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Industrias Bachoco, S.A.B. de C.V. (IBA) Q4 2018 Earnings Conference Call Transcript

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Industrias Bachoco, S.A.B. de C.V.  (NYSE: IBA)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Fourth Quarter 2018 Industrias Bachoco Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Ms. Maria Jaquez. Ms. Jaquez you may begin.

Maria Guadalupe Jaquez -- Investor Relations Officer

Thank you. Good morning everyone and welcome to Bachoco's Fourth Quarter and Full Year 2018 Conference Call. We released our financials yesterday after market closed. If you need a copy of the release, please visit our website or request it from our Investor Relations department.

This morning's call contains certain information that could be considered forward-looking statements regarding anticipated future events and performance. These statements reflect management's current beliefs based on information currently available and are not guarantees of the future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our annual report 20-F, which could make our current results differ materially from the forward-looking statements discussed in this call.

Except as required by applicable law, Industrias Bachoco undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, unless otherwise indicated, the amounts mentioned in this conference will be figures of 2018 with comparative figures of the same period of 2017 in Mexican pesos. As a reference, the exchange rate as of December 31, 2018, was MXN19.67 per US dollar. Here with me are our CEO, Mr. Rodolfo Ramos; our CFO, Mr. Daniel Salazar and our Strategic Planning Officer, Jose Juan Carinihio (ph). Now, I will give the call to Mr. Ramos.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Maria. Good morning, everyone. As we mentioned in our press release issued yesterday, most of the conditions prevailing in the third quarter of '18 continued into the fourth quarter of '18 in both Mexico and the US, even when we saw an improvement in those conditions as well as seasonal effects. Those conditions mainly were in Mexico, oversupply in our main product lines due to the uncertainty in macroeconomic conditions.

We also perceive a softer demand mainly in our traditional markets. In the US, we saw an oversupply of meat proteins, which put pressure on commodity poultry prices. In Mexico, total sales increased more than 5% compared with the fourth quarter of '17. However, we still observe a cautioned consumer mainly in our traditional channels. These conditions affected our volume growth year-over-year mainly in our balanced feed business line. We should make clear, however, that our pet food line continued growing.

In the US, oversupply condition of animal proteins remained for the fourth quarter of '18 leading to lower prices and a net sales increase (ph) of 4.8% versus the fourth quarter of '17. On the positive side, our Albertville operation allow us to capture some benefit of those market conditions. Regarding raw material costs, we observed stable grain and soybean meal prices in dollar terms, which helped our US operations. However, volatility in exchange rate resulted in a depreciation of the Mexican peso of around 4.5% in the quarter, which offset the benefit of a lower raw material cost in our Mexico operation. Our total SG&A increased 3.2% in the quarter mainly due to our Mexican operation as those expenses were affected by increases in fuel prices. The aforementioned condition led us to an EBITDA margin for the quarter of 5.9% versus 7.8% of the same period of 2017.

As a result, with a very good first half of the year and a challenging second semester, we reached an increase in total sales of 5.2% for the full year of 2018. When compared to the full year of '17 with an EBITDA margin of 8.3% versus 11.1% margin of 2017.

Despite the challenging condition that the overall industry is facing, our financial structure remain solid and it allow us to continue growing and to be closer to our customers, which we consider as the key to overcome downturn cycle effects. At this point, I will turn the call to over Daniel to a discussion of the financial results.

Daniel Salazar Ferrer -- Chief Financial Officer

Thank you, Rodolfo and good morning, everyone. As a result of the conditions that Rodolfo mentioned before, our Company's fourth quarter '18 net sales increased 2.6% in the quarter as compared with the fourth quarter of '18-'17 (ph) -- 2017. The increase is a result of higher (ph) prices in our main business line, partially offset by lower volumes sold mainly in our other business line. This year, we saw an increase in total sales of 5.2% for the full year when compared to the full year of 2017. In the quarter, sales of our US operations represented 29% of total sale, a slight decrease from the 31.2% we recorded in the equivalent quarter of 2017. This was mainly a result of lower chicken commodity prices in that geography.

Cost of sales for the fourth quarter was MXN13,272.2 million and MXN51,421.9 million for the year. This represents an increase of 3.9% for the quarter and 8.2% for the year. The increase for the quarter was due to a higher cost of raw materials in our Mexico operation. Partially affected by a depreciation of the Mexican peso versus the US dollar of about 4.5% in the quarter. For the year, part of the increase is due to the integration of our Albertville operation for the full year.

