I would now like to turn the conference over to Mr. Adolfo Fritz, Gruma's Investor Relations Officer, who will present earnings results. We will open the Q&A session where Mr. Raúl Cavazos, Gruma's Chief Financial Officer, and team will be available to answer additional questions. I would now like to turn the conference over to Mr. Fritz. Please go ahead, Sir.
Thank you. Good morning, and welcome to our third quarter 2022 conference call. We're pleased to have you all on the line and thankful for the opportunity to share our results with you. With me today, as always, are Mr. Raúl Cavazos Morales, Gruma's CFO, and Rogelio Sánchez Martínez, Gruma's Corporate Finance VP. To start, I'd like a few minutes to discuss the fundamentals and results for the quarter. Then we'll open it up to any questions you may have. The big headline is consumer resilience even in the current inflationary environment. The robust consumption trends we have been seeing since the first quarter of the year continued into this current period. Gruma has also introduced and expanded new products into the respective markets, yielding very satisfying results.
In the U.S., inflationary pressures have led to a general preference for staples, including both tortilla and corn flour or more expensive products, in addition to healthy demand for new SKUs introduced recently to the market. In Europe, a greater distribution network coupled with stronger brand awareness has supported growth in every channel to record levels, while our subsidiaries in Asia and Oceania are recovering from the floods in the first quarter of the year and lockdowns in China. The combination of these factors drove up consolidated tortilla volumes. Performance in corn flour during the period paralleled that of corn tortilla in the U.S. Overall, we saw 3% volume growth in corn flour on a consolidated basis.
The preference for corn flour as a result of inflationary pressures supported volumes in the country, while in Mexico, volumes were supported by the higher tortilla yield with the use of corn flour amidst an inflationary environment. The Central American subsidiary benefited from greater distribution and higher availability of richer and more sophisticated SKUs, and Europe was the only outlier due to logistic challenges on the back of the war in Ukraine, which obviously affected volumes. Thanks to the resilient nature of Gruma's products and its extensive product line, we have been in a good position to offer products that satisfy different needs and client profiles, increasing total volume sold by 4%, while price increases implemented net sales growth of 21%.
It should come as no surprise that cost pressures continue to impact Gruma as they have the rest of the industry in the form of higher raw material costs, higher energy costs, and higher freight costs as a result from scarcity of transportation across supply chains. One measure we have taken to counter this effect is to pass on the incremental cost of inflation via the price increases I just mentioned, yielding positive results for our operations. EBITDA increased 13% relative to a year ago, while profitability was protected in terms of EBITDA per ton, which rose 10%. In the U.S., we're still seeing a very strong and resilient market, and so far, we have not experienced any elasticity effects or trade-downs within the product line as a result of inflation.
Continuing with the trends we saw last quarter in our retail channel, we are pleased to report robust demand for tortilla products given their nutritional value and price point when compared to other more expensive items on the shelf. Also, thanks to our adaptability to new trends in the market, we have successfully and efficiently introduced new sophisticated SKUs into our Better For You product line, which have been welcomed by a buoyant demand. These two pillars of growth were underpinned by stronger distribution and marketing efforts, which yielded growth of 4% in our tortilla operation. Corn flour grew by 5%, had a similar driver to our tortilla corn products as higher prices of corn have spurred demand from industrial clients, while home cooking has become more attractive than dining out to inflation-sensitive consumers.
In all, strong demand for our products across the board, in addition to stronger branding with retailers in the U.S., led volumes to increase by 4%, while the additional costs and widespread inflation that has been able to pass on to end customers in the form of price increases in both corn flour and foodservice tortilla helped net sales grow by 25%. Although costs remain at the forefront of the attention of the entire industry, we have managed these inflationary pressures successfully, and we were able to deliver EBITDA growth 33% higher than that of a year ago. We expect the current trend to continue and look forward to concluding a solid year for our company in the U.S. Our operation in Mexico keeps delivering results in line with our initial intended plans for this subsidiary.
