Earnings Call: Q3 2021

Oct 21, 2021

Quarterly report

would now like to turn the conference over to Mr. Alonzo Fes, Gruma's Investor Relations Officer, who will present earnings results and then to Mr. Raul Cavazos, Gruma's Chief Financial Officer, who will be available in the Q and A session after the opening remarks. I would now like to turn the conference over to Mr. Fritz, IRO. Please go ahead, sir. Thank you. Good morning, and welcome to our Q3 2021 conference call. As always, we are very appreciative of your time and for giving us the opportunity to share results with you. I'm joined here today are Raul Galafez Morales, Gremas CFO and Eduardo Santiago Sanchez Martinez, Gremas Corpus and SVP. Before we open the call for questions, I'd like to share with you our results and fundamentals for the quarter. Our company keeps capitalizing on opportunities in other regions where our footprint has been expanded in both the Tortilla and the Permian businesses. In the Tortilla business, the retail channel has been very benefited by accepting for a better free line in the U. S. In addition to a solid performance of our foodservice channel, having a common key 3 opening in both the U. S. And Europe. Coupled with this, our efforts in the division in Asia and Machinery have been paid off with a great performance and acceptance of our products in this market, we just passed for the success we've had in educating the world with regards to the use and versatility of tortilla in every new under those cultures. In the core NIM business, we increased prices further in July in Mexico and mid August in the U. S, adding to the price increases we implemented in Mexico during the first half of the year. We feel comfortable that these additional increases will help us to completely offset the decreasing effect that took place during the first half of the year and keep attractive margins going forward in our operations and these divisions. This price increase, however, could result in a temporary 2% decrease in volume in the Mexican division, while in the U. S. Division we reached 10% volume growth. We expect the volume decrease in the Mexican division to be recovered over time until clients deploy to current inventories and start products with new surprises. Given the product mix of the portfolio, while volumes remain flat, net sales increased by 2% even with the negative effect of the strengthening application, without which we would have grown by 9%. More importantly, however, compared to 2019, net sales of corn 17% setting up a solid base for the future. On our cost side, higher cost of corn in the Mexican division and labor in the U. S. Division, in addition to an overall growth in inflation, impacted our COGS. We are confident that this effect will be compensated with the price increases done in cornflour as well as in the tortilla side, we were glad to inform that we just increased prices in the Tortilla division in the U. S, whose benefit you should see reflected starting in the Q4 and therefore, it should start reflecting higher levels of EBITDA margins. EBITDA was 7% lower given the inclusion of extraordinary gains during Q2. Excluding these extraordinary guidance, EBITDA would have decreased by 2% and without the negative currency change effect, it would have grown by 5%. Let's focus now on the Intermodity division, so we can have a more detailed picture of the fundamentals of our expansion. In the U. S. Division, the retail channel has proven to be very resilient after the pandemic effect, which gives us great results in 2020. The client base we have been able to build for better for year 1 has enabled us to create sustainable levels of growth through these products, which as part of our strategy has increased the composition in the portfolio from single digits to 25% currently. Our plan is to keep on pushing forward to further expand the composition of these products, making the portfolio even more profitable over time. This routine base of clients was coupled with a solid support from our foodservice operations, which have been growing in line with the primary color in this region and the solid performance of our cornflour operations. Volume sold during the quarter grew by 4%, supported by our cornflour clients' own business seasonalities, driving a 10% volume growth, with being flat in 2QA volumes. Net sales grew by 6% in the U. S. Division supported by changes to our portfolio mix progressively shifting to a more profitable composition. It is our purpose to continue the strength as we keep supplying the strong demand we're seeing for our products in various regions of the country, particularly in the Northeast. Furthermore, our core mailing business increased the price of our products during the quarter. Please note that compared to 2019, our total net sales in the U. S. Have also grown by 17%, giving us a great momentum there. Labor continue to be a winning factor on our COGS as we keep on hiring new personnel to smooth out the cost of overtime. We don't see additional labor costs increasing and are certain that the incremental amount of COGS we experienced will be diluted over time as we keep on hiring during the year. With this performance, our U. S. Division yielded a flat EBITDA, and EBITDA margins contracted 110 