I would now like to turn the conference over to Mr. Adolfo Fritz, 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&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 third quarter 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 by Raul Cavazos Morales, GRUMA's CFO, as well as by Rogelio Sanchez Martinez, GRUMA's Corporate Financial VP. 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 corn milling businesses. In the tortilla business, the retail channel has been really benefited by the acceptance of our Better for You line in the U.S., in addition to a solid performance of our food service channel as the economy keeps reopening in both the U.S. and Europe.
Coupled with this, our efforts in the division in Asia and Oceania have been paid off with a great performance and acceptance of our products in this market, which just adds to the success we've had in educating the world with regards to the use and versatility of tortilla in every meal of diverse cultures. In our corn milling business, we increased prices further in July in Mexico and in 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 deflation effect that took place during the first half of the year and keep attractive margins going forward in our operations in these divisions.
This price increase, however, did 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 as our clients deplete their current inventories and start products with the new set prices. Given the product mix had a portfolio where volumes remained flat, net sales increased by 2% even with the negative effect of the strengthening of the peso, without which we would have grown by 9%. More importantly, however, compared to 2019, net sales have grown 17%, setting up a solid base for the future. On our cost side, higher costs 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 corn flour, as well as on the tortilla side, where we're glad to inform that we just increased prices in our tortilla division in the U.S. These benefits you should see reflected starting in the fourth quarter. Therefore, we should start reflecting higher levels of EBITDA margins. EBITDA was 7% lower given the inclusion of extraordinary gains during 3Q 2020. Excluding these extraordinary items, EBITDA would have decreased by 2%. Without the negative currency change effect, it would have grown by 5%. Let's focus now on each one of the divisions so we can have a more detailed picture of the fundamentals I just mentioned. In the U.S. division, the retail channel has proven to be very resilient after the pandemic effect, which fueled its growth results in 2020.
The client base we have been able to build for our Better For You line has enabled us to create sustainable levels of growth for these products, which as part of our strategy, have increased their 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 our portfolio even more profitable over time. This retained base of clients was coupled with a solid support from our food service operations, which have been growing along with the economy recovery in this region, and a solid performance at our corn flour operations. Volumes sold during the quarter grew by 4%, supported by our corn flour clients' own business seasonality, driving a 10% volume growth with flat inter-period 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 this trend as we keep supplying the strong demand we're seeing for our products in various regions of the country, but particularly in the Northeast. Furthermore, at our corn milling business, we 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 going forward. Labor continued to be a weighing 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 experience 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 3Q20. However, margin should be restored as the new set prices in our tortilla products are implemented during the fourth quarter. On Asia, 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 newly priced corn flour. As a result of such price increases, net sales grew by 13%. EBITDA was 8% higher than a year ago, and EBITDA margins stood at 15.6%. Please note that EBITDA margin is 7 basis points below that of Q2 2020, 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 experienced during the last quarter continued in the third quarter. The tortilla volume sold in Europe was 16% greater than that of last year, giving us not only very promising signals for the future performance of our tortilla business in this division, but also a new historical volume record. It is our intent to keep on focusing our strategy on tortilla growth in Europe and maintaining it as our core product going forward. Volumes sold in cornmeal were 20% lower as the fundamentals we saw last quarter mirrored those we saw in Q2 2021. Some markets have been very sensitive to price increases in cornmeal products and byproducts and have been reluctant to buy at current levels.
This, coupled with a 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 by 43%, while EBITDA margins stood at 8.4%. This drop in EBITDA is on the back of extraordinary gains related to insurance claims that took place last year. Without these one-time gains, EBITDA would have grown by 39%. Lastly, the Central American division keeps going through a period of normalization since the last quarter of 2020. During that time, on the back 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 the economies are trying to stabilize as they reopen, 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 620 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 a side note, I would like to add how satisfied we are with our operations in the Asia and Oceania division as 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 teaser of how things stand today.