The efficiency and scalability that clients saw in our corn flour product was particularly underscored during this quarter with firm preference for corn because of its higher yield in the production of tortilla. This inflationary effect was echoed in our wholesale operations, where demand has risen, coupled with expected increase in corporate accounts back to our normal levels after finalizing our strategic selectivity process that we had initiated at the end of last year. These fundamentals drove a 5% expansion in volumes over last year, while sales grew by 18%. Costs were a challenge during the quarter, not only from rising inflation and raw materials, but also from higher than usual freight and overall logistics costs caused by a scarcity of storage and transport.
Although we see it as a temporary situation in our market, it is an additional cost we will have to plan for as long as this situation persists in the quarters to come. With these cost and revenue dynamics, EBITDA decreased by 12% relative to a year ago. In Europe, the rising prices of energy, in conjunction with today's overall inflationary environment, have led to logistics problems and weakening consumer demand in some countries as preferences shift towards discounts and cheaper products. That said, we're pleased to report the results in our tortilla operation in Europe remain at record high levels in all commercial channels. The momentum we've had in the retail channel has not waned, while foodservice continues to deliver steadily across the continent, yielding total tortilla growth of 11%.
Our corn milling operations slowed down as logistic issues stemming from the war in Ukraine have impacted volumes. As a result, our overall volume growth for the quarter contracted by 1%, while sales grew 18% given the price increases implemented in the region and a much better mix of products shifted towards tortillas over cornmeal. With these positive results, we remain optimistic about our operation in Europe, although cautious about further inflation pressures and continuing consequences of rising energy prices. At our subsidiary in Central America, the underlying economic recovery of the region, coupled with our continuous distribution expansion efforts and the availability of our new SKUs in countries and regions where it was absent before, increased our volume sold by 11%. We implemented pricing increases of 24% in the third quarter compared to a year ago.
Those price increases are already catching up to cost growth, yielding an EBITDA expansion of 65%. In Asia and Oceania, the recovery in Australia and China led to a 3% volume growth, and these two countries were largely behind 4% sales growth in the region as well. There was some downward pressure in this division from Malaysia due to supply chain disruptions, coupled with continuing COVID restrictions in Asia. Costs in China have been growing faster than revenues in light of inflation, creating a deflating effect with the implemented price increases. This looms over our profitability metric as the lack of availability of transportation is driving freight costs across the board and EBITDA was 39% lower than that of a year ago. In spite of these obstacles, the subsidiary has been improving its operational metrics since the lockdowns happened in China.
Therefore, we expect recovery and a better performance as we close the year. Because of its relevance to our capital structure, I'd also like to inform that we have successfully raised MXN 4,500 million of capital in the local debt markets in Mexico. This new bond is part of an existing issuance program and will be used to pay $150 million raised in 2018. It will mature in 2027, and by doing so, we have effectively increased the duration of our liabilities and support projected asset growth going forward. We remain with a very healthy and debt-less profile and will continue our strict vigilance going forward. In all, although the world faces various challenges today, the defensive nature of our products, in addition to the wide array of needs they cover, have given us solid results.
We have a positive outlook for our company for the fourth quarter, and based on what we're seeing in each of our subsidiaries, there is a very solid base to plan for additional profitability and growth next year. With that, I'd like to open the call for questions from our listeners today. Could you help us with that, operator, please?
Thank you. We will now begin the question and answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by two. If you're using speaker equipment, you will need to lift the handset before making your selection. Our first question comes from the line of Fernando Olvera with Bank of America. Please proceed with your question.
Hi, good morning, everyone, and thanks for taking my question. I have two questions. The first one is related to the U.S. Can you comment how much is growing the Better For You category, and how much are the new launches contributing to growth, and what do you have in the pipeline in coming quarters? My second question is related to Mexico. Regarding the anti-inflationary plan implemented by the government, what are the risks that the plan could extend beyond February 2023 and that more strict measures could be implemented? Thank you.
Sure. Thank you for your questions. So in terms of your first question, we've had a growth tempo around 11%, almost 11% in our Better For You line, relative to last year. Of that, around 30% of that growth was attributed to the introduction of this new SKU in the U.S. Now your second question, I could not. You kind of broke up on the call. Can you repeat it, please?
