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Edited Transcript of NUTRESA.BG earnings conference call or presentation 29-Jul-19 1:00pm GMT

Q2 2019 Grupo Nutresa SA Earnings Call

N/A Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Nutresa SA earnings conference call or presentation Monday, July 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Ignacio Gallego Palacio

Grupo Nutresa S. A. - CEO & President

* Catherine Chacón Navarro

Grupo Nutresa S. A. - IR Director

* José Domingo Penagos Vásquez

Grupo Nutresa S. A. - CFO & VP of Corporate Finance

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Conference Call Participants

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* Andres Soto

Santander Investment Securities Inc., Research Division - Head of Andean Research

* Carlos Enrique Rodríguez

Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research

* Daniel Guardiola

Banco BTG Pactual S.A., Research Division - Director of Equity Research

* Federico Pérez García

Bancolombia S.A., Research Division - Oil and Gas Junior Analyst

* Felipe Ucros Nunez

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [1]

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Good morning, everyone. Welcome to the conference results for the second quarter of 2019 for Grupo Nutresa. At the table we have Carlos Ignacio Gallego, President of Grupo Nutresa; José Domingo Penagos, Vice President of Corporate Finance; and Santiago Escobar, Director of Corporate Finance. My name is Catherine Chacón, Director of Investor Relations. Thank you all for being with us. After presenting the results for the second quarter of this year, we will start the Q&A session. The questions that we received from the webcast will be read verbatim. Those who are connected to the conference in English, we appreciate it if you send your questions in through the chat option in the web chat. (Operator Instructions) I'll give the floor to Carlos Ignacio Gallego, President of Grupo Nutresa, to start the presentation.

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [2]

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Good morning. Thank you for being with us in this conference. To start with, I'd like you to see Slide #2, where we share some of interesting -- share some interesting events for the quarter. First of all, let's tell you that Grupo Nutresa was rectified as the second company with the best -- company to retain and challenge in Colombia. It was the first place in the food sector according to MERCO in 2019 ranking. This recognition challenges us to continue strengthening our practices that connect people into their jobs, and the organization of Groupo is developing capabilities and motivating those who work with us to continue helping and contributing to the organization. At Nutresa, we are convinced that the commitment is built when we inspire and follow and assist our employees to develop. We also want to tell you that according to Fitch rating, the ordinary bonds of Grupo Nutresa for COP 500 billion as a AAA column with a stable outlook.

In addition to tradings, this decision reflects the company's solid position in the relevant markets, the geographic diversification and a sound credit profile, and we complete these events by moving to Slide #3, where we can share some recent innovations with an emphasis on health and nutrition. As we said earlier, the wording of our consumers is a pillar of Grupo Nutresa strategy and that is why we developed products and experiences that help us contribute to healthy lifestyles and improve our consumers' quality of life. According to that, during the quarter, we will show you the following success in quinua, ancestral quinua, which is grown by mother's head of households in the Calcutta region in Colombia and it's a part of our crop substitution program, creating job opportunities and building quality of life for the indigenous and peasants around the region. Another interesting product is the -- all pancakes are carbon neutral and we have a whole line of (inaudible) called Kibo Foods that's under that brand, developed based on higher nutritional plant origins like beans, soys and peas, and they're going to start selling in the Groupo strategic market and that was what we created a company, Kibo Foods, high quality. It is a company that is integrated with the innovation ecosystem in Austin and it has a huge potential. After these 3 events, we go through Slide #4 to tell you about the sales for the second quarter of the year. In Colombia, during the second quarter, we had sales for COP 1,503,000,000 with a growth of 5.8%. With a very good business dynamics, all the businesses show positive growth. I would highlight that most of this growth comes from 5% of volume increases, price, prices grew 0.5%, mainly because of the changes in the product mix we highlight the growth in pastas, consumer foods, confectionery and ice cream with the dynamics higher than the average with the group and we reflect the good business activities that we have reported during the first quarter.

Outside of Colombia, in international sales, we reported a growth of our main platforms overseas in their local currencies, and we had sales for $276.7 million with a decrease of 1.9% in dollars and a growth of 12% in Colombian pesos. The decrease is mainly due to the rate of exchange due to devaluations in each country. That's why we were saying that the behavior in local currencies was positive. When we look at this business separately, we can see that TMLC in local currency have a growth of 2.7%. After we consider the effect of the devaluation of Chilean peso vis-a-vis the dollar, this becomes a decrease of 6.8% in dollars because we had good operations in Central America and local currencies, also very good export for Columbia, but because of the devaluation of currencies in Central America, the dollar results was minus 0.02%. In chocolates, we had growth in international sales, considering devaluation and this becomes a minus 1%. In coffee, better sales dynamics, mainly due to very good recovery of exports from Colombia towards the U.S. It grows 6.7% in dollars. Also in the consumer retail market, we had good performance in local currencies, which becomes a growth of 1.9% in dollars and in the (inaudible) decrease of 12.8% in dollars because of slower dynamics in Panama and especially because something we have mentioned during the previous conference, which is a reduction in exports from Colombia due to restrictions through the atmosphere we hope to have the country recertified in next few months. When we combine this good performance, both in Colombia and in international operations, we can see in Slide #5 that we have consolidated sales for the quarter for COP 2,400,000,000 with a very good growth, 8%, and with all businesses showing positive behaviors. I would highlight growth like past 12.4%, this [good likely], retail food 11.8% and (inaudible), which is very good during this quarter, sales -- innovation sales increased 21% -- or were 21%, 4% of that total sales. Innovation is shown here as a real driver for growth and is making the difference in many of these categories.

