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Edited Transcript of LALAB.MX earnings conference call or presentation 22-Oct-19 3:00pm GMT

Q3 2019 Grupo Lala SAB de CV Earnings Call

GOMEZ PALACIO Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo LALA SAB de CV earnings conference call or presentation Tuesday, October 22, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto A. Arellano Garcia

Grupo Lala, S.A.B. de C.V. - CFO

* David González Peláez

Grupo Lala, S.A.B. de C.V. - Head of IR, Treasury, and Risk Management

* Mauricio Arboleda

Grupo Lala, S.A.B. de C.V. - CEO

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Conference Call Participants

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* Antonio Gonzalez Anaya

Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research

* Felipe Ucros Nunez

Scotiabank Global Banking and Markets, Research Division - Analyst

* Fernando Olvera Espinosa de los Monteros

BofA Merrill Lynch, Research Division - Associate

* Luis Miranda Valenzuela

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

* Miguel Angel Tortolero

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to Grupo LALA's Third Quarter 2019 Results Conference Call. Please note that today's conference is being recorded and will be available for replay. I'll now turn the conference over to Mr. David González, Grupo LALA's Head of Investor Relations. Please go ahead, sir.

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David González Peláez, Grupo Lala, S.A.B. de C.V. - Head of IR, Treasury, and Risk Management [2]

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Thanks, Rob, and good morning, everyone. Thank you for joining us to review LALA's third quarter 2019 financial results. The related press release was issued after yesterday's market close and has been posted to our Investor Relations website at grupolala.com. As always, we have presentation slides to aid today's discussion. You can find the slides in the same location of our website along with an updated fundamental spreadsheet.

Participating on our call today are Mauricio Leyva, LALA's CEO; and Alberto Arellano, our CFO. Please move to Slide 2.

Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties, and actual results may differ materially from those suggested by the statements.

Please move to Slide 3. Today's discussion of LALA's results will be as follows: Mr. Leyva will start by providing an overview of LALA's third quarter performance. He will then review our results by region while also providing an update on the various strategic growth initiatives that we have underway in each of these markets. Mr. Arellano will follow and review LALA's financial and operating results in more detail.

We'll then open the call up for questions. After today's call, I will be available for any follow-up questions you might have.

It's now my pleasure to hand the call over to Mr. Leyva.

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [3]

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Thank you, David, and good morning, everyone. Thank you for joining us. For the third quarter 2019 highlights, can you please move to Slide 4.

During the third quarter, branded sales grew nearly 3%, and our EBITDA reached MXN 2.3 billion, including the onetime payment from the previously announced Lactalis settlement. On a comparable basis, our EBITDA increased 28% with a corresponding margin expanding 240 basis points and in line with our 2019 plan.

LALA's controlling net income more than tripled on a 30% increase in operating income, lower financing expenses and also benefiting from a substantially low effective tax rate than in last year's quarter when we incurred a onetime tax penalty.

During the quarter, in Mexico for the first time, we broke the working capital barrier by achieving negative working capital, improving this ratio 410 basis points year-over-year. On a consolidated basis, working capital fell further 1.6% of consolidated revenue. Lastly, our debt leverage improved to 2.9x EBITDA on track for a 2.5x target.

On Slide 5, we are highlighting to start the overview of our third quarter performance in each region, we'll start with Mexico.

Please move to Slide 6., where we see that branded sales grew nearly 3.2% through a combination of innovation, premiumization and core campaigns, which are among the main component of our strategy to accelerate growth in this market.

The renewal of our core product portfolio and a clear differentiation strategy drove a nearly 7% increase in LALA branded Milk and Cream during the quarter. Capitalizing on our innovation strategy, LALA's market share in Greek yogurt increased close to 12% in the first 5 months. We are further expanding into premium cold cuts by launching LALA Plenia, sale of cold cuts grew 29% year-over-year. And in the plant-based category, combined sales of our mainstream and premium milk alternatives increased 84%.

I would like to highlight here our impactful LALA season campaign, which featured Chris Evans. In addition to generating over 240 million impressions in the first 3 days, this campaign created a halo effect for the overarching LALA brand and across the whole milk category.

The campaign helped drive a 45% increase in our premium milk sales as well as achieve a record 8% market share of total milk sales in Mexico.