basis points compared to 20 20. However, margin should be restored as the new set prices in Northropia products are implemented during the Q4. At Hinsa, volumes decreased by 2% from the effect of price increases in the face of higher corn prices. We expect this effect on volumes to be temporary as our clients experience a turnover in inventories and replenish them with new priced cornflour. As a result, such price increases, net sales grew at 13%. EBITDA was 8% higher than a year ago and EBITDA margins grew at 15.6%. Please note that EBITDA margin is 7 basis points below that of 3Q 'twenty given the arithmetic effect from the increase in prices on revenues relative to expansion in costs. In terms of profitability, we have increased EBITDA per ton by 10%. In the Europe division, the positive trends we experienced during the last quarter continued in the Q3. The tortilla volume sold in Europe was 16% greater than that of last year given us not only very promising signals for the future performance of our Torpedia business in this division, but also a new historical volume record. It is our intent to keep on focusing our strategy on Torpedia growth in Europe and maintaining it as our core product going forward. Powering sold, headwinds were 20% lower than fundamentals we saw last quarter, near those we saw in 3Q 'twenty one. Some markets have been very sensitive to price increases in core milling products and byproducts and have been reluctant to buy at current levels. This, coupled with the solid year we had in 2020 as a result of the pandemic, led us to have the aforementioned contraction. Total sales increased 17% relative to a year ago. EBITDA declined 42% while EBITDA margins grew 8.4%. This drop in EBITDA is on the back of extraordinary gains related to insurance claims that took place last year. Without these onetime gains, EBITDA would have grown at 39%. Lastly, the Central American division keeps going through a period of normalization in the last quarter of 2020. During that time, on the path of the pandemic, several UN programs were in place in addition to direct sales to several countries that boosted our performance in this division when compared to our historical levels of operation. As economies are trying to stabilize and stay reopened, those programs are no longer in place. However, our operational metrics are marginally higher than those of last year as we keep pushing on our marketing efforts diligently across the region. As such, our volumes were 1% higher than last year, while our sales were 4% lower. The higher cost of corn and other raw materials has also put additional pressure on this division, contracting EBITDA margin by 6 20 basis points and EBITDA by 48% compared to a year ago. We're confident that price increases will restore margins as we grow volumes in this division. On side note, I would like to add how satisfied we are with our operations in the Asia and Machinery division. We keep expanding our presence and our production capacity. As we have mentioned in the past, we briefly opened the numbers of this division this quarter, just as a key year of how things stand today. Dowling grew at 10%, sales stayed at $60,000,000 growing at 6% relative to 3Q20 and EBITDA increased by 31%, reaching an EBITDA margin of 16.9%. As I've mentioned before, it is our intent to publicly disclose these figures to the sector division and will clearly show the market in more detail what our plans are in that part of the world and how that fits within our overall business strategy going forward. Our other subsidiaries operating income increased MXN163 1,000,000 to MXN 144 1,000,000 due to the performance of the Asia and Maschine division, the Technology division and better expense absorption at the corporate level during the quarter. In terms of CapEx, we invested $65,000,000 in capacity expansions at our treatment plants in Vienna, Spain and Malaysia and maintenance work in Omaha as well as in base water treatment systems of our cornflowers plants in Evansville. Additionally, we invested $45,000,000 to purchase the property of our tortilla plant in California, which was previously being leased. With everything we talked about, we want to reiterate that we are on track to reach our consolidated guidance for the year. For 2022, we have hedged all our needs of corn from operations in the U. S. As well as 80% of wheat for the first half of the year and 100% of corn in Mexico. We feel very comfortable with this position, reassurance that to give you an assurance that we keep working hard with expanding our operations abroad to keep up with the fast growing demand we're seeing in the U. S, Europe and Asia, while always safeguarding profitability. With that, I would like to open the call for questions from the listeners today. Operator, can we open up the call for questions, please? Thank you, sir. We will now begin the question and answer session. You. Our first question comes from the line of Felipe Uchros with Scotiabank. You may proceed with your question. Thank you. Good morning, John, good afternoon here in the U. S. Price increases in the U. S, you mentioned price increases in Totea at the end of the quarter. Can you delve a little bit deeper to tell us in which channels you drove the price increase and