter 2020 Earnings Conference Call. Thank you for your participation. You may disconnect.