Earnings Call: Q1 2021

Apr 28, 2021

Good day, everyone, and welcome to Grupo Bimbo's First Quarter Results Conference Call. If you need a copy of the press release issued earlier today, it is available on the company's website at www.grupobimbo.comen/investors/quarterlyreport. Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward looking statements. I will now turn the call over to Mr. Daniel Sarvitiers, Chairman and Chief Executive Officer of Grupo Bimbo. Please go ahead, sir. Thank you very much. Good afternoon, everyone, thank you for joining us. On behalf of of Grupo Indo, I hope that you and your families are healthy and staying safe. Connected on the line today is our CFO, Diego Racchiolla, our BBU president, Fred Penny, and several members of our finance team. We started off 2021 with the best first quarter on our history in terms of sales, profits and margins, following a remarkable year for Grupo Indo. These trends continue to reflect the hard work of our associates and the strength of our brand as well as the benefit from being a diversified company. We were able to maintain the strong momentum across our four regions, especially in North America, Latin America, and EAA. With continued market share gains across multiple categories, especially in the breakfast category in The US, which includes English muffins and bagels, and a recovery of our global QSR business, driven primarily by the improved COVID nineteen situation year over year. In fact, we will be investing more than $25,000,000 of our annual CapEx plan to open a bakery in Georgia, USA to better serve the QSR customers in the region. I would like to highlight that we have begun to cycle difficult comparisons driven by the pandemic induced buying which occurred in some of our geographies starting in March of last year. So in the second quarter of twenty twenty one, we will see the full effects of the panic shopping behaviors experienced during the second quarter of twenty twenty. Although this will be challenging, we expect our 2021 run rates to demonstrate strong performance versus 2019. We remain fully committed and confident with the guidance that we provided and that Diego will reiterate in a few months moments. Looking ahead, we are facing a significantly higher inflationary environment. More specifically, we're seeing increases in commodities, freight, and labor costs, and we will be taking actions to cover these cost increases. Now looking at the regional results of the first quarter, in North America, sales grew by more than 8% in peso terms, while dollar sales increased by 6.1%. We continue to see the strong loan rate compared to previous quarters with market share gains in all our branded categories, especially in breakfast. We also continue to see strong performance of the retail channel, which includes grocery, mass merchandising and club, while e commerce nearly doubled its size. We continue to see strong run rate performance compared to pre pandemic levels driven by retail demand and favorable branded mix. The the private label business run rate has remained soft, while food service is beginning to rebound as schools and restaurants manage partial openings. Our adjusted EBITDA margin reached 12.6, reflecting the strong sales performance, favorable branded mix, trade efficiencies, and productivity benefits from past investments, which were partially offset by increased strategic investments in our brands. We are cautiously optimistic going forward as trends continue to be strong, and we have been able to maintain the run rate team over the past quarters and to retain our new consumer households while while we remain focused on increasing investment in our vans. I'm also proud to share that with you that we recently signed two virtual power purchase agreements with renewable energy systems to procure procure renewable electricity that will offset % of our electricity consumption in Canada. This is a big step towards our commitment to be 100% renewable by 2025. In Mexico, despite the pandemic and a strong first quarter in twenty twenty, sales grew 1.6% driven by positive price mix and good performance of the buns toasted bread, snacks, and confectionery categories, and also we performed very well in the traditional China. Adjusted EBITDA margin expanded 30 basis points as a reflection of distribution optimization initiatives in the commercial area. In Latin America, the 6.6% sales increase was attributable to the strong results in all our divisions. The tortillas, bread and buns categories outperformed, and we had market share gains on our bread category across our geographies. The strong sales performance coupled with productivity initiatives and cost cost cutting like zero based budgeting and the turnaround project in Brazil, despite the currency devaluation which continues to impact our profitability in the country, have enabled us to expand our adjusted EBITDA margin by 150 basis points. In EAA, sales increased 19.1%, mainly as a result of a strategic acquisition of Paterna in Spain and a good organic growth in The UK and Bimbo QSR businesses. Results in Iberia were under pressure due to cycling difficult comparisons given that in the first quarter of twenty twenty, the panic shopping hit the country and the ongoing lack of turns because of the pandemic. The EBITDA margin expansion of 50 basis points resulted from strong operating performance in the QSR business as it is recovering from the depths of the pandemic and also because of the distribution efficiencies across our routes in Iberia. I would now like to turn off the call to Diego, who will walk you through our financials. Please, Diego, go ahead. Thank you, Daniel. Good afternoon, everyone, and thank you for joining us today. I would like to start with a summary of our financial results, which were outstanding. Achieving growth across