Gross profit for the quarter was MXN2,148.8 million with a gross margin of 13.9%, compared to 15% gross margin for the fourth quarter of 2017. For the full year of 2018, we reached a gross profit of MXN9,630.2 million with a margin of 15.8%. This amount is 8.7% lower than the gross profit we reached in the full year of 2017.

Total SG&A for the fourth quarter of 2018 was MXN1,566.3 million and MXN5,940 million for the full year, representing an increase of 3.2% and 9.5% respectively when compared to the same periods of the previous year. Part of this increase is due to higher fuel prices in Mexico, which mainly affected the second half of 2018.

For the fourth quarter of 2018, we reported an operating income of MXN588.5 million and an operating margin of 3.8%. The operating income for the full year of 2018 was MXN3,806.9 million with an operating margin of 6.2%, which is lower when compared with the 9.1% reached in the full year of '17. The EBITDA margin for the quarter was 5.9%, lower than the 7.8% EBITDA margin for fourth quarter of '17. For the full year, the EBITDA margin was 8.3%, lower when compared with the 11.1% reached in 2017. In the fourth quarter of 2018, we reported a net financial income of MXN389 million and a net financial income for MXN793.8 million for the full year of '18. The positive effect for the quarter was partly due to a net interest earned in partial (ph) and partially due to FX valuation.

Our total taxes were MXN182 million for the quarter and MXN1,155.1 million for the year. Those were higher than the equivalent periods of 2017 as we recognized a positive effect in deferred tax as a result of the fiscal change approved in the US at the end of 2017. All the above led us to a net income of MXN795.5 million for the quarter with net margin of 5.9%. For the full year of 2018, the net income totaled MXN3,445.6 million with a net margin of 5.6%, which is lower than the net income and margin of the same period of 2017. The net income per share was MXN1.32 for the quarter and MXN5.72 for the full year.

Going into our balance sheet, we kept a healthy financial structure with an increase in total assets of 4.3% when compared to 2017. Our net cash was MXN13,414.3 million at the end of the year, 11.9% higher than our net cash at the end of 2017. Our CapEx was MXN1,996.3 million, which is lower when compared with 2017 when we registered part of our Albertville and La Perla acquisitions.

Well that's it. Thank you and I will turn the call back to Rodolfo for final comments.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Daniel. We know that our business is cyclical and after consecutive years of good results, we consider it to be in the low part of the cycle. Therefore, even when the conditions are improving, we expect to face a challenging 2019 at least in the first semester of the year. Further, we will have a difficult comparisons since we achieved good results in the first part of 2018. In the US, chicken commodity prices seem to be slowly going up. However, oversupply of main (ph) protein is expected to remain, at least for the first half of the year. So we remain conservative in this geography. We expect condition in Mexico to improve throughout the year as volatility and uncertainty seems to be decreasing and the constituents (ph) to return to a normalized economy growth. In the Mexican poultry industry, we expect a normalized growth in 2019. We expect to continue with our CapEx above (ph) maintenance levels as part of our organic growth strategy. As a result, we are confident that we will continue growing our total sales in the middle-single digit level and returning to our normalized EBITDA margin range in 2019. And we are confident of that since we have a very valuable and experienced team supported by a robust information system that will help us to focus on those things we can control.

We will work in keeping on capturing efficiencies along all our processes and value chain, attending our customers as best as we can, keeping our solid financial structure. We consider those things will allow us to improve results and to capture growth opportunities that may arise. Of course, as always, we will continue managing and mitigating effects of things out of our control depending on the market condition in our industries.

With that, we will now take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) We have a question from Luis Miranda from Santander.

Luis Miranda -- Santander -- Analyst

Hi, Rodolfo, Daniel, Juan, good morning. I just wanted to understand a little bit better how you are seeing the beginning of the year and I know this is, as you mentioned, it's -- uncertainty is relatively high and also we have had the gas supply problems and the blockage in Michoacan, but trying to understand if -- how are you seeing this start in terms of -- if there's potential upside for price increases in Mexico poultry and also if you could see some benefit from a relatively stronger hedge -- sorry, currency in your cost in the short term. Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Daniel, do you want to answer?