in which ones you have not? And also, I don't know if you can discuss this, but it would be great to know what the magnitude of those increases was and how the negotiations with Walmart ended up going if they're done? Sure. Thank you for your question. Well, in regards to the price increases, we increased prices on all our products across all regions progressively, of course, but in the U. S, they were implemented at the end of the quarter, as you very well said. The prices we implement in our products range depending on which category, but in all, we went from single high digits to even mid-20s. So with those percentage increases across our product line related to the increases we're experiencing in our cost structure, we feel more comfortable going forward and not only in restoring margins but being more profitable ahead. That's great color. And were you able to I'm not sure if you can discuss the channel makeup. Obviously, you talked about products and regions, but there's one channel, which is large retail that has historically been a bit more problematic. I'm not sure if you can give us some color on how that went. Sure. The actual negotiations or the price increases that we closed at the end of the quarter were for the retail portion of the business. And again, it just depends on the product we're talking about, but they were approximately on kind of high single digits, more or less. Or less. Great. Fantastic. I think that will close-up for me. I'll give some space to the other hands. Thanks a lot. Thank you for your question. Our next question comes from the line of Isabella Simonotto with Bank of America. You may proceed with your question. Thank you very much. Good afternoon, everyone. I have two questions. In the U. S. Still, can you guys give us any view if you're facing any sort of disruption or shortage across the supply chain? I understand, of course, labor has been an issue for a while, but have you facing any sort of logistics issues, higher freight or anything in that sense? And moving to Mexico and similar to Felipe's question in the U. S, how are you thinking pricing, especially in 2022? And if you could give us a sense of magnitude on potential hikes in Mexico for the upcoming quarters? Thank you. Sure. So 1st and foremost, as most of you know, labor supply chain disruptions, it's a theme of the last few months, and it's something that's been progressively getting worse over time. However, I can tell you that in terms of labor, our problem has been in terms of the overtime in capital to our employees because of the vast demand we saw in the country in the U. S. I mean given that, that was the case and given that we experienced that between, let's say, the Q2 and the Q3, we started hiring progressively. So we have now completed almost the hiring process in this regard, and that should keep our labor costs down from the levels that we saw probably at the beginning of this quarter. So in terms of labor, we've had an ongoing process in terms of new hires that should alleviate the additional load of cost in that regard. In terms of your other question in terms of supply chain disruptions, right now, we don't see any. As a content policy for many years, we've been we've had a very secure line of inventory levels that allows us to count even in our operation for mishaps along the supply chain. So we contemplate those mishaps in any other business in the world. And right now, we're very comfortable with the levels that we have our inventories in and supply chain disruptions should not be seen in our operations in the near term. In terms of the other question in Mexico, price right now, we just concluded the price increase, as you know. In August, we replaced our latest price hike at 13%. Overall, here, it was a pretty aggressive hike along the lines with the basic basket of goods that exists here in Mexico and inflation. And moreover, obviously, look at the corn prices that we saw in the market and everybody was seeing globally. We have to wait until next year to see how the price of corn behaves until then and how the trend is relative to Chinese demand and the harvest at that point in time. However, my main message and our main message to everyone is that we will sit down again with our counterparts and start negotiating further price increases as need to be, whether it's inflation or whether it's any other sort of cost disruption along the cost structure of our business. Our next question comes from the line of Antonio Hernandez with Barclays. You may proceed with your question. Hi, good morning. Thanks for taking my questions. Actually, now that the supply chain has been already discussed, I wanted to check if you could confirm, please, the amount of hedges that you have for next year in different regions? Sure. No problem. So we as I just briefly mentioned, we covered all our hedging for corn in the U. S. We're at 100%. We have 80% of wheat covered for the first half of the year and 100% in corn Mexico as well. So we're in pretty good shape. As you know, we as of last quarter, we're not disclosing the exact level of those hedges for commercial reasons, but we're in pretty good shape in terms of coverage. Perfect. And seeing the overall, I mean, interest pressure, but also being offset with these