Please move to Slide 7. In terms of profitability, third quarter performance in Mexico was affected by an operational headwind in our cheese plant at Torreón that reduced our inventory levels for the last week of August and for the month of September. We had out-of-spec materials that impacted our manufacturing reliability and brought additional costs to reprocessing and rerouting of product in order to maximize existing stock levels.

This ended in a year-over-year 8.8% volume contraction in cheese product offerings for the quarter, affecting sales by MXN 207 million and additional expenses of MXN 194 million due to waste and additional transportation.

Strong operating processes and actions at our global procurement office identified the root causes and the actions needed to correct the situation, including but not limited to the development of alternative suppliers and revised minimum safety stock levels of critical materials to avoid business disturbances like this one in the future. We have taken immediate operational actions to control and correct the problem and inventory stabilization is currently in progress to replenish the trade nationwide.

Please move to Slide 8. During the month of September, we negotiated the annual price we paid for raw milk based on the new methodology we shared with you during LALA Day. This enabled us to secure a price increase below Liconsa and the dairy inflation index.

Our CAGR of 3.4% versus 4.9% for Liconsa and dairy inflation still reflects a difference of 150 and 70 basis points, respectively, continuing to bring some of the operational efficiencies and scale achieved by our producers to Grupo LALA milk prices for the years 2019 and 2020.

Moving now to Brazil on Slide 9. Value-added dairies are mainly geared to accelerate growth in Brazil, specifically yogurt, cheese and spreads. Category in which we have made significant market share gains of 90 basis points and 70 basis points, respectively. However, Brazil economy slowdown continued with consumer spending falling in the quarter and the value-added dairy could not make up for the full volume reductions of UHT Milk offerings that we specifically made to protect our margins.

With the recent prices of raw milk, seen on the chart on the right side of the slide, we have returned to UHT milk sales in Q4. Pressure on our margins was eased by lower raw milk costs in Brazil and we benefited from the Lactalis settlement, which was paid to Vigor during this quarter. Setting aside this onetime benefit, our EBITDA margin was in line with earlier quarters.

Please move to Slide 10. Margin accretive additions to our product portfolio is a core component of our growth strategy in Brazil. So I'm pleased to report that the expansion of our Parmesan facilities are in place and fully operational, doubling the capacity and allowing us to further expand in this category via our Vigor and Faixa Azul brands. The maturing of these cheeses takes between 6 up to 18 months, therefore, our first batches in the additional capacity will be ready for the market between February and August next year.

On slide 11 please, about the United States. In the U.S. sales grew 1.6%. And importantly, the price increase that we implemented earlier in the year enabled us to continue expanding margins. The revenue management strategy, operational improvements and the transformation of the U.S. business into a fit-for-purpose organization have been the drivers that are taking our EBITDA from negative territory in 2018 to a positive variance of $9.4 million in the quarter versus a year ago. Sequentially, our margin increased 40 basis points.

During the quarter, we also implemented a plan to accelerate growth by segmenting into different channels our brand portfolio within the U.S. For example, Promised Land flavored milk is now targeted at the American mainstream consumer in retail outlets such as Costco, Publix, Kroger and Whole Foods.

While LALA-branded products, which are focusing in the U.S. Hispanic market and relaunching drinkable yogurt in chains such as Walmart, Sam's Club, Superior Grocers, Fiesta, El Rancho, among others.

On slide 12 about Central America. We delivered double-digit growth across the region, we did over 9% in U.S. dollar terms. In local currency terms, Nicaragua grew over 16% as we captured additional market share and drove milk sales, while Guatemala grew more than 12%, driven primarily by yogurts and milk.

In this market, we have also reversed the drags on LALA's performance. Year-over-year, our EBITDA margin expanded 430 basis points. Bear in mind the onetime fit-for-purpose restructuring charge that took place in this region 1 year ago.

During the quarter, we expanded our brand portfolio with the launch of Nutri Lety in 1.5 liters package and a new drinkable yogurt aloe + fibra, which addresses the emerging health and wellness trend in this marketplace.

I will now turn the call over to Alberto, who will review our third quarter financial results in more detail. Alberto, please go ahead.

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Alberto A. Arellano Garcia, Grupo Lala, S.A.B. de C.V. - CFO [4]

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Thank you, Mauricio. Good morning, everyone. Please move to Slide 14. As Mauricio noted, LALA's branded sales grew nearly 3% versus last year. Except for Brazil, milk sales grew in all of our markets up 1.5%. In Other Dairy, sales increased across all of our geographies up 4%, with Mexico leading our growth in this segment.