Sure, Adolfo. It's related to Mexico, regarding
Mm-hmm.
Anti-inflationary plan implemented by the government. I would like to hear your thoughts about what are the risks that the plan could extend beyond February 2023 and that more strict measures could be implemented.
Well, the plan just highlights the strategy that we've been having historically of not raising prices during the second half of the year for corn flour. If you look back at our historical performance, you'll see that all price movements have taken place at the beginning of the year and not in the second half of the year. It's just highlighting the same strategy we've had. The last price increase we normally do or we've done in this current inflation environment has been around August, which was communicated from the government over to the press. Now in that article, it said that we wouldn't increase prices until February, which is exactly what we've done also last year, and that's probably what we'll do the following years as well.
In the following years, we won't, we will just raise our prices during the first half of the year and not increase them during the second half of the year, just on that particular product line, which is corn.
Adolfo?
Thank you.
Thank you. Our next question comes from the line of Benjamin Theurer with Barclays. Please proceed with your question. Mr. Theurer, your line is live. Sorry about that. Our next question comes from the line of Sergio Matsumoto with Citigroup. Please proceed with your question.
Scott, good morning, and thank you for taking my question. In the United States, can you comment on the pricing environment more broadly? Are you able to increase your prices both in the rate of your products and the mix? Or just, you know, is it more, you know, skewed to one of those? You know, if you could comment also a bit on the color with the discussions with the retailers, please. Thank you.
Sure. You know, retailers have been, as we've said in other calls, very open to the price movements and price adjustments that we've had to make given the inflationary environment that we're living in. So far we've been successful at transferring the cost of inflation that's been pressuring our cost structure. You know, we've been able to maintain and protect profitability through those increases. We've been able to increase our prices across our product line without any problems. Retailers, again, have been very open to those increases because of the reason that we're doing them.
You know, going forward, you can expect further price increases or price movements, depending on whether we see it necessary or not, as we see our cost structure being pressured by inflationary pressures or not. If we feel that the profitability is being jeopardized, we will of course increase prices and, as long as it's justified.
Understood. Second question, if I may. Do you have an update on the guidance for this year?
No. I mean, we're in line with guidance. We're actually a little bit over guidance at this point, projecting it out until the end of the year. We're not making any adjustments or any changes to the guidance we provided.
Okay. Thank you, Adolfo.
Thank you.
Thank you. Our next question comes from the line of Alan Alanis with Santander. Please proceed with your question.
Thank you so much. I think I'm gonna follow on the same topic that we're talking right now. First of all, congratulations on the results, and thanks for taking my question. I don't recall in my career having seen in the United States an increase of any product of 21% and then still seeing sales volume grow up 4%. That's pretty impressive. I think what we're trying to do is try to understand how that was achieved. I think you answered part of the question regarding the new product. If you could give us more color regarding channels. I mean, is this incremental volume from off-premise, from restaurants or more supermarkets, regions? Are you gaining market share? Is the industry growing in that level?
Because I think the big question is how sustainable is this combination of pricing with positive volumes? Please, that would be my first question.
Sure. Well, all the volume changes that we've experienced after the price increases have come from all channels really. In different proportions obviously, but it's come from all channels. As you know, depending on the product we're talking about, they're aimed to specific markets. These markets are not or have not presented any price elasticity whatsoever. The real question is, as you very well said, and I think that question goes for the entire industry, how much of a price increase is the market going to sustain until we see more elasticity? However, I would suggest that our product might not feel that elasticity at all just because it's a product that it's still on the low price range of comparables.
It caters to markets that are non-price sensitive. For example, the Pepperidge Farm line, as we talked about before, is catered to a market that's normally not price sensitive in any of the other products they buy. I would suggest that that's the reason why we have not seen any immediate impact in volumes. If you go to the other spectrum of the products, to the corn-related products, those products are aimed for Hispanics that consider tortilla and corn flour the basic need product, and it's part of their meals every day. They would forego probably other types of food before they start foregoing buying corn flour or tortillas for their everyday meals.