If we go to Slide #6, we can see that accumulated sales at the end of the quarter. On the first quarter of 2019, in Colombia, we reported sales for the semester of COP 2,911,000,000, with a growth of 5.2% with a positive growth sustained. In the quarter, we must say that this growth is based on higher volumes growing 4.2%, while prices grow 0.9%. And below each of those bars, you will see that all business units have grown in -- by value and by volume during the quarter -- during the semester. As far as sales outside of Colombia, our international platforms, we had revenue for COP 544 million during the semester, representing a 0.6% decrease in dollars in Colombian pesos the growth is 12.2% and it's COP 1,734,000,000. Similarly to what I was telling about in the quarter, there are positive performance in international operations in the [functional] currencies (inaudible) Colombia during this period due to mainly chocolate and coffee businesses. When we go to Slide #7, we see that as a result of a positive commercial dynamics, both locally and internationally, we have accumulated sales for the semester of COP 4,646,000,000 with a growth of 7.4%.

I'd like to point out the double-digit growth in the past biscuit and coffee businesses for the period, and very closely following the consumer retail food and chocolate businesses. The sales of innovative products during the semester represent 21.8% of the total sales.

Going to Slide 8, we can see sales by region accumulated at the end of June 2018. In Columbia we have 72% of our sales, outside of Columbia 37.3%. Important to tell you that all geographies outside of Colombia are growing significantly in the U.S. in Central America although Colombia [and] Asia market, let's say, second market in Central America that we have 9.8% of the sales, the third is the U.S. with 8.5% and fourth is Chile with 8.2%. Here we've been making an effort based on our strategy so that Groupo can have not only a portfolio of categories but also a [fanatic] portfolio of geographies and I think it's a very good quarter for the international activities.

Going now to Slide #9, I'd like to share with you a summary of our position in the market. I will say that vis-a-vis this position in the market we have -- significantly in leadership positions in the [postscript categories] we have participated with sound commercial strategies based on effective innovation with superior purpose and brands, paired with the consistent work to develop channels. In general, we have positions that we have in each shift of the categories they have been [holding off] very heavy competition and everyone -- by the way, we believe that competition forces us to be better, work harder and get to know the consumer (inaudible) customer much better and this motivates us to create differentiated and winning value propositions and (inaudible) and consumer preference.

Now on the next slide, in Slide #10, let's look at the behavior of the inputs. The market index for the first half has an average, which is lower than the previous year, this is because of lower international (inaudible) spices and (inaudible) oil, sugars, (inaudible) and coffee. Here to tell you that the local prices of these raw materials do not necessarily follow the same behavior and that the valuation of the -- devaluation of the currencies, vis-à-vis the dollar as I said earlier in sales increased the final cost of some of these inputs. There are some mechanisms such as civilization funds and price (inaudible) and we share those prices locally. As the most representative input in this field is the packaging materials. It's about 15.5% of the total and most representative in the field, coffee and wheat has specifically in what I'd like to say that we've been working significantly to manage the possible contingencies in prices. And many of you are aware in China, there is an episode of cold fever, which has led to the slaughter of large portion of the pigs in that country and that increases its international prices. In our favor, coordinating with hedging strategies for pork, strategies to cover food for pigs and (inaudible) in local strategies we have some corporate issues with small farmers and we provide small piglets with the appropriate genetics, and we help them with technical assistance, and we facilitate their food. And lastly, we are working on the strategies to guarantee that (inaudible) value allows us to have possible impacts of the cost. I'd like to say that this year the coverage is working very well. We're working -- we're covering all of this very well. We are working on hedging for next year. About profitability, this will be -- Jose Domingo Penagos will give you the information.

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO & VP of Corporate Finance [3]

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Thank you, Carlos Ignacio Gallego. Good morning to everyone. I'm starting on Slide #11. We have the group's profits here behind the business units. First generally, as of January 1 this year, our style of financial statements reflect the application of the new financial presentation standards, which modify the leases contract or agreements. We reported information performance so that you can compare the figures. And there is obvious comparison to the percentages that can help us make the comparisons.

First of all, we have EBITDA for COP 328,000,000,000 with a growth of 22%, with a margin of 13.7% COP 190,000,000,000 pressure with a margin of 12.1% and a growth of 9% compared to the same quarter in the previous year.

By business units, I highlight in terms of size, the margin the performance of retail foods, biscuits, pasta and coffee, most of them can see double-digit growth and performance above the averages. And I will give you the details in a second. But there is very good numbers for the businesses during the period.