our four regions and the strong EBITDA margin expansions as well as a two thirty basis point improvement on our return on investment. We are clearly benefiting from being a global and diversified company, from participating in a resilient industry and from having the leader brands in the markets in which we operate. As volume has been strong in most of our markets, especially in North America. Our revenues in hard currency continued to grow, representing now nearly 60% of the total. The strong sales performance across every region, primarily North America, Latin America and the recovery of Bimbo QSR, coupled with lower cost of sales, productivity savings and the MEP's non cash effect during the first quarter of twenty twenty plus the MEP's benefit that we had in this quarter related to the interest rate movements enable us to grow our operating income by more than four times and expand the margin by eight thirty basis points. Notably, three of our four regions switched to positive operating income. Our financing cost slightly increased 9%, mainly reflecting foreign currency translation offset by lower interest paid due to the deleverage. We ended up the quarter with a 37.5% effective tax rate, which reflects an important benefit of our turnaround businesses, which have been performing substantially better than last year. And as a result, the net effect of these factors yielded a significant improvement in net majority income and the margin expansion of more than 500 basis points. Turning to our balance sheet, thanks to our strong cash flow generation, we closed the quarter with a net debt to adjusted EBITDA ratio of 1.8 times. Our total debt increased by 3,000,000,000 pesos when compared to December 2020. This is mainly because of the depreciation of the Mexican peso. As a little bit more than 50% of our debt is denominated in US dollars. As you know, during the March, we announced an anticipated partial redemption for $600,000,000 of our bond maturing in January 2022 with the intention to finance it through our $2,000,000,000 revolving credit facility. Given that such redemption was effective until April 26, our short term liabilities as of the first quarter of twenty twenty one still show the full amount of such bond. This transaction is in line with our permanent commitment to optimize our capital structure and continue our proactive search for future opportunities to maintain a solid balance sheet and the right debt profile. With this, we currently have approximately $1,400,000,000 in undrawn commitments under the credit facility, which provides flexibility and liquidity for the future. Our net operating working capital, which mainly considers accounts receivables, inventories and suppliers has improved significantly by four days over the first quarter of twenty twenty, which is equivalent to COP 3,600,000,000.0, mostly due to accounts receivables and accounts payable. Our free cash flow before share buybacks totaled COP1.9 billion, from which we have returned nearly MXN $750,000,000 in the buyback program. And finally, I would like to share with you that even including a new estimate of a stronger peso, given the outstanding results of the first quarter and continued strong trends, we maintain our optimistic view about 2021 and feel confident in our guidance for the year. So versus 2019, we are expecting low double digit growth rate in our top line and mid to high teens in EBITDA. While versus 2020, our sales and EBITDA will remain essentially flat. We are expecting an effective tax rate in the mid to high 30s and our CapEx is estimated to be in the range of 900,000,000 to $1,000,000,000 as we are restarting those projects that were put on hold back in 2020. We are optimistic about the future as our results continue to be strong. Our teams are doing an extraordinary job and our global diversification continues to pay off. That concludes our remarks this afternoon. So Eili, please proceed with the Q and A session. Thank you. The floor is now open for questions. If at any point your question is answered, you may remove yourself from the queue by pressing star then two. Questions will be taken in the order they are received. When you ask your question, please pick up your handset to provide optimum sound quality. Our first question today comes from Ben Theurer with Barclays. First of all, congrats on the strong results. It was clearly a very good first quarter. Two quick questions. So first of all, and you've kind of alluded to it, but considering the strength you're currently having, but at the same time, the cost environment, and I think you flagged commodity, freight and labor costs, the three of them. So clearly, all somewhat going against potentially keeping those margins at the levels where they were last year. So how proactive have you been on the pricing side? And what have you seen? Because obviously, it's not only you having to raise prices, it's across the commodity board. So how have you seen reception of those price increases? And how have potential wholesalers pushed back on you when it comes to price increases? That will be my first question. Daniel, I believe you're on mute. Daniel, we we cannot hear you. Yep. Sorry. I I muted. Yes, Ben. What what I was saying is that our our coverage in in in of of of commodities ranges country from country depending on the on the particular circumstances. And what what we have done in in countries where we have increased prices so far is that there has been an understanding on on the market that that there is a there's inflation. And and and so far, we've been able to, as you could see in our results, behave positively in the market. Okay. Perfect. Thank you very much. And then second, it's kind of connected question. So you've made the announcement, and you've talked about what you're doing and what you're planning to do