I would say that we are, we've been fortunate enough, to cater to markets that allow us to be naturally hedged in these conditions, if you wanna use that term, to yield the volumes we've been able to have during these times.
That makes sense. Basically, people are not eating as much steak, and they're eating more tacos. Okay, so you're benefiting from the downside.
Yeah, really.
That's very useful. Okay. The second question also kind of touched before, but I wanna expand on it, and I wanna make sure that I'm understanding. What's your strategy regarding pricing in Mexico for the next few months, for the next few quarters?
As I said, we're just gonna follow the same strategy we've been following historically. Before inflationary times, we made price adjustments according to the harvest. As you know, here in Mexico, there's two harvests, so we have to have price movements done by the first half of the year, and that's what we've done historically. Going forward, that's exactly the same situation. We will do the same thing or we'll start if it's justified, obviously.
Mm-hmm.
We'll start making price movements during the first half of the year and not do anything during the second half. Again, that's just for corn flour, obviously.
Got it. No, that's very clear. Thank you so much. Again, congrats on the results.
Thank you for your questions.
Thank you. Our next question comes from line of Alvaro Garcia with BTG Pactual. Please proceed with your question.
Hi, Adolfo, Raúl, Rogelio. Hope you guys are well. A couple of questions. The first one on pricing as well in the U.S. Now we saw pricing accelerate 8% quarter-over-quarter, which was a surprise to us. We had sort of left off with the pricing you had mentioned at the beginning of the year, sort of high single-digit in tortilla, low double-digit in foodservice and so on. I was just wondering to confirm if this was an additional rate increase or if this was just a product of a big shift in mix that we saw this quarter. That's my first question.
Yeah, sure. I would attribute that to the, I would say the shift in mix across the product line, more so than anything else. Also the implementation of the prices across the board of our products are being done at different stages. That's why you have a, if you wanna call that delaying effect in the prices. As we've talked in other calls, we're catching up to the cost growth. We're performing those price increases as we go. That's the result of it, really.
Perfect. No, that's super clear. A little bit of a delay there. That one makes a lot of sense. Then, one housekeeping item. We noticed that in other subsidiaries and eliminations, there was an EBIT loss of $9 million and EBITDA loss of $14 million. I was wondering if you could sort of expand on what drove that, if there was any sort of specific non-recurring item that was involved there.
Yeah, no, that's clearly a non-recurring item. It's just a result of intercompany eliminations, really. If you looked at the operating income of each of the subsidiaries that comprise that part, that group within the income statement, you'll see that they're, you know, they have positive results. However, through intercompany eliminations, that's where we get that expense that you're talking about or that fall that you're talking about. I would attribute that to that. Also, we have also had extraordinary corporate expenses.
Okay. Just one last one from me on you know, in your COGS, so your cost of goods sold, increases year over year. You're sort of in the low 20th now. I think corn and wheat were way higher than that sort of one year ago, nine months ago, six months ago. It's been difficult to sort of for us to measure when we might see this cost per ton increase or if this is the peak increase we might see. Any commentary on sort of directionally if we if you? That's my last. Thank you very much.
No, I mean, look, I think that level of growth is probably a quote-unquote normalized growth for the next quarter. It's difficult, as you know. We use different types of corn at different prices and different layers of prices as we start producing our products. It's difficult to say how much of corn or what price are we using relative to from quarter to quarter, really. As a base guideline, I would say that you could count on that level of growth for the next quarter.
Okay. Thank you very much.
Next question.
Thank you. Our next question comes from the line of Felipe Ucros with Scotiabank. Please proceed with your question.
Good morning, Raúl, Rogelio, Adolfo. Thanks for the space for questions. Quick one on Mexico. Looks like you're over the hump of the recent client rationalization. I was just wondering if you could expand a little on that. Did you see that the clients that were rationalized are coming back now, for the new SKUs? Or has the growth been coming from any? Another one on operational efficiencies in Mexico. Very clear that you delivered a lot of efficiencies, but it wasn't clear to me exactly what drove that. Just wondering if you could go a little deeper on that explanation on efficiencies. Thank you.