In Beverages and Other segment, sales rose a strong 17%. Plant-based beverage and cold cuts drove sales growth in Mexico offsetting lower juice sales in this market.

Please move to Slide 15. Now a look at sales by region. In Mexico, we delivered growth across all of our segments. Most of this was milk, yogurt, cream, and as noted on the previous slide, plant-based beverage and cold cuts.

In Brazil, growth in Other Dairy could not offset declining volumes in UHT milk. Our Promised Land brand continued to grow in U.S., where in addition we are now targeting the Hispanic market with our drinkable yogurt portfolio.

In Central America, we saw growth across all segments with sales expanding double-digits in Nicaragua and Guatemala in local currency.

Please move to Slide 16. In terms of profitability, our margins expanded reflecting positive results in most of our operations fueled by the onetime payment from Lactalis settlement in Brazil and, partially offset by a setback in Mexico related to operations issue in the cheese plant.

LALA's EBITDA increased 28% year-over-year and 4.3% sequentially with corresponding margin expanding 240 basis points and 40 basis points, respectively.

Please move to Slide 17. Mexico's third quarter EBITDA margin contracted 50 basis points, mainly as a result of the operational issue in cheese, which affected sales by MXN 207 million and expenses by MXN 194 million.

Brazil, our second largest market, drove improvement in our EBITDA with margin more than doubling, mainly behind the settlement with Lactalis. Otherwise, our Brazilian margin would have been around prior quarter's level. Importantly, the U.S. and Central America are no longer drags to profitability with the U.S. margin expanding up to 3.2%.

Please move to Slide 18. We finished the quarter with over a 200% increase in controlling net income on a 30% increase in operating income. A 11% decrease in financial expenses that benefited from the improvement in exchange rate affecting the company debt and a third consecutive quarter of an optimized effective tax rate as we continue to proactively manage our tax liability in all the regions.

Our taxes were also comparatively favorable due to the onetime tax penalty that we incurred in last year.

On Slide 19, as I mentioned on the previous quarter, we have improved our net debt-to-EBITDA ratio to 2.9x moving us closer to our target leverage ratio of 2.5x by next year.

Please move to Slide 20. At the end of the quarter, LALA's total debt stood by MXN 28.2 billion. The average terms of our Mexican and Brazilian debt are 4 and 1.5 years, respectively. Each average 71 basis points and 85 basis points above the respective reference index. 85% of our debt is peso denominated with the balance in reais, 58% bears fixed rate, while 82% is long term.

During the quarter, we increased bank lending in order to refinance 49% of our Brazilian debt that was due at the beginning of this month. The refinanced debt is net of proceeds from Lactalis settlement. We're also in the process of refinancing Mexican debt to extend our maturity profile, some details of which we're going to talk probably in the next slide.

Please move to Slide 21. In the upper part of this slide, is the current maturity profile of our Mexican debt and the blend of debt for each year it comes due. The bottom part of the graph illustrates how we plan to shift our debt profile, refinancing the bilateral bank loans and part of our syndicated loans. We're also looking for up to MXN 7 billion of CEBURES, (foreign language) in 2 formats, 7-year fixed rate and 5.6-year variable rate. We are confident that current market conditions are favorable, close to profit during the liability management process.

Please move to Slide 22. Earlier, Mauricio touched upon working capital improvement. If you look at the graph, we had a 290 basis points improvement against last year, mostly due to the renegotiation of supply terms, which move our DPO from 57 to 77 days in the third quarter of the year and especially by the results driven by Mexico's working capital committee that have been launched across the year.

For a closer look of working capital in Mexico, please move to Slide 23. As part of our superior financial performance target, we have achieved a year in advance negative working capital in Mexico, a 410 basis point improvement year-over-year, falling to negative 0.7% for this quarter.

Please move to Slide 24. Our focus in working capital and capital allocation has also been demonstrated in this year's CapEx amount, which also comes as a result of having embedded in operational capacity expansion over the last 4 years.

On a 9-month basis, our CapEx-to-sales ratio fell 100 basis points to 2.2% of sales. For full year 2019, we are guiding 2.7% to 3% of sales. For subsequent years, our guidance remains unchanged at 3.5% to 4% on sales.