in Canada on the renewable energy, which kind of reminded me, could you give us an update where you stand on the situation in Mexico with some of the co generation you're having and how that could potentially impact if any reform or any change to the regulatory environment, what that could mean for you from an input cost pressure perspective, just considering all the noise been out there over the last couple of weeks? Yes. First, have to tell you that electricity is not necessarily our main cost in in the company. It's a it's a smaller part of our of our cost inputs. And we were now over 80% of our energies coming electricity energy is coming from renewable sources, and we're we're very happy what we have done in in all the countries. In Mexico, we have solar roofs in most of our plants and and DCs and and some sales centers, which are not included in in the reform that the government is is pushing for. And we also have a a contract with a power generator that that uses renewable sources. And and so far, it hasn't nothing has has has changed so far. The the law, it's still in the process of of being basically implemented, and we, as always, will be will be abiding by by any changes that that happen in in that regard. But there hasn't been any news lately. Okay. Perfect. Thank you very much. I'll leave it here. Congrats again. Thank you. Our next question comes from Ricardo Alves with Morgan Stanley. Good night, Daniel, Diego. Thanks for the call. Very impressive indeed. A couple of questions, if I may. I actually wanted to insist or to go back to the first question on the commodities and pricing. Appreciate how strong you performed in the first quarter and also understand the hedging policy of the company when we think about 2021. But when you're thinking about, you know, later 2022 and as we head into the second half of this year, are you already or is the industry already taking measures, you know, when it comes to forward looking pricing? Any more details that you can give on the competitive landscape, what you think that the industry is doing when you're thinking about 2022 and as the hedges go by? The second question is kind of related. I mean, The U. S. Performance, the strong performance that you had in The U. S, I mean, we continued to see very solid performance for Bimbo when we look at Nielsen in the first quarter, looking at a two two year CAGR basis. We are particularly surprised by the market share gains versus the industry you know, both in sales and volume. So I would appreciate if you can could comment on those market share gains. When we start to think about the reopening and the, you know, the return of channels such as food service, convenience channels, are you guys comfortable that, you know, these market share gains are sustainable? You know, if you could talk a little bit about the the categories that you mentioned in the in the preliminary remarks, breakfast and so forth, maybe that could help us to understand how sustainable you think that those are. Appreciate the time. Thanks for the questions. Sure, Ricardo. I'll answer the first question, and I'll relay on Fred to give you more comments on the second one. On the first one, I what I have to say is that these these increases in in commodity costs and and others are happening globally or or in most countries. The competitive situation in each country is different, so I I cannot tell you that that this is gonna happen every every word. But but I I I would say that all the participants are are facing the same the same increases. The the the question is when will they be affected given that they might have x or y coverage on on those on those futures that that they might or not might be be be buying. But in general, this is inflation that we're seeing throughout many of our input costs. And Danielle, I'd be happy to take the second question, Ricardo. The I guess, first, I would say that we've we've been pleasantly surprised at how our run rate has held up across most of our categories as we hit the peak of the pandemic, which was really week 11 of last year. Obviously, we're running, whether it's Nielsen or whatever the measure is, we're running negative to year ago numbers, but we're running, strong numbers, to pre COVID twenty nineteen. And so we've, you know, we've seen, gains in market share. To your point, we've seen gains in household penetration. And we've really been focused on executing behind our our our core brands, our our best brands and products, and we've invested incremental marketing dollars targeted to retain as many of the households that we gained through the pandemic and hopefully build on our share gains. But I would say all in all, I feel pretty good about where the run rates are. There is a big question of what's gonna happen as we get into the second half of the year. I spoke about that in our last quarterly call, thinking about the year into three phases, obviously, pre pandemic and then cycling the the significant, numbers of of primarily the second quarter, and then heading into the the second half of the year with broad scale vaccinations. I anticipate that we would see some, category slowdown, as things get back to normal. But I also would say that there's there have been, you know, shifts in consumer behavior, and there's still open questions about when all schools are fully back, all colleges are fully back, work from home versus back in office, etcetera, that I think are gonna continue to favor more consumption at home. And so we'll just you know, we'll have to see how that plays out. But so far, it's been on the positive side. Thanks, gentlemen. Very helpful. Our next question comes from Lucas Ferreira with JPMorgan. Hi, guys. Good evening. Thanks for this space to ask question. My first question is about Mexico. If you can elaborate a little bit more on the demand side, how