Sure. Well, in regards to the, I mean, what we're seeing right now is a lot of our clients are, as you very well stated, coming back for these new SKUs that we're putting out. So we're rebuilding our client portfolio with a richer mix of products. So that was the effect that you saw when we stated that our portfolio was back to normal levels after this activity process that we had here internally in the company. In regards to your second question, I'm not sure I follow. Please.
Yeah, sure. In Mexico, it looks like you had, you know, your SG&A as a percentage of sales improved. In the commentary, I couldn't really understand what the source of the improvement on the SG&A to sales ratio. Any detail you can give me on what programs or how you're managing to drive those efficiencies? Maybe more importantly, what you expect going forward, if you expect more efficiencies. Thank you.
No, we don't have anything to point our finger at. What we've done here, what we do normally is the marketing costs that we incur, and based on that, we either spend more or less. In this quarter in specific, we started to spend less. If you see the ratio itself, it just moves. I mean, it's not. It's marginal how much it moves. If you wanna point your finger at something, it would be those expenses that we talked about.
Got it. Thanks for the color.
No, thank you.
Thank you. Our next question comes from the line of Lucas Ferreira with JP Morgan. Please proceed with your question.
Thanks. The first one on the hedging. If you guys are already doing any hedge for Mexico for next year, and how to think about hedging pace for the U.S., how much if you can give us some details on how much you have fixed for next year, that would be great. And the second question regarding pricing, if this falling commodity prices is putting any pressure on pricing for your products and for competition at all on our side. How to think about those with this environment of a lower commodity prices we're seeing today. Thank you.
Sure. Well, in regards to your first question, we do have hedges in place already, for the U.S. We have our entire needed volume hedged for next year. In Mexico, we have the first half of the year hedged, as we do normally. In regards to your second question, you know, the price of corn will still be bought. There are a lot of fundamentals. There are a lot of bearish fundamentals, and there are a lot of bullish fundamentals. I could tell you that corn was very bullish over the quarter because a lot of funds came back.
There was a lot of appetite for funds to buy corn because of the prices they were at, because of the fundamentals, given that there are a lot of droughts in the world. There are a lot of weather conditions that are pointing to a lower yield corn. But on the other hand, there are a lot of other fundamentals that point to a lower demand. There are lower exports and the demand for ethanol has lowered, I think, over the last two or three months. There are a lot of contradicting fundamentals, and I would say that that would put the price of corn where it has been for the last couple of weeks, stable at that point until we see something really drastic going on in terms of those two.
Either there is a lot more droughts, or demand starts picking up back again. I would say that the demand of corn should be stable at the levels that we've seen it during the last couple of weeks. So far it hasn't put any pressure on us. We strategically went into the market, as we've done in the past to buy at the best price possible and to hedge, to buy the hedges at the best price possible. We feel comfortable going forward with our operation and the pricing that we close the hedges at.
Perfect. Thank you very much.
Mm-hmm. Thank you.
Thank you. Our next question comes from the line of Barbara Halberstad with JP Morgan. Please proceed with your question.
Hi. Thank you. Thank you for the questions. The first question would be with regards to funding needs and financing strategy. You were able to access local market, now in October for short-term debt. Would that be where you would like to continue to fund yourselves going forward? There's the bond due in 2024, so just trying to think if local funding is where Gruma would be tapping next, I guess.
Yeah, sure. Thanks for your question. Well, as you very well point out, we do have an upcoming maturity in 2024, which is an international bond. We will for sure go to international market to replace that. But for working capital purposes, we'll always fund ourselves in the local markets in pesos. That is our strategy.
Okay, perfect. Just a follow-up question. Sorry if this was already addressed in the previous questions and I missed it. In terms of storage capacity in Mexico, how you're managing that, and in terms of like volumes, you mentioned you're comfortable with your hedging strategy for corn. In terms of like volumes of products that you have in managing storage capacity, how has that been locally?