Daniel Salazar Ferrer -- Chief Financial Officer

Yes. Yeah, Rodolfo. Thank you, Luis. What we would like to share with you is, of course, we are very cautious on what is going on in the variables that we cannot control for instance, the increase in the oil, the negatives in -- of the energy prices, but what we are doing at this regard is to try to optimize our feed (ph) in order to have a better focus in all our supply chain as well as evaluating what are really important to preserve so -- distribution centers. So we are trying to understand what is better for us if we continue doing what we are doing right now in terms of supply chain or getting in a better agreements with our customers, mostly with big customers which have a distribution center, so we can use their capabilities in order to be more efficient and to reduce the total (ph) cost. In terms of the market, we expect some pressures as we have mentioned. We think that we are in the wrong side of the cycle, but even so, we think, we can have some opportunity to catch -- to be closer to our customer and to be very efficient in our whole processes. In terms of SG&A, we are trying to reduce our expenses to be more efficient in all the process not only in the back office but also in the sell-side and in the supply chain.

Luis Miranda -- Santander -- Analyst

Okay, thanks, Daniel. Just want to underscore, in terms of pricing, do you see any opportunity for price increases in the first quarter or oversupply remains a constraint?

Daniel Salazar Ferrer -- Chief Financial Officer

Well, we have seen an overall (ph) recovery in the prices. So even that -- it's very smooth. We think we can have a better performance than the previous quarter. Of course, if you compare with the previous year, it's a very difficult comparison because we have exceptional first quarter last year, but -- even so this quarter, we think, it's (inaudible).

Luis Miranda -- Santander -- Analyst

Thank you, Daniel.

Operator

The next question comes from Carlos Arriola from Actinver.

Carlos Arriola -- Actinver -- Analyst

Hello, everyone. Congrats on the sequential improvements. My first question has already answered, but my second one is about the Mexican market. I would like to know, if this is, I will say, right, because I have been tracking some prices in Mexico and I have seen that prices have declined during January almost 12%, I would like to know if this is according to your operation?

Daniel Salazar Ferrer -- Chief Financial Officer

I think the prices has been stable from the last December and January, more or less have been the same -- at the same level of prices. What we saw in December was a very good demand of the product, but we couldn't increase the price -- prices as December of 2017. So January, we are seeing a normal January, as all the seasonal -- in all because of the seasonal time. So we are seeing a good demand -- a normal demand of the product with normalized prices too.

Carlos Arriola -- Actinver -- Analyst

Okay, thank you.

Operator

The next question comes from Pedro Leduc from NewFoundLand Capital.

Pedro Leduc -- NewFoundLand Capital -- Analyst

Hi, everyone. Thank you for taking my question. Hello, everyone. Hello, Rodolfo. And Daniel, three quick ones, please. First, we saw the quarter closing with a lot better margins than 3Q, now (ph) close to zero and now you ended at six (ph). If you can comment maybe how the intra quarter behavior was, let's say, if it ended like November, December was already much better than the average that we saw, the six (ph) and also if it's indeed a gradual improvement. That's the first question.

And then second, by now, if you have any visibility on the production costs for 2019, the variable ones, right, grains. If it's going to increase per kilogram produce or decrease, at least from what you have already hedged or visibility on just for us to understand that if you need to do extra pricing or not to keep margins are (ph) improving.

And then the third question is around the United States, I know you -- just want to make sure that it's still behaving below the consolidated operations in terms of margins and in your prepared remarks, you mentioned that you're seeing some signs of improvement. I'm just trying to understand what those are and what you're seeing et cetera. Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Good morning, Pedro. The first question is about, in the fourth quarter for three years in a row, December has been lower than the November results. So right now, it's -- we can say that it's a normal behavior in terms of pricing because the December is a very good month in demand (ph) and we increase the volume in that month more than 10% of the previous month, but in terms of pricing, it's more challenging because there is a lot of supply and for the third year in a row that's -- had been the performance.

So the second question is about the costs. The only -- we are seeing stable prices in corn and soybean, which is our main ingredients in terms of cost, but the only thing that we are having increases is in fuel prices, energy prices. Last year, we had a very high increase in that region. So right now, we are working, trying to mitigate that increase in fuel, gasoline, diesel and energy. We had increases all over (ph) the year about 15% of increase in those things. And that has an impact in our SG&A, so we are expecting that situation is going to continue during the year.

Maria Guadalupe Jaquez -- Investor Relations Officer

Expectation in the US.