things have been sort of progressing over the last couple of months. If you see improvements, which are the channels that are doing better, worse, and how competition is looking like and how pricing is evolving. Are you guys also feeling comfortable with, you know, passing through some eventual, cost pressure there to to, to the prices? So that's my first question. And then I'm sorry to insist that once again, my colleagues already asked about costs, but that's certainly one of the key topics right now. But just look at your guidance. Your guidance is for a flat margin. Right? But you will start a year with a 50 bps expansion. So either your guidance is kinda conservative or you foresee some sort of a pressure maybe eventually in the second half of the year. Just wanted to to double check if it's fair to assume some margin pressure at some point of the year to bring your average margin to be flat year on year. If that's the case, what are the regions that could be facing most pressure in your view? Thank you. Daniel, I believe you're on mute. I I didn't I didn't pick up the the the first part of the question, Lucas. But if you if, or or Fred, if you if you get it, just just just just if you can answer him. And and maybe the second one, Diego, it's for you. Sure. Should I repeat the first the first part of the question? It was about Mexico. So the outlook on Yes. Yes. We see. Uh-huh. Yeah. If you can just recap Mexico, give more details on on the performance of demand, the consumer, how it's being evolved in the last couple of months, and, if we're being able to to eventually increase prices in Mexico to, to cover eventually higher increasing costs. Thanks. Yes. Yes. Okay. Yes. Actually, I'm feeling positive about the country. We I I I talked with consumers, customers have been in the in the in the market. I I believe that that there's there's good demand. We the the brands are are are performing, and I I I believe that there's there's a there's a good good feeling about the industry in in in the country. And and and we we we we are we have been able so far to make sure that we we can cover our costs here as well. So not particularly any any, you know, extraordinary news, but things are are looking looking good here. Diego, would you answer the second question? Lucas, let probably let me start answering a little bit and giving a little bit more color on on on commodities on what we are expecting for 2021. And I would say that we feel very certain because most of the commodities are already hedged according to our hedging strategy and our hedging policy. So the impact that we would see in our results is gonna happen more in the second half. And the annual impact that we will have because of the commodities increase in 2021 without taking into consideration the different strategies that are being implemented as Daniel already discussed about it. It's gonna be less than a percentage point. Also, again, this is assuming everything else stays the same. Now in terms of the guidance, let me just be very clear. In terms of the EBITDA, remember that this quarter, we still have kind of an easy comparison. It was a very strong quarter, outstanding results basically all across the the regions in the in the four segments that we report. But we're gonna start to face very challenging comparisons, particularly in the second quarter, a little bit in the third and also in the fourth quarter of last year when we had margin increases of 80 more than a hundred basis every quarter. And also and and that mainly because of the extraordinary volumes that we have mainly in North America. Of course, there are some expenses that we faced last year, particularly with related to COVID that we also believe are gonna be lower this year, but we're going to lose part of the margin ability that we were able to achieve because of these extraordinary volumes. So that is why basically in terms of sales and EBITDA, we're expecting to see a flat margin. Having this increase in the first quarter, we do expect to see a decrease particularly in the second quarter. Excellent. Thank you very much. Our next question comes from Alvaro Garcia with BTG. Hi, gentlemen. Thanks for the call. A couple of questions on my end. The first one would be on the outsourcing, the new labor law in Mexico. I was wondering if there'd be any material impacts worth commenting on there. Sure, Alvaro. Well, we believe that it was a good dialogue that the business organizations and the private sector and and and labor have. At the end of of the day, I think it was a law that will will bring benefits to to the country. And in particular, in our in our case, we we are reviewing all the details of of it and what changes we need to make. But at this point in time, we don't see any material impact to our course of business. Great. Thanks. And then my my second question is on on taxes. Diego, you mentioned that, you know, part of the reason why the tax rate was lower was, you know, higher profits in places like Europe and and Latin America. My question is whether, you know, you've used tax assets in the past, particularly in The US, whether or not we should expect for you to deploy some of these tax assets in places like Latin America over the next couple of years. Yes, Alvaro. Let me tell you that a very important positive effect that we have been seeing in the last quarters. It is not just a matter of the first quarter, is that the operations that are still with a loss before taxes have been improving, substantially. So our accounting policy has been very conservative. We haven't been creating any deferred taxes from these losses in the past. So today, we're seeing in some of the operations that are now in the positive side, like a global warming positive effect because we're having a profit. And on an accounting perspective, we did not create