Sure. Look, we have our own silos and third-party silos. We feel that's enough for us in that sense. In terms of the transportation pickups that we experienced, you know, with energy prices rising the way they have been, and the lack of transportation out there, prices clearly rose to levels that we had not seen in the past. It's a matter of waiting out when, you know, when these prices will go down relative to the prices of energy. We have to wait until the next quarter to see how the situation evolves. We're still prepared to deal with the situation if prices still rise in that respect.
Perfect. Thank you.
Thank you.
Thank you. Our next question comes from the line of Benjamin Theurer with Barclays. Please proceed with your question.
Okay. Does it work now? Hello?
Hello.
Can you hear me? Yes. Can you hear me?
Yes. Yeah, I can hear you. Yeah, I can hear you.
Tried it a little different. Apologize for the tech issues earlier during the call. Question is around the energy cost headwinds you've talked about. I guess particularly in Europe, they're most likely gonna be prevailing, but we're also seeing obviously elevated energy costs across the operations in North America as well as Central America. Just wanted to understand if you're doing anything on trying to lock in certain energy cost levels as well, aside from what the hedging strategy is around the core product, i.e. corn, wheat, from an ingredients perspective, but also like energy cost hedging. Is that anything you've been looking into or if you've been doing right now?
Yeah. No, we're definitely being proactive in that respect as well. We're hedging for the price of energy. We are covered for full year in Europe, and we're covered around 60%-65% in the U.S. So we're prepared for those headwinds, sure. You know, we have to see where energy prices end up being for the year if needed in the U.S., but we're prepared for that. What we're not prepared for is inflation in other parts of the cost structure, such as labor, which has waned. That was our primary concern in past quarters. But it's really stabilized in these past couple of quarters.
That's not our primary concern, although we're obviously not. We can't do anything about that right now. In terms of other raw materials and, you know, we can't hedge on those, but they're not a meaningful component of our cost structure at all.
Okay. Perfect. Then, just one last question. I'm not sure if that's been elaborated on, but maybe you can talk a little bit about the tax rate environment we should expect going forward. That level of the high 30s, is that something you would consider reasonable for the foreseeable future on the effective side, on the income statement tax rate?
Yeah. There shouldn't be a change from other years. We're expecting, like you say, high 30+, 36.5%-37%, at those levels.
Okay. Perfect. Thank you very much.
Thank you for your questions.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from line of Carlos Laboy with HSBC. Please proceed with your question.
Yes, good afternoon, everyone. Perhaps you can just to stay on the topic of that Alan raised on the U.S. Do you have perhaps more room than you thought for higher pricing of premium value add products, and maybe also at foodservice accounts in the U.S. than you thought? In other words, is there more runway for you to increase pricing there in those two areas? I have a follow-up question relating to your ESG report. We noticed that the report is light on benchmark measurements at this stage and on targets. As you consider ESG targets, are there any major CapEx investments that you can already see that you'll need to make in order to meet desired targets?
Yeah, thanks for your question. In regards to the first one, it's hard to say. I mean, we're doing price increases relative to what we feel, how much pressure we're experiencing in our cost structure. The fact that we haven't seen any price elasticity, you know, obviously is positive and can give us a positive outlook for the context we're living. We don't, I mean, we don't measure that as having a more leeway into further prices. I mean, if the prices are justified, I think that we'll still be able to make those price increases by all means. At this point, I mean, we don't.
I mean, it's an unknown to everyone in the market and everyone in the sector how far you can get with price increases without seeing elasticity in your volumes. As I said before, we're fortunate that we're focusing on a product that has not experienced that, and it's something that we don't see given the nature of the product and the markets that we're catering to. We'll just have to wait and see. In terms of our ESG report, yeah, we're obviously with the steps that we're taking into ESG internally in the company, we will have a portion of our CapEx targeted to meet the targets that we set ourselves going forward. Also we're trying to be fully TCFD compliant.
We're making changes internally in order to do so, and one of those changes is obviously having a specific CapEx component targeted at ESG metrics and ESG targets.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Fritz for final comments.
Well, thank you all again for being here with us again for the call, and looking forward to talking to you or seeing you or meeting you in future conferences that we attend. Thank you so much for the call, and thank you so much for your questions. Bye.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.