Please move to Slide 25. We keep advancing towards our objective of improving our rate on invested capital -- sorry, our return on invested capital as margins expanded for the third consecutive quarters from 6.2% at the end of 2018 to 8% in the third quarter. We know this is still far from our WACC and our ambition, but we continue to make progress towards that goal.

With that, I'll now turn the call back over to Mauricio for some closing remarks and then we will open the call for questions.

Mauricio, please go ahead.

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [5]

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Thank you, Alberto. So moving on last Slide 26. In summary, we are on track with implementing our Virtuous Cycle for superior performance despite the operational issue that affected Mexico's margins in Q3, but that have been identified and addressed.

Key metrics demonstrate that we're effectively leveraging LALA's position as a preeminent dairy company in Mexico and its leadership in Brazil's growth categories. We are further strengthening our innovation capabilities, which are showing strengths in our market, and we are enhancing our comprehensive portfolio of leading brands with a focus on nutritious, value-added product.

Finally, disciplined capital allocation is behind our growth initiatives. We have continued with our advantage of raw milk yearly price negotiation and our emphasis remains on enhancing ROIC.

Thank you very much.

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David González Peláez, Grupo Lala, S.A.B. de C.V. - Head of IR, Treasury, and Risk Management [6]

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Thank you for your time. I would like to turn the call over to Rob, our operator, who will open line for the Q&A portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Felipe Ucros with Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Let me start with one on innovation. You've been pretty busy over the last few quarters with innovation. So you introduced LALA Griego, you also launched Plenia, and you made a big push into the plant proteins with Vita. And it seems like most of these are going on really well based on the numbers that you showed us. Can you give us some further insights into how the market is taking them? Maybe give us some color in terms of how much you're investing in those launches right now? And whether that could put some pressure in the coming quarters? And finally, I was wondering if you could commend -- a comment on how long do you think the investments for the launches are going to be showing up on the SG&A? Congrats on the results for those launches.

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [3]

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Thank you, Felipe. Could you repeat your second question, please?

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Yes, I was wondering if you could give us an idea of how long you think that the investment on these launches -- the investment phase is going to last?

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [5]

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So Felipe, thank you for your 2 questions. This is Mauricio speaking once again. The strategy on innovation is a clear component -- or a key component of our Virtuous Cycle where generating top line growth will come from sales, volume as well as pricing, but more importantly as well the mix what we call premiumization strategy, and of course, innovation. In that sense, what we've seen is Mexico's top line growth going from a little bit less than 2% prior year due to innovation to more than 5%, 5.5% this year, so that's double the amount right now.

So innovation is going well in the sense that it's being well accepted, it's consumer driven. It's being also worked together with some key chains and retail environments that support us also in guiding various preferences and need for new products coming from dairy or alternatives that are not being successfully met in the market, so that's where we're focusing. Our target right now is that this continues to grow from 5.5% closely to a 7% to 8%, and we have a full innovation pipeline on track.

If I speak from experience due to the Vita, the alliance with Blue Diamond as well as Griego or Greek yogurt, as you mentioned, it has actually been above our expectation and demand is actually being met as we produce more and increase capacity, specifically to produce those SKUs. So in the case of Griego, we'd have to invest in additional membranes to produce the Griego yogurt. In the case of LALA Vita, we'll have to increase in additional capacity of our packaging, which is called the tetra pack line that produces -- or contains these products. So we've been doing innovation in order to step up to the new demands and growth.

As long as investment is set, what we are seeing is that the increase in marketing expenditure this year has been approximately 15%, and we believe it should stay for the end of this year and next year between 15% and 18% increase versus prior year. This is in order to support the growth of top line and as far as the Virtuous Cycle as we find efficiencies and effectiveness, but we reinvest in order to continue with the pipeline of innovation that will not slow down versus what we've implemented this year and there are some very interesting products coming along and will be rolled out in due time in this year and in 2020.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Great. That's fantastic. And I was wondering if you could also give us some color on how those innovation launches are going into traditional channel. I did some visits on the traditional channel a week ago that I was in Mexico, again. And I saw that Griego was taking quite a lot of shelf space in the traditional channel, I'm not sure if you can give us some comment on that?