Volume grew by 10%, sales stood at MXN 60 million, growing by 6% relative to Q2 2020, and EBITDA increased by 31%, reaching an EBITDA margin of 16.9%. As we've mentioned before, it is our intent to publicly disclose these figures as a separate division as we appear to 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 MXN 163 million to MXN 144 million due to the performance of the Asia and Oceania division, the technology division, and better expense absorption at the corporate level during the quarter.
In terms of CapEx, we invested nearly $65 million in capacity expansions at our tortilla plants in Indiana, Spain, and Malaysia, maintenance work in Omaha, as well as in the wastewater treatment systems of our corn flour plant in Evansville. Additionally, we invested $45 million 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 for our 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, especially in relation to the price increases we managed to pass on, providing us a promising perspective on higher margins in 2022.
In sum, our team wants to give you 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 you open up the call for questions, please?
Thank you, sir. 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 the 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 Felipe Ucros 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 tortilla 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? 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. Thanks.
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 implemented on our products range depending on region and category, but in all, we went from single high digits to even mid-20s. With those percent increases across our product line related to the increases we experienced in our cost structure, we feel more than comfortable going forward and not only restoring margins, but being more profitable ahead.
That's great color. I'm not sure if you can discuss the channel makeup. Obviously, you talked about products and regions, 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. Again, it just depends on the product we're talking about, but they were approximately high single digits, more or less.
Great. Fantastic. I think that'll close up for me. I'll give some space to the other analysts. Thanks a lot.
Thank you for your question.
Our next question comes from the line of Isabella Simonato 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., 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? Moving to Mexico, similar to Felipe's question in the U.S., how are you thinking pricing, especially in 2022? If you could give us a sense of magnitude on potential hikes in Mexico for the upcoming quarters.
First 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 we have to pay our employees because of the vast demand we saw in the country, in the U.S. Given that was the case and given that we experienced that between, like I said, the second quarter and the third quarter, we started hiring progressively. 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.
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 the other question in terms of supply chain disruptions, right now we don't see any. As a company policy, for many years, we've had a very secure line of inventory levels that allows us to count even in our operations for mishaps along the supply chain. We contemplate those mishaps like any other business in the world. 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, right now we just concluded the price increases, as you know. In August, we placed our latest price hike of 13%.
Overall, in the year, it was a pretty aggressive hike along the lines with the basic basket of goods that exists here in Mexico and inflation. Moreover, obviously, look at all the corn prices that we saw in the market that 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. My main message and our main message to everyone is that we will sit down again with our counterparts and start negotiating on further price increases as need be, whether it's inflation or whether it's any other sort of cost disruption along the cost structure in our business.
That's very clear. Thank you very much.
Thank you.
Our next question comes from the line of Antonio Hernández of Barclays. You may proceed with your question.
Hi. Good morning. Thanks for taking my question. Well, 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. Thanks.
Sure. No problem. 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 in Mexico as well. We're in pretty good shape. As you know, 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.
Okay, thanks. Seeing the overall input cost pressure, but also being offset with these hedges and then supply chain disruption, and that is also being overcome, labor issues as well. Out of these three, four issues, what could be maybe your biggest concern?
Could you repeat the question, please? I had a little bit of problem understanding it.
Sure. Considering that hedges are in place to offset some of this input pressure, that supply chain disruption is also being overcome and labor issues are also being overcome as well. Considering these three, four, 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 that was also a market concern overall for quite a bit of time. I feel that we successfully raised prices, as I said, across all our channels and across all our regions. We'll be implementing them progressively in other regions, other than the U.S. and Mexico, which they're already in place there. As of now, we don't see challenges that we're not currently handling, and we're handling them pretty well. We feel confident with our position right now.
Very well. Thanks a lot. Have a nice day.
Our next question comes from the line of Alan Alanis with Santander. You may proceed with your question.
Thank you so much. Good result. Congrats. Let's take a step back. 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. You said that you want to increase that even more. Congratulations. What's the premium pricing that those products has? My most important question is, okay, you covered with all of your hedges for next year, for 2022. 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 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 most important question. Consolidated across all the countries.