hedges and then supply chain disruption that is also being overcome, labor issues as well. Out of these 3, 4 issues, what could be maybe your biggest concern? Could you repeat the question, please? I had a little bit of problem understanding it. Sure. I mean considering that hedges are in place, you have said some of these infrastructure, the supply chain interruption is also being overcome and labor issues are also being overcome as well. So considering this 340, is there anything in particular that might be of a concern going forward for next year? No. Right now, I think our main focus has been on the price increases in our products. I think that was a concern. There was also a market concern overall for quite a bit of time. We feel that we successfully raised prices, as I said, across all our channels and across all our regions. We've been implementing them progressively. Other regions are in the U. S. And Mexico, which they're already in place there. But as of now, we don't see challenges that we're not currently handling, and we're handling them pretty well. So we feel comfortable with our position right now. Our next question comes from the line of Alan Alanis with Santander. Good result. Congrats. So let's take a step back. So you have 25% now of your products in the United States being better for you. So that you have premium pricing. I have two questions. How much and you said that you want to increase that even more, congratulations. I mean, what's the premium pricing that those products has? But my most important question is, okay, you're covered with all of your hedges for next year, for 2022. You have very good you're taking very aggressive well, you're taking pricing because of you're taking pricing. Right now, consensus is expecting around a little bit over 16% EBITDA margins. But it seems that you have everything already locked in, in terms of price increases and hedges for next year. Is it fair to say that you can exceed your margins of 2020 in 2022? I guess that's the real that's the most important question. So it's holiday across all the countries. Thank you for your question. So yes, our main strategy, as you just said and as I mentioned on the opening remarks, is to increase the composition of the better for you on. These products are very sophisticated in nature in terms of the composition of ingredients that they have in the market that they service. So our main goal is to increase them. And of course, given their nature across our product line or array of products, they're in the upper end of our pricing. That's just because of the target that the market is targeting and the nature of their products. Now what our target is for that composition, right now, we're just very glad about the growth we're seeing in that division as we enter further enter the market in the U. S, where it's been very, very satisfying to see the high demand we're having for those products. I can tell you that product wise, those products have had a growth of double digit growth consistently. So we're very proud of them, and we're very satisfied with the development over time. However, along that evolution, we're probably trying to get those to be above 30% of our composition in the short term and hopefully increasing margins. In regards to your other comment of us having everything locked in, As I mentioned, we're in a pretty good shape after the price increases and after covering ourselves or having everything in place to be prepared for any further challenges that could happen along the lines of supply chain disruptions or logistic disruptions. So right now, it is a question of servicing the everlasting demand we're experiencing. I cannot overstate this enough how the demand that we're seeing right now, it's unprecedented. And right now, we're focusing on expanding capacity. Right now, our capacity is along to 1% to 9%. So we're focusing on providing more volume to the market to benefit from the margins that we're able to achieve. Got it. So in other words, the focus continues to be on profitability, and it would not be out of the question to reach record. You had record high margins in 2020. You should be able it sounds like you can break that level of 16.5% and go above 17% or 17 point 5% in margin for next year? I think that would be a fair assessment, right? Yes. That would be a fair assessment. As you know, our CEO has always been focused on profitability, and that's how we're going forward. Yes. Last question, last question from my part. Could you quantify the increasing pressures of labor in the United States? I mean, because you're not the only one who's complaining about not being able to find people, right? Just give us a ballpark figure of how much that those labor cost pressures are just across the board, across your industry and across what you're seeing in your industry? Thank you. Thank you so much. Congrats. Well, labor overall, we're presenting timing of the region, obviously. But on a constant basis, we're talking about 8% of COGS. So given the weighting, we have not seen an actual increase that I can pinpoint right now. But more or less, it should be around 20% increase across the industry. Yes. Got it. Yes, I know. That's about the inflation we're seeing in the United States. Okay. That was very