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [7]

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It's a very interesting question because we were seeing that Griego market was basically sold through modern trade, meaning especially supermarkets and convenience stores. We introduced our LALA Griego, which comes in 120 milliliter presentation -- milligram presentation into traditional phase, into the changarros and it has been very successful.

So while modern trade will continue to have bigger range of flavors and offerings and multipacks, in traditional trade, we are focusing in some key flavors and lower packs such as singles and 6 units of 120-milligram offerings, and it's doing tremendously well. So a big part of this gain, that in less than 5 months we've gained almost 12% market share comes from going into traditional trade as well, which is something relatively new or new for the yogurt category here in Mexico.

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Operator [8]

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The next question is from the line of Fernando Olvera with Bank of America.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [9]

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I have 2, if I may. My first question is related to other income. You registered a net gain of MXN 750 million. I believe part of such gain is explained by the benefit from the settlement reached with Lactalis. But excluding such amount just to have net gain of around MXN 450 million. So can you comment what explains such gain and if it will be recurring? And my second question is related to the cheese plant in Mexico, can you elaborate more about the operational issue in the cheese plant, I mean what was the problem exactly, when does it happen? And we should expect additional expenses in the fourth quarter?

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [10]

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This is Mauricio. Thank you for your question. Let me answer your second question first regarding the cheese plant issue. As we explained during both written and my explanation, unfortunately we had some headwinds that had to do with specific out-of-spec materials that impacted -- impacting our manufacturing reliability. Because we didn't have enough inventory due to this, we had to maximize existing stock levels by taking product from some specific plants or parts of Mexico to others, therefore, incurring an additional costing in transportation as well some waste materials and what we call in Spanish (foreign language), which is waste due to unspecified material that we didn't of course bring out to the market.

This actually ended up in a contraction of volume offering out in the trade of 8.8% versus prior year. This has been solved, which has been managed already by both the global procurement as well as the operations team, and we shouldn't be expecting to see any material impact in Q4. As I said, we are replenishing the market, as we speak. So it may come with some additional costs due to transportation or average distance trips to replenish the market, but nothing significant that we would expect to impact Q4 results.

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Alberto A. Arellano Garcia, Grupo Lala, S.A.B. de C.V. - CFO [11]

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Yes, Fernando on the second -- on the first question, which was the guidance of other income. Yes, in this one, we did record benefit of settlement with Lactalis. By contract, we are not allowed to openly speak about the amount that, that implied. In this line, we always also record some other income based on either certain assets that we sell from time to time. They may have -- old equipment or certain [cities] or warehouses that we own, roundabout half of our assets today are -- LALA still has in terms of the warehouses are rented. So from time to time, we also modify, upgrade or change. So you do have, I would say, a variety of things that we record in that line. But yes, I would say the most important one the settlement with Itambé and Lactalis.

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Operator [12]

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The next question is from the line of Luis Miranda with Santander Bank.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [13]

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A couple of questions. First one is with regard to Brazil yogurt market. Mauricio, you mentioned in this segment, there is 70% basis increase in market share. I just wanted to be more precise, that's on the Greek yogurt or it's on the overall category? And if you could give us some color on the competition and the price initiatives in Brazil? And the second question is with regards to the margins. I understand you cannot disclose the amount. But you mentioned that EBITDA margin was close to similar levels in the last quarter. Do you mean the second quarter or more the average of what we have in the year?

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [14]

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Thank you, Luis. Regarding the first question on yogurt, the basis point market share gain that we talked about is based on total yogurt. And the reason is because we continued to grow in Greek. However, since last quarter, innovation launched in Vigor in Brazil, other types of yogurt which are more affordable and accessible to other lines of the population and segments and this has also been quite successful since we started launch.

This is relatively new as far as the innovation that we presented last quarter and this is one of the issues that has helped us gain market share. However, this is total yogurt for both Greek and total yogurts are growing. In the sense of pricing or general conditions of the Brazilian market, what we are seeing is some companies being a bit more aggressive regarding pricing in the sense of not taking price or not following suit to the price increase that we held this year and that can be seen more specifically in the yogurt domain, more in the mainstream or core brands and targeted to the mainstream consumer.

The premium yogurts are still competitive, let's say, pricing wise from our perspective and revenue management initiatives and that has allowed us not only to gain value share, but also some volume share due to the new mix of both spoonable and more affordable yogurts.