By unit, starting with the cold cuts, we have a proved sales in Colombia especially, which is our major market for this business unit. But profit is -- has 3 challenges. First, the export of fresh meat, exports have been reduced because of sanitary issues, the business unit export exposed to the same country as we have been exporting last year. And this will be improving, when the sanitary issues are resolved. Carlos Ignacio made a good reference to that. All I could add is that the hedging, both physical and financial hedges are averages that allow us to have a certain margin. We are working on that for -- the next year that allows us to keep our profit margin for this business profits as we have that group recoveries, while it is in Colombia the profits will be covered. That's with the cold cuts. The business is very significant percentage. Margin is 15.4%, the growth is 30%. I refer to this business, it is an area of good performance. The business results are good, Colombia and overseas. It's a well-balanced portfolio, 50-50, Colombia and internationally. In this case, comes from other geographies and that gives you the benefit of the rate of exchange. The business gives us a benefit of higher invoicing. We have a very good coverage of raw material vis-à-vis highest prices, mainly (inaudible) also good performance, single-digit margin, 13.4%. One of the businesses were above average performances. We've had some, more than market maybe, and cocoa has very healthy coverage level and are little longer in cocoa. This will be helping us, and then virtually year probably and the challenges have little bit changed. This has very significant variations in dollars, [related] To margin, good business dynamics and (inaudible) sound balance with respect to the financial issues. Then we have TMLUC, where we have impacts in some raw materials. In Chile, the valuation has been more significant. It has an impact on the margin and that's why we have this 11.6 as you see on the graph and a decrease of 4%. Coffee has better business dynamics, especially internationally. Good growth, good performance as we mentioned in biscuits and in dollars, (inaudible) practically go to the EBITDA and exchanges has good take but the rate of exchange but also the business dynamics with obviously would had increased sales especially in areas such as the U.S. and it also helps the rate of exchange. (inaudible) foods also very significant. Growth of about 15%, margin of 13.6% these are the figures but behind that is the consistency and the strategy. There is big discipline in, especially we're opening the facilities (inaudible) transactions. This has been growing very well in all chains. (inaudible) at especially in Central America, Caribbean also very good balance based on transactions and it's helping us much more with the profit levels. Very good expense management we had rearrangement of the portfolio. As we mentioned in previous conferences, we have a series of initiatives that are beginning to give fruit, and that's why we have these significantly good numbers especially in the growth of the EBITDA, which is we have to look at aggregate and not only the percentages. We actually have an expansion growth of 6%. Despite all of that, we have some impact on the cost of those raw materials. We are working on covering those products, but you can see the impact on profit levels. And lastly, perhaps -- is higher than last year's margin, good performance in Colombia, especially local growth a very good expense management, both variable expenses and the consequences of fixed expenses due to the commercial performance. This is helping us in the business units, and we have a very good performance in profit levels. That is a performance in detail of the business units during the quarter and I would like to repeat this because the same thing -- this is very similar in the order and the accumulation for the semester. I would only point out the growth in the magnitude COP 574,000,000,000 and margin of 12.3, a growth of 6.3% and a good performance especially in business like this with chocolate and retail food. It is very similar to the behavior of the other quarter.

So let's go to slide #13 where we see the statement of results for the quarter, laid out pro forma for comparison purposes. You can see operating revenue, which 8% good growth and the cost increases slightly above -- slightly above the revenue. This is mainly the effect of rate of exchange with good cash coverage. We have to be very careful with this one. We have about a 30 basis points for the accumulated figures in the expenses. We have growth especially administrative and operating expenses 14%, 10%. What I'd like to tell you is that we have a onetime expenses administrative, technology, we are setting up some new technologies and some operations overseas and that all, which is single time for the quarter or for the year so I'm pleased, but it's not recurring expenses. In the future, these expenses would not be included and the technology are -- those expenses are an absolute dollar and that means that the expenses are higher. In administrative and operating expenses we have to surely performance of the sales expense, which is the most significant in that area, they grew 6.1% below the increase in revenue. It's good control there, thanks to the work we've been doing in this area. But the most important thing here it's after gross profits of the group at 7% when we have the control of expenses we had operating profits that grew 14%, very good performance. Very much better than the growth of the same revenues and that is the relevant details for expenses. We had some effect due to differences in rate of exchange, especially in working capital accounts not very significant, and we have nonoperating revenue of around COP 3,300,000,000 due to the sale of assets a piece of property in the U.S, especially a few years ago, 1.5 years ago, we've cut out the operations in (inaudible) in the U.S. we sold the facilities during the period. That's why we have this revenue. These are also onetime income figures.

Our effects on the P&L, we have operating income with a growth of 14%. These are very good operating results. In the postop results, we have financial expenses with very good consistency. They continue to decrease because of the decrease in rates. The decrease in debt level that has been going down that idea continues -- trend continues. We have the comparison of Grupo Argos. This was down during the second quarter. This is usually reflected in the second quarter. There was some slight difference over this quarter when we compared it with the performance value. It's only for comparison purposes. COP 1,400,000,000 revenue due to our net foreign exchange positon position. Last year, we had (inaudible) income, we had coverage of bonds that we had extraordinary revenue. Also single time revenue, which is only used for the pro forma analysis. With this we find that with our sales, we grew 14% pretty much aligned with the growth in revenue. We're not taking into consideration the revenue from Grupo Argos. Growth will be 10.7% for final equation. For the quarter, we have net profits of COP 130 million with a growth of 15.9% that was the pro forma calculation that I was telling you about and the effect of the [dividends] from Grupo Argos was very much aligned with the operating profits and that as part of the growth in revenue. And it's the first and the last lines in the P&L.