Rodolfo Ramos Arvizu -- Chief Executive Officer

And in the US, I think, we are -- I think we want to have a good year in terms of margin because with the acquisition of Albertville, right now, we are net buyers of breast meat. So we are going to take advantage of the market conditions right now. So we are expecting a normalized year, taking in account the difficult conditions that the industry is facing in that country.

Pedro Leduc -- NewFoundLand Capital -- Analyst

Okay, OK. In the US, the fourth quarter was still below Mexico then for you and...

Rodolfo Ramos Arvizu -- Chief Executive Officer

Yes, yes.

Pedro Leduc -- NewFoundLand Capital -- Analyst

Okay, and then 1Q, we are seeing some signs of light in this?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Yes.

Pedro Leduc -- NewFoundLand Capital -- Analyst

Okay and then just to backup. Sorry.

Jose Juan Carinihio -- Strategic Planning Officer

Daniel, you want to say something?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Daniel, want to say something, Daniel?

Daniel Salazar Ferrer -- Chief Financial Officer

Well, only an additional comment, something about the cost. The -- last week's appreciation that we have seen in the Mexican peso. Of course, it will give us a space (ph) of benefit. I think it is something that also (inaudible).

Pedro Leduc -- NewFoundLand Capital -- Analyst

Hello?

Maria Guadalupe Jaquez -- Investor Relations Officer

Yes.

Pedro Leduc -- NewFoundLand Capital -- Analyst

Okay, my line broke up, sorry. Thank you.

Maria Guadalupe Jaquez -- Investor Relations Officer

(multiple speakers).

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Pedro.

Pedro Leduc -- NewFoundLand Capital -- Analyst

Bye-bye.

Operator

The next question comes from Miguel Tortolero from GBM.

Miguel Tortolero -- GBM -- Analyst

Hi, good morning, Rodolfo, Daniel, Jose Juan. Thanks for the questions. Regarding your cash position, you reached over MXN18 billion in cash. I understand that there is not much that you can share, but I just would like to understand a bit more what you are looking for in terms of M&A. So what the characteristics you are searching in terms of geography, business line, size, et cetera and second one is regarding the other segment, just to -- if you could elaborate a bit more on what do you see in this segment just to understand what is driving the double-digit drop in volume. Thank you very much.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Miguel. In terms of M&A, so we are actively looking for some opportunities. I think in this -- because right now, we are in the low part of the cycle. We are going to start seeing opportunities mainly in United States, here in Mexico, we can see some opportunities and we have some other opportunities in Central and South America and we are looking at those geographies, not all out of America. And outside of the country of Mexico, we are just looking for poultry companies. Here in Mexico, we are looking for some other proteins -- animal proteins. (multiple speakers).

Pedro (ph), the other question about the balanced feed, because of the volatility that we have in the foreign exchange in Mexico during the year, we reflect that increases in cost in our sales price, in our balanced feed. That causes a reduction -- an important reduction in the balanced feed, but in the other hand, we continued growing our pet food and every year, it's more important the participation of that business line in the balanced feed. For the year or for the quarter-by-quarter -- in the fourth quarter of '18 against the '17, we increased our volume of pet food almost 20% and we decrease 14.1% our balanced feed, swine, beef, poultry, other (ph) customers. So we are very happy with the performance of our pet food line.

Miguel Tortolero -- GBM -- Analyst

Okay. Thank you very much.

Operator

The next question comes from...

Rodolfo Ramos Arvizu -- Chief Executive Officer

Okay, go ahead, Hilda.

Operator

Thank you. The next question comes from Ulises Argote from JP Morgan.

Ulises Argote -- JP Morgan -- Analyst

Hi, guys, good morning. Thank you for the call. Just one question on the volumes front, we saw a decrease in the consolidated poultry volumes that you report there in your press release. Can you give us some sense on how volumes look like for Mexico in the quarter and maybe some thoughts of what we can expect into 2019 on this sense? Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Yes, in the quarter, the volume of poultry here in Mexico was a little bit lower, but in the year, we have an increase in volume of 1.8% as a total -- as a total volume and our -- the industry -- we can say the industry -- the projection of the industry is around 3%. So we were just almost 2% of growth and for this quarter, we expect to remain more or less the same. And the projections for us for the whole year is to grow at least close to 3%, which is the industry trend.