Mm-hmm. Thank you for your question. Yeah, 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 line. These products are very sophisticated in nature in terms of the composition of ingredients that they have, and the market that they service. 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 market that they're 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 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. We're very proud of them, and we're very satisfied with their 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 about us having everything locked in, as I mentioned, we're in 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. 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. Right now we're focusing on expanding capacity.
Right now our capacity is along the lines of 9%. We're focusing on providing more volume to the market to benefit from the margins that we're able to achieve.
Got it. In other words, the focus continues to be on profitability, and it would not be out of the question to reach a record. You had record high margins in 2020. It sounds like you can break that level of 16.5% and go above 17% or 17.5% in margin for next year. I think that would be a fair assessment, right?
Yep, that would be a fair assessment. As you know, our CEO has always been focused on profitability, and that's how it's going to be going forward.
Yeah. Last question from my part. Could you quantify the increasing pressures of labor in the U.S.? 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 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 presuming depending on the region, obviously, but on a consolidated basis, we represent about 8% of COGS.
Yep.
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.
Mm-hmm. Yep. Got it. Yeah, I know. That's what the inflation we're seeing in the United States. Okay. That was very clear and very useful. Thank you so much, and congrats. Thanks.
Thank you for your question.
Our next question comes from the line of Luis Willard with GBM. You may proceed with your question.
Yeah, good morning. Thanks for taking my question. You kind of talked about it in the previous couple of questions, but if you think or look beyond the recent headwinds in the U.S. coming from labor and the commodities and the cost pressures overall, 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 were fortunate enough to have these talks after everything "played out" in terms of all the cost disruptions that we saw along our cost structure. We were able to negotiate based on those. Based on the price increases that we put in place, we're pretty comfortable with that. Now, what 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.
We're more than prepared to assist something in regards to the cost pressures, to sit back down again with whomever we have to sit back down again in terms of our counterparts and negotiate pricing again to safeguard profitability and shield our operations as we just did in the retail segment and in the food service segment and in our corn flour segment across the board.
Right. Maybe another way to ask this is, do you still see 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. 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 your line. Can you repeat the question? It didn't come up very clear on my end.
Don't worry. Yeah. I said, another way to ask this is, the secular trend for tortilla flatbreads in the U.S. doesn't change post-pandemic, and in one case, it even accelerates. You're seeing strategies as premiumization of your portfolio accelerating as well. Nothing of this story that you've told us over the years in the U.S. has changed after the pandemic. Maybe that's another way to ask the question.
Yeah, 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. It was a great time for our clients to know our products, our entire array of products, which is pretty vast. More specifically, the products that are good for your health, which is the product line that we're currently focusing on to expand. The pandemic also a lot of healthier lifestyle trends that helped us in that regard as well because of the same reason.
The pandemic gave us 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 the pandemic, or the 2020, I should say, because the pandemic is still going on in some regards. 2020 was a huge year for us. In spite of that, we were able to deliver growth compared to that performance. We feel very comfortable with the clients and the market that has been established, not only in the Better For You line, but across the board. We're extremely satisfied with how the brand of our products has gotten to be known within our clientele and with the demand we're seeing.
In terms of the post-pandemic, if you want to view it like this, I would say stable growth from the retail channel relative to how it is today, something that I think the market was not counting on. I could tell you that also the same thing is happening in Europe. In Europe, if you see the performance, pre-pandemic, we were focused on food service, 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.
Combining that performance with the U.S. post-pandemic now and the other regions that we're working on, including Asia and Oceania, which, as you can see from our report, we have great margins over there, and the acceptance of our products has 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.
That was excellent. Thank you for the color.
Thank you.
Our next question comes from the line of Ulises Argote with JP Morgan. You may proceed with your question.