For the semester, we have very structural, very sound trends in the various levels, but we have more general trend because this is -- this shows a gradual improvement. I mentioned earlier is the contraction of the 30 [basis] points in the gross margin. We had the same behavior, although the growth is different in expenses. There's a very good sound growth of 11.8%, COP 447,000,000,000 in operating profits in postop (inaudible) performance. Some have specific (inaudible). We are calculating both quarters. It says ordinary items in the second quarter than in the first, and which I already mentioned such as covering the bonds in Peru, some issues in foreign exchange differences. I was referring to profits of COP 289 million go to control the financial expenses very good -- very competitive tax rates, which allows us to show these results.

And in slide #15, we can show you the debt level or the characteristics of our group debt first the peso equivalent is COP 2.6 billion is the level of the debt in the group. We have 2.2x the EBITDA. We're using the cash flow to leverage the group this -- that is mainly local currencies very low or almost nil exposure in dollars. This is a variable structure, and we have to finance the cap with the working capital and the funding for the purchase rebated lately. This whole cost is 6.27%, and we believe that is a very competitive level for the market.

The first quarter especially -- the second quarter is a little more intensive in working capital use, especially for some expenses. The taxes and such and I mentioned working capital because we did some physical coverage activities that allows to show the good profit levels and good cash flow management. The second quarter is going to be less intensive in working capital so that will improve our cash flow management. The CapEx that we are committed of COP 276 thousand million, we've got so far COP 71 million, which is the curve that varies according to the level of execution. Although we have a little less that we had forecast for the first semester. I'll give the floor now to Carlos Ignacio, which will share his outlook for the rest of 2019 and then we will go to the Q&A.

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [4]

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Thank you, Jose Domingo. So with respect to the outlook, I'd like to refer first to the commercial part. In Colombia, we have a sustained good dynamic based mostly on volume growth. With respect to prices, I think that we're going to continue with really little price increases locally. We will do that very focused and only in some categories where the brands and the channels will allow us to continue growing. But Colombia, I would summarize it has good business dynamics. Outside of Colombia, we've forecast a sound local performances where we continue to see the effect of cross rates of exchange but we -- I think we have sound local performances.

In general, what we can see for the next few months is good commercial performance with a significant effect of -- from innovation and channel development that in terms of commercial. With respect to profits, without ignoring that pressure by rate of exchange and the behaviors, the commodities, the -- our efficiency and productivity programs that we have been applying and are ongoing will enable us to achieve sustained profits and returns at a very good level. So in general, this is a favorable outlook both commercially and in terms of profits. I'll give the floor now to Catherine, so that we can go now to the question-and-answer session.

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Questions and Answers

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [1]

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Thank you, Carlos Ignacio. We'll start the question-and-answer session. I will start with 2 questions by [Juan Carlos Alvarez] from (inaudible).

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Unidentified Analyst, [2]

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The first one, can you tell us what improvements are there in the debt profile of the company and [PSN] 2.25x of the EBITDA, do we have a special increase our debts. How are we doing with this in organic growth strategy?

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO & VP of Corporate Finance [3]

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I'll answer the first and Carlos will take the second one. The debt profile I also mentioned the cost variable structure, I'd say with respect to the opportunities with the profile of the average life, which is approximately 3 years, especially because we have more working capital as part of the debt and less in capital debt of acquisitions. As we see some opportunities, purchase something in the future, we'll do that, taking very good care of the cost and the cost of the loans.

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [4]

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Well, Carlos, first of all thank you for your question. And I'd like to say that obviously, we have room, and we're working very hard in that inorganic part. In the previous conference, we have mentioned the (inaudible) food service, which is still being analyzed by the trade authorities. We also shared the hedging strategy where we're also being active, looking for capacity especially with respect to productivity, go to market and nutrition and health. And lastly, we have the other purchases that are within the strategic region in which complement our existing capacity or that gives access to important growth in terms of growth in profits. We are very active in one of the most intensive periods in you and investors and the market. I can only tell you after we close the business but there is room for -- we are working and as we show, we will have organic growth -- we will have good performance in inorganic growth. I do want to assure you that we are not going to do any bad business just to show growth in the first line. We are only going after acquisitions that will give value for the organization, for the shareholders and as they come out of -- the cash flow that comes in we will decrease our debt levels as we have been doing. So we have a very a judicious program, and we go after good buys.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [5]

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Now we will start the questions that we have through the audio of the teleconference. (inaudible), can you help us to go with the next question.

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Operator [6]

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(Operator Instructions) We have a question from Federico Pérez from Bancolombia.