clear and very useful. Thank you so much and congrats. Thank you for your question. Our next question comes from the line of Lewis Willard with GBM. You may proceed with your question. Hi, guys. Good morning. Thanks for taking my questions. So you kind of talked about it in the previous couple of questions. But I mean, if you think or look beyond the recent headwinds in the U. S. Coming from labor and the commodities and the cost pressures as well. But thinking long term, can you share with us your thoughts on how do you see post pandemic growth and margin potential for the U. S. Business? Well, right now, as I just mentioned, we've been able to work. We're fortunate enough to have these costs after everything out in terms of all the cost disruptions that we saw along our cost structure. So we're able to negotiate based on those. And based on the price increases that we put in place, we're pretty comfortable with that. Now where the future is going to hold post pandemic is something that I wish I knew. I wish that I knew exactly how things are going to be post pandemic. But we're more than prepared to say something in regards to cost pressures to sit back down again with whenever we have to put that down again in terms of our counterparts and negotiate pricing again to safeguard profitability and ensure our operations as we just did in the retail segment and in the foodservice segment and in our cornflowers segment across the board. Right. So maybe another way to ask this is, I mean, do you still see a premiumization of your portfolio in the U. S. As a growth avenue and also profitability avenue? You mentioned about the strong volumes that you're seeing and you're adding capacity to it. So perhaps this is a secular trend that did not move and perhaps even accelerated post pandemic? I'm very sorry. I think there's something wrong with the line. Can you repeat the question? Because it didn't come up very clear on our end. Don't worry. Yes. So I said another way to ask this is there's I mean, the secular trend for CATIA flatbeds in the U. S. Doesn't change post pandemic. And in one case, it even accelerates. And so you're seeing strategies as a pre usage of your portfolio accelerating as well. I mean nothing of this story that you told us over the years in the U. S. Has changed after the pandemic. Maybe that's another way to ask the question. Yes, sure. I think that what the market in general was expecting was a contraction, especially in the retail side post pandemic. I believe we've done a great job during the pandemic to market our products, and it was a great time for our clients to know our products, our entire array of products, which is pretty vast. And more specifically, the products that are good for your health, which is the product line that we're currently focusing on to expand. So now that that's been a very the pandemic has suffered a lot of healthier lifestyle trends that helped us in that regard as well because of the same reasons. So we have the pandemic created a pretty stable base of clients in the retail segment that has enabled us to reach the volumes and the sales we're presenting to you today even after a great year, which was a pandemic, as you 2020, I should say, because the pandemic is still going on in some regards. But 2020 was a huge year for us. And in spite of that, we were able to deliver growth compared to that performance. So we feel very, very comfortable with the clients in the market that has been established, not only the better for Uline but across the board. We're extremely satisfied with how the brand of our products has gotten to be known within our clientele and showing demand we're seeing. So in terms of the post pandemic, do you want to be like this? I would say stable growth from the retail channel relative to how it is today, something that I think that market was not counting on. And I could tell you that also the same thing is happening in Europe, right? In Europe, each of the performance pre pandemic, we were focused on foodservice. And we had a not rough time, but we were a little bit delayed in the reaction in terms of the retail channel. If you see our numbers right now, we're really doing fantastically well in retail in Europe, and we see that as a very strong base for future growth as well. So combining that performance with the U. S. Post pandemic now and the other regions that we're working on, including Asia and China, which as you can see from our report, which have great margins over there and the acceptance of our products have been outstanding. I think it's just a question of pushing on volumes with keeping profitability, of course, but keeping on pushing volumes in all our regions, responding to the huge demand we're seeing, particularly in the U. S, as I mentioned, and focusing on that to keep going on and keep increasing the intrinsic value of the company. Our next question comes from the line of Ulysses Argote with JPMorgan. You may proceed with your question. Hi, guys. Thanks for the space for questions. Just one follow-up on the U. S. Price increases. So just to understand a bit better, is this like an extraordinary increase that you're doing right now in the final part of Q3 and into Q4? And can we expect any more increases into next year? Or will