The market is -- it's still far from where we would like it to be regarding growth and consumer spending. However, some good signs are being seen like, for example, on increasing desserts. And as we've said before, this is perceived in this industry as an early indicator of positive momentum when people start spending more in desserts as a subcategory of dairy.

So we keep our positive momentum for Brazil. We are defending ourselves with yogurt. Some specific companies and one specifically is not taking price as much as the others and that is allowing them to grow some market share and show some short-term growth in at least in the last 2 quarters, and that's basically in a nutshell what we've been seeing in Brazil in yogurt category.

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Alberto A. Arellano Garcia, Grupo Lala, S.A.B. de C.V. - CFO [15]

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On the margin front, unfortunately, I cannot answer that question factually without telling you the amount of settlement with Lactalis. But if you take the average of Q1 and Q2, that's kind of a good indicator -- a good front.

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Operator [16]

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The next question is from the line of Antonio Gonzalez, Crédit Suisse.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [17]

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I just got 2. The first one is, I wanted to ask if you can comment on what's your expectation perhaps for the next 4, 5 quarters for volume in Mexico, right? Obviously, in the third quarter we saw a decline, but it's tough to see how much of this is coming from the cheese issue that you already pointed out versus how much is coming from the pricing activity you've been putting in the market over the last several quarters, right? So if there's any perspective you can share, you think that volume growth can kick in, in the next quarter already or you're a little bit more cautious because of the macro environment, any sort of qualitative indication would be super helpful?

And secondly, I wanted to ask Mauricio, if you can give us some strategic comment also on Brazil regarding your management team, right? Some Brazilian news outlets have been mentioning about a transition, right, in your top management with the departure of your former CEO who was, of course, a very emblematic figure in the Brazilian industry, I guess. So I wanted -- and I know that people is one of your key focus points. So maybe, if you can share any perspective on how this succession has been taking place that will be very appreciated as well.

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [18]

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Thank you, Antonio, and let me start answering with your second question first and then I'll talk about growth in Mexico. Regarding top management in Brazil, as a fact, Xandó who is our CEO in the Brazilian operation in Vigor had signed an original contract with Grupo LALA when we purchased the company for 2 years. Therefore, his contract expires end of this year. He announced that he would like to move forward and follow some new initiatives and ideas he has professionally for his career and personal decision. In that sense, he announced, I think, decision in around the month of June, July, giving us in process is 6 months for this transition.

After profiling managers and looking at different candidates, we made the decision to appoint Luis Gennari who was the commercial director of Vigor, someone who has been in the business for more than 7 years. He has been working with Xandó specifically for more than 25 years. And he was one of the 2 most senior executives in this management team. So one is Darlan who is our Operational Director and the other one is Gennari and Gennari will now take over from Xandó.

The great news is that the process has already started, the transition. Xandó will end this year and close 2019 until end of calendar year. And starting the 1st of January, as a good, well-thought transition, Gennari will take over. The team is quite strong and motivated. Gennari is someone who knows the industry, who knows the market, who knows the company, who knows our portfolio quite well. And more than change, this is evolution and sustaining the strategy and continuing with the great job that Xandó has done.

I have to take the opportunity to thank Xandó for his enormous work, support and helping us bring together Vigor and LALA. And now, the baton goes to one of the person or people that he has mentored for many years. And we have been getting ready for this post. So this change is taking place on the 1st of January 2019 -- 2020. On the other hand, I'm glad to say that 2 senior executives from Brazil, which are João, who is our global VP of Innovation and Quality and Anne, who is our new VP of Added Value Product here in Mexico were from Xandó's team and coming from Brazil and are now sitting here with us in Mexico having a global responsibility.

So we are also taking advantage of this intellectual synergy by bringing people to different geographies and 2 additional people from finance and HR from Mexico are going to be part of Gennari's team now in Brazil.

So everything's in plan. We are very grateful for Xandó's huge and valuable work done in these 2 years and now it's time to hand down the baton to Luis Gennari.

In regarding Mexico and sales, I have to say that we are looking more due to the macroeconomic environment and consumer expenditure, more flattish volumes and positive total sales based on, as I said, innovation, premiumization, mix and pricing. So guidance would be more towards flattish volumes, but definitely higher and positive total net sales. And what we are seeing is that with this we're still gaining market share, for example, UHT milk gained 90 basis points year-to-date, pasteurized milk 100 basis points year-to-date and there's still different categories. We've been hit by cheese due to the specific issues that we discussed. But in general, the pricing strategy together with our mix and innovation is working well.