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Federico Pérez García, Bancolombia S.A., Research Division - Oil and Gas Junior Analyst [7]

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I have several questions. First, I think that we -- can you tell us a bit more, Carlos Ignacio, about the business dynamics that you mentioned at the end of the presentation for Colombia. We are seeing that in this first quarter, the business dynamics has been very good for you. But in the figures, we have seen perhaps did not support the continued dynamics, we have unemployment so are you -- we are reviewing our are revising our economic growth figures. So how do you reconcile that with the current economic reality in Colombia?

Can you tell us a little bit about the -- a little bit more about the strategy for hedging our rate of exchange, which I am very good affecting -- also had a negative effect on the cost. The answer was more of a negative effect of the rate of exchange. And at least, if we continue with that rate of exchange that is stable, [we're going to be] significant evaluation. Do you have any strategy? Do you have any dollars? What can you do to mitigate the effect of the rate of exchange?

And lastly, simply the innovative products. So I think they are more representative -- increasingly more representative in our sales. Can you tell about their performance vis-à-vis the general products for the group?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [8]

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Thank you, Federico, for your questions. I will refer to the first and the third one, and I'll let José Domingo talk about the rate of exchange. With respect to the commercial dynamics, I'd like to start by talking about 2 references that we have for consumer presence in Colombia. Firstly, Consumer Confidence Index which clearly is an indicator that measures people's opinion, consumers' opinion and their expectations vis-à-vis consumption, that is an indicator that is not a real expensive, rather the willingness to spend. As you mentioned, that indicator in June was minus 6.3%, which is far from a positive value of 15.5% that we had for 2018. The expectations for the -- by the consumer, the Consumer Confidence Index is made up by other 2 indices, economic conditions and consumer expectations. When you look at the consumer expectations, which is at minus 5% in June, internally, you ask 3 questions, and one of them has to do with what you think about whether your home will be doing economically better a year from now. And still the index is positive. So these are environments that look pessimistic but which are not necessarily reflected in the real expenditure. The index for our economic conditions does show a more negative outlook. We must say that the economic, works not only because of real (inaudible) but by what you think is going to happen and sometimes even with -- seems that have to do with sports events like the Cup of the Americas, so what happens with the huge [Trial-Fin] cycling changes people's perceptions. So the -- you understand that the consumer willingness to spend is less good than last year. But when you go to the other indicator which is one that calculated by radar which shows you how you think your home is going to be doing, their indicators says that in June, the expenditures were 5.8% higher than last year. And that there are 3 segments that were above the dynamics, which were food, entertainment and miscellaneous or sundries. And so the general behavior of the economy, you have to be careful because people might abstain from major investments, for example. It's true that purchasing housing is not going to get the same speed, especially that is not low-income housing. But in foods, there is a positive outlook. Inflations control, we believe that the country is growing between 3% and 3.5% which is higher than other countries in our same region. Unemployment is a risk. We do not ignore that, but consumer, our consumption -- food consumption is growing. So that is one outlook.

The second is the innovation leverages, to which I will refer because of your question. In channel development, which is extremely important for Grupo Nutresa, we have said -- and I'm referring to channel development. We've said that Nutresa, we see that all actors in the market, we look at them with great respect in all channels. And in some of the channels that previously might have been seen as a threat are also being a source of growth.

Let me give you an example. The discounters, which have a significant part of the market and where we have fewer brands playing were not in all categories, selling through the discounters. But what we do, we have a significant profit for them and we grow.

Secondly, that distribution where more than half of our sales and nutrition come from what we call traditional channels, that channel where we have corner stores that are growing, mini markets, independent mini markets that are growing also, in that area, the wholesalers have been reinventing themselves. Our sales goes through a major -- chains have been growing. And in those major chains, we have different format. We have the most important as the large hypermarket, but the other representations are growing.

And the other area which we call other channels, you can see we have very good growth especially in restaurants, in catalog sales, in vending machines. So if you combine massive consumption expenses that are growing, although people are seeming pessimistic, they are still consuming and we're playing aggressively in all channels, that explains a large part of that growth.

Why do we get that through innovation? So first, before going into discussion item by item, I'll tell you that innovation is not only products, innovation is business model, innovation is also a way to reach the consumer in different manners, innovation has to do with reformulating products to make them more adequate to our nutritional profile that each of the people want. And if you ask me -- or if you want a long answer, but I will talk to you about 2 things. First, in general about -- that we are -- we have -- we believe our great potentials in the Cold Cuts, the entire main analog segments like veggie burgers and et cetera, we've seen that is very positive; chocolates, the entire nuts, Chocolisto, we have coffee, all developments were done globally for cold brews; in TMLUC, nut and wheat grains and chocolate bars in Chile; in Ice Cream, the entire strengthening about the Crem Helado brand, that we're redesigning that; in the TOSH ice cream, with health profile, the brand development and the quinoa developed in pasta; in retail foods, the development for new burgers, wings, hot dogs and chicken.