Ulises Argote -- JP Morgan -- Analyst

Okay, perfect. And then just one quick follow up on the cash deployment side of things. Can you comment on any changes that you could see through the dividend payout or what kind of trends we can expect for dividends in this year? And the other one, thinking on M&A, would you be willing to lever up the Company in order to explore larger M&A deals or what's your take around those opportunities? Thanks.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well, the first about the dividends that we are going to keep our policy to 20% of the net income of the previous year and in terms of the acquisitions -- of the M&A, we are hoping to explore large acquisition, but all with the responsibility to add value to our shareholders. (multiple speakers) and we can leverage 2 times EBITDA -- up to that amount of leverage we can acquire a company of that value.

Ulises Argote -- JP Morgan -- Analyst

Okay. Perfect. Thank you, guys.

Operator

Our next question comes from Pablo Ordonez from BBA

Pablo Ordonez -- BBA -- Analyst

Hi. Good morning. Thanks for the question. You mentioned that higher gasoline and diesel prices negatively affected your cost structure in 2018. Could you give us a figure of what percentage of total OpEx represented the fuel expense in 2018 and in 2017? That would be my first question. The second is, where do you see more more pressure in prices within the public market, the live chicken market or in the retailers? Thanks.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well the first question is, the fuel expenses affect the SG&A and as a percent is around 10% of the SG&A is fuel. So the increase (ph) in the total -- it can be 4%.

Jose Juan Carinihio -- Strategic Planning Officer

It was a decrease (ph) in the quarter.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Yes, and that's just in the quarter, that 4%. It's -- the net effect in our total expenses. And the second question is about the pressure in different channels. We saw a lot of pressures in the live market, mostly in the live market because I think there is an oversupply in that channel in the southeast of the country. Public market was more or less in line with high volatility, it's just normal in that kind of channel. The less pressure than I think was in the retail, but in the other hand, retail is not so large like public market and live market. And the other -- the other market that was under pressure was the Rotisserie yield for the ready-to-cook product in the food service and fast food -- in the Mexican fast food. So we saw some pressure on that channel too.

Pablo Ordonez -- BBA -- Analyst

Okay, thanks a lot.

Operator

And at this moment, we show no other questions. I would like to turn the call over to Mr. Rodolfo Ramos for any other remarks.

Maria Guadalupe Jaquez -- Investor Relations Officer

Hilda, I think there is another question.

Operator

I apologize, it comes from Mr. Hector Areliz from Rainbow Fund.

Hector Areliz -- Rainbow Fund -- Analyst

Hi, good morning. Thank you for taking my question. Just one quick question with regards to competition. Now that there's been some further consolidation from your larger competitor in Mexico. Have you seen a different -- have you seen a change in dynamics once that acquisition has finally been finalized and could that partially be related to some of the challenges you've been having in the traditional market? Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well, the consolidation of these two companies on one hand is I think they are taking more -- their strategy is more in line with the market condition. So we are seeing more production or more competition in the southeast in the live market. So in the last quarter they report and they are kicking (ph) the expansion in that part of the country and that was one of the reason of the -- on the -- the market conditions over there, but it's not all of these --- there is some other issues with consumption, the economic growth, so it is not just one thing, there is some other issues there that are affecting the consumption in that part of the country. Obviously, for this quarter, the economic conditions of the area (ph) are going to be very important issues in terms of the demand in that area.

Hector Areliz -- Rainbow Fund -- Analyst

Great. Thank you.

Operator

(Operator Instructions) We show no other questions. I will like to turn the call back to you, Mr. Ramos for any other remarks.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you everyone for joining us this morning. If you have any further questions, please contact our Investor Relations area, who will be glad to assist you with your questions. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.

Duration: 37 minutes

Call participants:

Maria Guadalupe Jaquez -- Investor Relations Officer

Rodolfo Ramos Arvizu -- Chief Executive Officer

Daniel Salazar Ferrer -- Chief Financial Officer

Luis Miranda -- Santander -- Analyst

Carlos Arriola -- Actinver -- Analyst

Pedro Leduc -- NewFoundLand Capital -- Analyst

Jose Juan Carinihio -- Strategic Planning Officer

Miguel Tortolero -- GBM -- Analyst

Ulises Argote -- JP Morgan -- Analyst

Pablo Ordonez -- BBA -- Analyst

Hector Areliz -- Rainbow Fund -- Analyst

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