However, due to some economic constraints that we are seeing in the market, it's -- we see a bit more difficult for volumes to increase in the short term. That's kind of, in a nutshell, what I see as Mexico's top line.

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Operator [19]

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(Operator Instructions) The next question comes from the line of Miguel Tortolero with GBM.

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [20]

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The first question is regarding the cold cuts segment. We continue to see strong increases in top line in this segment. I understand that this come from a low composition base. But just would like to get more detail on the dynamics you see here, the competitive environment in there. And where does this business stand in terms of your strategy going forward? And the second one is regarding volumes in Brazil. I understand that some of the volume decline is explained by macro issues. But regarding the stop in milk production due to high milk prices, how longer do you expect this to keep pressure in volumes going forward? Do you foresee more normalized level by year-end?

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Alberto A. Arellano Garcia, Grupo Lala, S.A.B. de C.V. - CFO [21]

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This is Alberto. So on our cold cuts strategy. The reality is that if you look at the volume and share over the last 2 years is that we have been constantly gaining and very much gain, I would say, volume and value in terms of double digit year-on-year. This is certainly a category that is leveraging on many of our strengths given our distribution network and the amount of products that we release to the product team and so on. We are recently relaunching our brands also as to appeal to, I would say, a more premium type of consumer. We have also very recently redefined part of the portfolio in those [things] that we are seeing are gaining more traction.

So overall, we are happy on where we are in terms of cold cuts. Yes, it does command a lower contribution margin and this comes pretty much given the current capacity utilization in our plant in Tizayuca. This is a brand new site that started 2 years ago. So up to the point where we are not yet utilizing our capacity in the neighborhood of 80%, then we are still not as profitable as we need to. But then again based on the pace of sales growth, based on the pace of how innovation is getting traction, we are pretty confident on the future of that category.

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Mauricio Arboleda, Grupo Lala, S.A.B. de C.V. - CEO [22]

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And again, just one more thing regarding cold cuts. It's a two-pronged approach. So what we've been focusing on in more recent, let's say, quarters is on Nutri Deli, which is a more core value offering that's well -- very well sold in traditional channels. And at the same time, we are focusing, as Berto said, in more premium consumers with LALA Plenia, which has been a recent launch and part of our innovation portfolio. The difference is that Plenia is a 100% Turkey meat and this is quite an interesting and more premium offering that's most strongly sold in modern trade. So through Nutri Deli, traditional channels, core value segment and Plenia, Turkey offerings more in the -- more premium, let's say, and modern trade, supermarket convenience stores.

We'll continue to work and push. As you said, competition in this segment is quite strong. We do have the advantage of the biggest refrigerated distribution network in the country, which is more than 550,000 outlets, 2 or 3 times a week. So there is an advantage that we want to use in order to take a fuller portfolio of offerings beyond dairy, and cold cuts is one of them. So you will be listening more and more about cold cuts, and we are working. Part of what I just explained, it's part of the exercise that we work from the word go how to win in order to increase utilization capacity of our recently or relatively new cold cuts plant.

In the case of Brazil and milk and cost of raw milk, what's happened in Brazil is with recent price increases that affected mostly the first 7, 8 months of this year, as you saw in the chart that we shared in the presentation is that margins in UHT milk in Brazil is quite low. Therefore, when that happens, we restrict sales, production and therefore from packaging and therefore sales of UHT milk in Vigor. Right now the milk started to come down below including prices of 2018 and raw milk prices are much more competitive, and we're able to protect our margins. We'll roll out UHT milk sales, again. As a fact, it already started and you'll see volumes coming from UHT in Q4. And this, as a whole, adds to the total top line both in volume and value of the milk sales.

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Operator [23]

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We've reached the end of the question-and-answer session. And I'll now turn the call back over to David González for closing remarks.

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David González Peláez, Grupo Lala, S.A.B. de C.V. - Head of IR, Treasury, and Risk Management [24]

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Thank you, Rob. And thank you, everyone, for joining third quarter results call. We look forward to talking to you on our next quarter earnings call. Thank you very much.

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Operator [25]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.