If I go to sales in specific areas, like we've done in Cold Cuts by reducing the sodium; by Cold Cuts in lightweights, with biscuits with new Festival; or new presentations in chocolates, where we have done great things with the team so that we can facilitate consumption in homemade ice cream. It's a very long list. Each one of those innovations is mentioned not only by what it contributes to sales but because of their profit levels because it's not enough just to sell for the heck of it. It has to do with the increasing current sales but also opening new roads for the future. That is one of the answers. I went a little long, but I wanted to give you a general idea of why we're selling what we're selling locally. I'll leave José Domingo for the next comment.

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO & VP of Corporate Finance [9]

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With respect to rate, conceptually, although -- remember the general equation not by business units, we do not speculate. We have a quasi-natural coverage in revenue in dollars. And then for our size of the group, it's not very high but it's $300 million, and that position is what we used to cover in our financial markets. In -- and if you ask me what we are going to do in the future, the answer is going to be consistency. We're not going to react excessively. The quarter is 14, and the impact was only 20 or 30 basis points. Although all the coverage are for the P&L, but we'll focus on cost. So the general equation, although it's good, we're going to be consistent in our coverage strategies, always looking for optimization, but we will not be changing a lot. We have an expansion of gross margin significantly over the past few years. But this year is a year to protect that variable. We have very slight decrease compared to the devaluations we've had.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [10]

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We have a question from Andres Soto, Santander.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [11]

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This has to do with the leverage level. We have a level of 2.25, and the acquisitions you've made. My first impression was that there was a room to increase our dividend distribution. But because of the answer to this first question, there is other priorities. Do you have any idea of the order of magnitude of these new acquisitions and what is the average leveraging level that you would like to keep?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [12]

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Thank you, Andres. Each of the targets has -- leads to different financing strategies. I cannot give you details to -- about the order of magnitude, but the dreams we have are in different sizes and different categories and regions, obviously, when you have plans to grow. But why did we keep within those responsible limits, we are responsible to make this business grow profitably and to manage it as -- in an orthodox manner as always. The Fitch risk ratings agency want to maintain our credit rating. And for that, we would be having not higher than 3 all the time, although we might go, if we needed to, we could go a little higher with our undelevering level. So the answer is we want to maintain our rating. We want to -- we have different alternatives in mind. When you look for them, and our priority would be to decrease our debt level. Obviously, we have -- we're interested in good dividends, but that is not incomparable with the -- doing our -- this management. So we're going to continue to work for opportunities. And thank you for your question.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [13]

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And now I'd like to understand, in the previous conference you've mentioned about the EBITDA margin have lost a little relevance with respect to the change in standards, and now you'll be more focused on return on capital. Do you have any advances are gone to quick and we have new metrics for the long term, what we should be thinking for the company?

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO & VP of Corporate Finance [14]

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The EBITDA that we're evaluating more complete outlook. The return on invested capital, I think, will also -- our cash flow should produce some results. We've had some very good EBITDA levels and CapEx improvements and improves working capital. We're working on our long-term goals for the company. And I think that next year, we will be -- give you an idea of what our long-term goals. We want to have a goal which is revenue higher than the cost of capital.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [15]

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We have a question from Daniel Guardiola from [Banco BTG].

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division - Director of Equity Research [16]

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I have a couple of questions. I'd like to understand the drivers of our growth in volume region by region. If you look at Colombia, we had an interesting volume growth. How much was that driven by prices or by -- and higher demand? And also internationally, which countries do you see decreasing volumes? And what steps are you taking to counteract that dynamics? That's my first question.

And the other one is you have answered that one of the -- you're reviewing perhaps any investments as long as they created value. What does value creation mean to you, whatever you have in mind, any growth, geographic location? What?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [17]

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Thank you, Daniel, for your questions. This question is very long. We obviously will not disclose during this conference. There are a lot of categories with a lot of strategies with many combinations or permutations. I will give a long reply.

I'd like to talk about Colombia right now. We did some work several years ago updating all our price/demand elasticity models by SKU, by channel and by geography. And in a market like the Colombian market, which has a lot of channels at the same time, those models are fine-tuned and fed back every day and shows you every geography, each channel in each category how the volume changed when prices are touched. Our strategy is to have the best price, so the impact on volumes is the best for the company. That doesn't depend only on what Grupo Nutresa does because we are in markets where we have free competition. And we also consider different scenarios considering the competitors replies or responses. So what we've done is not a -- something that we haven't touch any prices. We haven't mentioned -- or we mentioned some prices. And what we've done is report the average behavior of the prices, and what we report has to do more with the change with the mix. The only source of progress is not price increases. The most powerful is productivity. And that is why mostly the results that we're showing also come from implementing improvement programs.

So the increases you're seeing are the -- in sales have to do with the combined implementation of all these strategies. That is why in the market, what you as analysts might do is also to compare, how other mass consumption actors are growing. And you see that those -- our growth are pretty different from other players during the same periods. So this growth is the result of our strategy we're implementing. Obviously, every day, we have a critical outlook, and we have to -- want to do it better. And that's why we do not give up any channel, that we have fewer brands but more powerful. As we want to know better the -- know the consumer, the buyer, the pressures to have offers for each. Innovation complements this issue. And that is why we have, in our case, more than 21% of our sales come from innovation.