this be the level that you will carry into next year? And then the other one just to dig a little bit deeper there on capacity utilization. I think you mentioned that you're currently running at around 90%. So can you provide a little bit of detail there on each of the regions, maybe particularly thinking to the U. S? And how kind of CapEx expectations should be around this for the final part of the year? Sure. Thanks for the question. So in terms of price increases, we negotiated on the cost structure that we see currently and foresee for the medium term. So we're comfortable with that position. What's going to happen in the future? We obviously don't know. But as I mentioned, we're very open and flexible. And the minute we see the cost structure, we'll sit back down with our counterparts and start negotiating on price increases again, just like we just did this year. So we feel very confident in that regard. And in terms of the capacity question you mentioned, well, we're 9% as I mentioned. Normally, you can count off investing on CapEx around $100,000,000 to $150,000,000 That's in addition to the maintenance work we do, which is around $100,000,000 So it's $250,000,000 more or less approximately every year. This year, we gave a guidance of RMB320 1,000,000. We're not going to reach that guidance, but we should be around RMB260 1,000,000,000 including the property we just bought in California. And right now, in terms of demand, the strongest demand we're seeing is coming from the Northeast. It's further right. Right now, we're trying to satisfy that demand with distribution and logistics, but we're more than sure that once things are up and running fully in the economy, Indiana, we'll be able to satisfy that demand pretty easily. Again, just as in price increase in our perspective on costs, we are everyday assessing future demand. And based on that, calculating our CapEx of the year. So please be rest assured that we're satisfying the demand as it is, which is right now extremely satisfied with the how demand is in post-twenty 20 and the prospects that we have for the future with the market like it is today. Our next question comes from the line of Alvaro Garcia with BTG. You may proceed with your question. Hey, Alvaro. I hope you're well. Thanks for the call. Hi, Alvaro. How are you? My first question is on the others. So we now thanks for breaking out Asian and Oceania, that's fantastic. Very profitable, 2nd most profitable market of years. But what I'm asking about is actually the other others. So the corporate expenses and technology division, if I grab the others and I subtract Asian Oceania, it's obviously a negative number. How should we think of that other others going forward into next year and sort of longer term? Is that something that will always be a drag? And if so, sort of if you can quantify that, that would be very helpful for modeling purposes. Well, I think you should talk about modeling forward. I think it's like MXN 100,000,000 or less per year. Okay. In terms of EBITDA, of course. Yes. Of a negative EBITDA just from inter companies and corporate expenses. Okay. Wonderful. Wonderful. Great. And then my other question on the Q3 specifically, It seems most of the pressure in COGS in the U. S. Came from non grain items, right? So I just wanted to sort of confirm that the Q3, you still had solid hedges in place from last year's prices of corn. Is that correct? Yes. No, everything is fine in terms of hedges. You should feel more than comfortable with those hedges and everything. We're at 100%. So don't I wouldn't feel that's an issue. And as I said, with the price increases we set at the beginning of the last days of the quarter in terms of our strategic operation in the U. S, we should also feel more than comfortable with further labor cost increasing or inflation or another typical aspect of our cost structure we have also. Yes. But for the Q3 specifically, so this last quarter that you've just reported, it's fair to assume that there really wasn't an increase in corn prices yet, right, that you still had a favorable hedge? Correct. That's correct, yes. Okay, cool. Great. Thank you very much. Thank you. Our next question comes from the line of Enrique Mendoza with Exane Bury. You may proceed with your question. Hi, good morning to everyone and thanks for the space to take my question. Actually, my question regarding labor cost in the USA, specifically, if you could share with us how much of the cost per unit increase is explained by labor cost increases. I don't know if you have any kind of figure about that. Enrique, thanks for your question. I actually don't have that number specifically, but I'll be more than glad to send you the information or to a call and give you the information in that regard. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Adolfo Fripps for closing remarks. Well, thank you all being here today and giving us a chance to share with you our results. We look forward to seeing you in future conferences or other calls who you might organize between our company and yourself, and have a great day. See you next time. Ladies and gentlemen, this concludes Guruma's 3rd quarter 2021 earnings conference call. Thank you for your participation. You may now disconnect your lines.