the deferred tax. So let me put it this way, it is working on our favor, having a profit and zero taxes on the p and l. There are still some operations that have losses before taxes that we have continued to be conservative, not creating any deferred tax assets. So if this trend continues that we feel optimistic, we will start to see a positive effect in in in our effective tax rate. Although this is not necessarily gonna have a big swing in 2021, this is probably more an effect that we will start to see in the coming years. Very clear. And then just one last one, if I may. I was wondering if you could comment you know, we we saw very good results from Latin America. I was wondering if you could on the profitability side, if you can comment on the increased relevance of the Latin Central Division within those results. I know you don't give much color, you know, country by country, but just sort of how that that that subregion has gained share would would be very helpful. Thank you. What what what we have seen is that that that particular region have probably more lockdowns or or or more mix of work from home than than others in in LatAm. And the reality is that many of the countries in that region, we saw we saw a higher a higher revenue. So that that's what what we believe happened. Our teams are are doing a great job, obviously, in the market. But but it's that but in general, I think that's that's one of the causes of of a very good performance. But we also have countries that outperformed like Chile or Peru that are doing very well as well. Great. Thank you very much and congrats on the results. Thank you. Thank you. Our next question comes from Emiliano Hernandez with GBM. Hi, Daniel, Diego. Congrats on the results and thanks for the space for questions. Two questions from my side. The first one regarding capital allocation. Could you comment on what are your priorities there in terms of dividends, buybacks and maybe M and A? Then could you share how much of the top line growth in Europe is coming from the contribution of Paterna plant? Yes. Paterna is a small part of EAA, although positive one, and and we're happy with the with that integration of that of that business. The the the the the most important part of the of the users of the funds will be will be in CapEx, and that's a reflection of, first, the delays that we had in in putting up many of the projects last year and also in some some constraints that we have in different categories because of the growth volume. And so that's that's the bulk of it. And we we have also shareholders' assembly tomorrow where where we are suggesting we're we're the the board the the assembly approves a dividend that it's it's already announced. Diego, I don't know if want to to Yeah. Comment anything else. Yes. On the on the capital allocation, I would probably say, Emiliano, that as every year and with a very long term view of city disputes in the company, we have a strong CapEx program. As I mentioned in in the guidance, we're probably gonna be in the range of a billion dollars. So it's it's gonna be one of the years in which we're gonna be reinvesting in the business more than any other year. No? So so a lot of the cash flow generation will will go to the CapEx program. In terms of giving back to shareholders, the dividend, if it is approved tomorrow, it's gonna be 4,500,000,000.0 pesos. We bought back 750,000,000 pesos in in the buyback program during the first quarter. As we have mentioned before, if we continue to have a free cash flow generation and we continue to see an opportunity regarding the price of the stock, the valuation of the company, we will be buying back more shares. Thank you very much. Our next question comes from Federico Galassi with PAMCO. Hi. Good afternoon. Congratulations for the results. Just two questions. The first one is a clarification, Diego. When for calculation of the EBITDA for this the guidance for this year and when you compare with the last year, you are including or you're excluding the loss and profits for MEPPs? And the second question is regarding, again, the commodities, a follow-up. How much of the production for this year and maybe for the next year have you hedged or buy up to now? Thank you. Yes. If it's okay, Daniel, I can take it both questions. Regarding the the EBITDA, Frederico, we we exclude the MEPPs effect. We have always excluded on our adjusted EBITDA any MEPPs effect either if it's positive or negative. Normally, last year, particularly in the first quarter, we had a big impact of more than a hundred and $50,000,000 because interest rates started to decline very quickly. Now that we have seen a rebound on interest rates, we are recognizing a profit lower value on the liability of the MEPPs that we have in our balance sheet. It is on the operating income on EBIT, but it is excluded on our EBITDA. Okay? Both in in every ratio even with IFRS 16 or without, which is the EBITDA that we take into account for the leverage ratio of the company. In terms of the hedges, remember that we have a, I would say, very sound and solid hedging strategy both with commodities and FX. As I said, we're basically hedged for 2021. And as part of this hedging strategy, we already started to take to take some hedges for, 2022. Of course, that with the prices that we're seeing today in the spot market, the cost of these hedges is gonna be higher than what we've seen in 2021. Thank you. Thank you, Frederico. This concludes our question and answer session. I'd like to turn the call back over to Daniel Sverdrupietje for any closing remarks. Well, thank you very much for your attendance today. And as always, we will be open to answer any of your questions or comments in our Investor Relations group. Thank you very much, and hope to see you next next quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.