I will be very glad our Director of Investor Relations can talk to you geography by geography. You didn't ask me this directly, but if you were to ask what is the geography with the biggest challenges for Grupo Nutresa in the future, I would say, perhaps, Mexico forces us to be very careful. Mexico, however, is a moderate percentage of our Grupo Nutresa sales. I think the slide shows Mexico's share in our International sales. You can see that there. Why would I call your attention to Mexico? The projection for our -- who said that Mexico is going to have a growth of about [8.5%]. And there's a recent contraction. So we depend on Mexico, but it is a geography that is pretty much in our sight. Catherine can give you more details. I think that's one of the things that we show you, all analysts, and we'll explain that with you. José Domingo would like to complement that question?

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO & VP of Corporate Finance [18]

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An easy way to do this is that our revenue is higher than the cost of capital. But these financial results are a consequence of management we have -- economic equation we've shared with you at times previously, we have a geography -- defined geography for everything within the organic and inorganic growth in south of the U.S. or the south of the continent. We have type of companies to add to our portfolio, some capabilities to add in the categories where we are [in the declares] for driving this returns. We have done a major effort to establish some platforms. And we're going to go to a country to establish the platform. Those returns take about 10 years to appear. When you have that already established, you can have returns earlier, sooner. So the best returns in invested capital were generating value. But this is a consequence of [driving this] strategy for the type of geography and the type of company that we want to purchase. Thank you.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [19]

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Next question is from Felipe Ucros from Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Simple question. You spoke about the administration expenses and other nonrecurring expenses. Can you give us a little bit more details which were nonrecurrent or what would the growth have been like if those nonrecurrent have not occurred? Where did you grow this especially well in coffee and retail foods? Can you go more into detail in those specific things?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [21]

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Thank you, Felipe, for being with us. I'll take the question you asked about biscuits and consumer foods. Let's talk about biscuits first. From a strategic point of view, this is a unit that sells practically the same outside of Colombia than inside Colombia. And when you combine that geographic distribution, outside of Colombia is mainly in the U.S. and in Central America. When you take this, I would say that you benefit from the dollar at the levels that we have in the period. So revenue increased significantly. But I'd like to isolate the effect of the dollar. And I'd say that this not only a biscuit company, it is very much growing into the health snack segment. As percentage of sales is still not very representative in a company of this size but which is a good part of the future with very good commercial outlook, the growth of biscuit economy was spectacular. And in lines that are very leading such as [Sardins] and Ducales had very, very important recoveries. And other lines that are other younger sectors such as Festival were worked here very well. And in Central America, we're also leaders in biscuits, which is also good. And in the U.S, has been growing in an interesting manner.

The fact that Kibo Foods, which is -- Kibo Foods which is a new company that we set up in the U.S, it's like a signal of where we think that there is room to grow more with those innovations. Where we had a good business performance, we had also a very good coverage strategy. And within very important productivity programs that we've been implementing during the period, even biscuits it was the biggest business in Grupo Nutresa. So more than Cold Cuts is a very active, very dynamic group, very strong brands and which have the benefits of a very good commercial activity with a good dollar and with significant coverage in most important raw materials.

With consumer -- retail foods, I'd like to refer to this unit, includes the ice cream and restaurants in Colombia. So that the ice cream shops of the Dominican Republic and the Caribbean is still very, very solid, very good growing double digits and high profit levels. And we have a very important development of the experience, not only the product. There are Caribbean geographies where the brand is an icon and where we are innovating. And we're doing -- we're being very well received and perceived by the consumers in Central America, I would say that there is a slight recovery that we mentioned earlier. We had some months where we had very slow, and we had an evolution mainly due to productivity we've been recovering our levels. Commercial, we still have room to grow.

And in Colombia, we have a combination. First, the restaurant business has a constant cycle of openings but also closures. Remember that we've mentioned that in the previous conference that we had roadmap of 2 change to focus on our own brands that worked well. On the other hand, the productivity strategies are bearing fruit. As we -- as José Domingo mentioned, openings have been very well received, and we have led to a significant number of transactions and increase in transactions. This strategy of keeping premium value products or going into restaurants in different levels, even when there are events, we promote some of the events that we participated, and we sell more in those events.

So I think that continuing with the consistent application of that strategy, I think we have to continue, we have to consolidate that, but we're very happy because we are seeing results. There is a big work being done on people especially in Colombia. Those human aspects are much sounder in the ice cream shops where we've been working to reduce personnel turnover. We have a very committed team, and that is always noticed in service and quality. So that is a comment that I can make about biscuits and consumer food -- and retail foods.

And about administrative expenses, José Domingo?