Hi, guys. Thanks for the space. Four questions. Just one follow-up on the U.S. price increases. Just to understand a bit better, is this an extraordinary increase that you're doing right now in the final part of the third quarter and into the fourth quarter? Can we expect any more increases into next year, or will this be the level that you will carry into next year? 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 into the U.S., and how kind of CapEx expectations should be around this for the final part of the year? Thank you.
Sure. Thanks for the question. In terms of price increases, we negotiated on the cost structure that we see currently and foresee for the medium term. We're comfortable with that position. What's going to happen in the future, we obviously don't know. As I mentioned, we're very open and flexible and the minute we see that in 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. We feel very confident in that regard. In terms of the capacity question you mentioned, well, we're 9%, as I mentioned. Normally, you can count on us investing on CapEx around $100 million-$150 million. That's in addition to the maintenance work we do, which is around $100. It's a $250 more or less approximately every year.
This year, we gave our guidance of $320 million. We're not going to reach that guidance, we should be around $260, including the property we just bought in California. Right now, in terms of demand, the strong demand we're seeing is coming from the Northeast. It's further out. Right now, we're trying to satisfy that demand with distribution and logistics. We're more than sure that once things are up and running fully in the autumn in Indiana, we'll be able to satisfy that demand pretty easily. Again, just as in price increase and our perspective on costs, we are every day assessing future demand and based on that, calculating our CapEx of the year.
Please be rest assured that we're satisfying the demand as it is, which is right now extremely satisfied with how demand is in post-2020 and the prospects that we have for the future with the market as it is today.
Okay, no, that is perfect. Thank you very much.
Thank you.
Our next question comes from the line of Alvaro Garcia with BTG. You may proceed with your question.
Hey, Adolfo. Hope you're well. Thanks for the call.
Alvaro, how are you?
My first question is on the others. Thanks for breaking out Asia and Oceania. That's fantastic. Very profitable, second most profitable market of yours. What I'm asking about is actually the other others. The corporate expenses, the technology division. If I grab the others and I subtract Asia and 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'll always be a drag? If so, sort of if you can quantify that'd be very helpful for modeling purposes.
Well, Talking about modeling forward, I think it's like MXN 100 million, more or less, per year.
Okay.
In terms of EBITDA, of course.
Yeah. Of a negative EBITDA just from intercompanies.
Yeah, correct.
Corporate expenses. Okay. Wonderful. Great. My other question on the third quarter specifically, it seems most of the pressure in COGS in the U.S. came from non-grain items, right? I just wanted to sort of confirm that the third quarter, you still had solid hedges in place from last year's prices of corn. Is that correct?
Yeah, no, everything's fine in terms of hedges. You should feel more than comfortable with those hedges and everything. We're at 100%. Don't worry about it. I wouldn't say that's an issue. As I said, with the price increases we set at the beginning or, better said, the last days of the quarter, in terms of our tortilla operation in the U.S., you should also feel more than comfortable with further labor cost increasing or inflation or any other typical aspects of our cost structure being volatile.
Yeah. For the third quarter specifics of this last quarter that you've just reported.
Yeah.
It's fair to assume that there really wasn't an increase in corn prices yet, right? That you still had a favorable hedge?
Yeah. Correct. That's correct, yes.
Okay, cool. Great. Thank you very much.
No, thank you.
As a reminder if you would like to ask a question please press star one on your touchtone keypad. One moment while we pull the questions. Our next question comes from the line of Enrique Mendoza with Actinver. You may proceed with your question.
Hi. Good morning to everyone, thanks for the space to state my question. I think my question regarding labor cost in the U.S., 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 call and give you the information in that regard.
Okay, great. Thank you. I understand. Thank you.
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 Fritz for closing remarks.
Well, thank you all for being here today and giving us a chance to share with you our results. We look forward to seeing you in a future conference or other calls we might organize between our company and yourselves. Have a great day. See you next time.
Ladies and gentlemen, this concludes GRUMA's third quarter 2021 earnings conference call. Thank you for your participation. You may now disconnect your lines.