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO & VP of Corporate Finance [22]

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Of course, the answer is half of that growth is for nonrecurrent expenses. The pro forma growth is 7% in those expenses; in Colombian pesos, it's about COP 7,000 million. And it's mainly fees, technology platforms especially that we have during 2019 but will not recur.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

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That's very clear. Can I ask you a follow-up on the -- especially about the Kibo? You explained the new strategy in the U.S. and obviously, this is a market where we have a lot of movement in vegetable protein. Have you seen anything that in the Latin American markets, what is the possibility of you implementing that in Latin America?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [24]

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Thank you. Let me take that question too, although the company Kibo Foods is headquartered in the U.S. we are already selling that in Colombia already. And in general, I included veggie burgers. So there's very good reception. The consumer usually doesn't give up the other ways of -- other forms of protein, it's like a new category that has been created. Initially, the new category has higher sales prices than traditional protein, but it's really appreciate people's value of the fact that this alternative is being offered to them. And it's more people consume animal protein sometimes during the week. But at others, they decide they want to have other types of protein. And we believe that it's important to be there because it is going to continue to develop. In general, the reception has been very good. The channels are not the most generous with their spaces, and they are more specialized area but the idea is to be there also. So the proposal has been very well received. And what we have in the Cold Cuts and what we have in the other proteins is good, it is still a small percentage of total sales but the consumer has received it very well.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [25]

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Question from Carlos Rodríguez.

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Carlos Enrique Rodríguez, Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research [26]

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A question about the Commodities Index. And I think at the minimum levels, what are your outlooks? Do you think that in terms of coverage, could you be a little more aggressive in that hedging or recovery for the commodities?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [27]

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Thank you, Carlos, for your question. It's really good. That index, we mentioned that in dollars. I was saying that it is not always those good behaviors are do locally because there are some hedging instruments that affect that, but the -- you're very right. It's when you see that indices are in these low levels, you tend as much as possible to get more coverage, without getting tied down because you might have 100%, and there are some levels that could be -- that could go down. What we've done in specific cases, like what you see in pork and in wheat, is to extend those coverage. We believe that it is likely for a rebound and that index will recover. We're pretty well covered. And remember that we combine -- in several of those categories, we combine that with the possibility of physical inventories where we have local production. So we've considered it, we've extended that as far as possible without being tied down so as we don't lose our advantage and being careful because there are specific tactics or situations that can happen. For example, all the pork is costly right now for some reason because of frictions between China and post -- there's an excess of inventory in the States they cannot ship, they would say, [goods] into China, they will have to sell off that excess, and that would reduce our -- the prices. So it's something of a strategy where commodities is working 24/7. And we're always looking at what is the activity as the recoveries for risk. We don't play roulette there because if you are careless, you can have very long negative terms, long term with negative results. But your comment is very good, and we're not going to waste any opportunities.

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Carlos Enrique Rodríguez, Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research [28]

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Allow me to ask another question about this new change for vegetable protein. Is there a possibility of extending this to other areas such as retail foods.

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [29]

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Yes, Carlos. In some of our formats that we already have optioned, which are not necessarily analogous product of sophisticated formulation. In many cases, there are some vegetable products that are completely substitute part of the food, for example. I can have a radish or mushroom replacing meat. Or we have a dish where quinoa is a main dish in tofu. So we use that as an accompaniment. It's not -- most of the pressure on tickets are not -- people are not dining alone. It's a group who go there and is likely that somebody would be in their group who wants a different type of protein, and then, yes, we have that option available to all consumers. This is a possibility. The -- what we have clear is that the studies around the world, most consumers of alternative proteins do not give up animal protein. They consume that at different times, but there is an opportunity.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [30]

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We have no further questions. Thank you very much. We have one last question here from Juan Felipe with (inaudible).

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Unidentified Analyst, [31]

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Could you tell us a little bit about the labeling law in Colombia and what do you think about that risk?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO & President [32]

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Thank you, Felipe. I will talk about that now. At Grupo Nutresa, we believe that the regulation has to do with labeling is important. We have -- we're not going to be opposing that at all. We believe that this should be based in scientific reasons. It should provide adequate information especially about the content of health-related nutrients. Those that are most usual are sodium, fats and sugars. Contents in previous legislation we had proposal or a bill before Congress that was not approved. What we understand is in this new bill, we're going to [submit this to the] legislature, and our position will be working on it from the Chamber of Commerce or the National Association of Entrepreneurs in Columbia is to go to a labeling system that was GDA like, similar to what is used in the States, which shows you the contents of each of those nutrients associated to our health. Obviously, this is something that where the measure of health has a lot to do. We believe that it's very important for the consumers to be properly informed so that they can make decisions about their nutrition. Health is the result of the combination. So factors, family life, contact with nature, the benefits that you have and the exercise that you have and a balanced diet. And we're going to be working from our trade associations to make that regulation as appropriate as possible.

How do we solve that risk? I think it is not the same type of risk and opportunity we have been working on all categories to improve our nutritional profile and to make sure that the consumer can compare our products with others. It's a major opportunities because we have products with excellent levels compared to many other competitors, even globally. So that is a growing status of things. We're going to have that discussion. And what we want is to have that done on a scientific basis and to do that for -- to benefit all the consumer.

And regulation is not only about labeling. It also has to do with the advertising especially with respect for children. And we see that with very good eyes, and we've been applying that already voluntarily in our categories. That is the answer I have for you. Thank you very much.

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Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [33]

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Thank you, everyone, for your participation. This concludes the conference results for the second quarter of 2019. Any further questions or concerns, you can send it to the Investor Relations directory. Thank you all, and have a good day.

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Operator [34]

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Thank you for your participation. You may now disconnect.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]