Earnings Call: Q2 2021

Jul 22, 2021

Quarterly report

I would now like to turn the conference over to your host, Mr. Raul Cavazos, Groomer's Chief Financial Officer. Please go ahead, sir. Thanks, Laura. Good morning, and welcome to our Q2 2021 conference call. As always, we are very appreciative of your time and for giving us the opportunity to share our results with you. Intertia Vines, whose footprint spreads mainly in the United States and Europe, exceed a return shift towards the food service channel as it has been recovering, mirroring the progress in the vaccination method across the world, resulting in food and leisure establishment reopening their doors to the public. As for the retail channel, it is showing remarkable growth in Europe and resilience in the U. S. Given the strong client base we have been building over the past few years. That said, it has slowed down slightly in this region relative to the year's remarkable performance. Although, it is still well beyond our historical metrics. In fact, according to IRI consumer panel, Roma has been identified in the operator of top brands in the U. S. To have significantly penetrated the market in 2020 and retain more than 50% of gain during 2021. We are excited about this news and are confident that our strong client base will help us fully involve our franchise and the presence of the tortilla across the country while increasing profitability. Similar to what happened to volumes in the tortilla industry in the U. S, The high activity in our corn operations last year was challenging to replicate, given the additional demand at the dawn of the pandemic. This effect had been similar across all the regions in our global cornflour operations. Revenues during the quarter were exceeded mostly by the strong Mexican peso versus the U. S. Dollar and to a lesser extent by the change in sales mix of both the tortilla as well as the cornflour operations. Nevertheless, in Europe, we have a solid performance while prices increased in Mexico during the first half of twenty twenty one. Please keep in mind, however, that excluding depreciation of the peso compared with Q2 2020, net sales will have grown 3.5%. The volatility seen in the price of the corn has hit all layers in the industry. We have seen fluctuations in a consolidated COGS figures that in addition to the strength of Mexican peso and the high cost of labor relative to the strong demand in the U. S. Have temporarily and slightly hindered our EBITDA margin growth. EBITDA stood at ARS3716 million, representing an 8% decline, while our EBITDA margin decreased 10 basis points to 16.6%. Again, in line business sales, excluding the appreciation of the peso compared with Q2 2020, EBITDA growth have grown 3.5%. Even with the price of corn at the level it is today, and the broader dynamics I just mentioned, I still want to highlight the notable trend that we are on relative to our historical performance. In the U. S, analyzing today's performance and demand, we will be growing at the CAGR close to 10% in the face that our key retail channel in the period since 2019 through the end of the year, again on an annualized basis. This is compared to the 12th historical 3% 8% of 8% and of 8% versus 3% in overall tortilla sales during this period of time. Following the same line of thoughts, our consolidated financials annualized indicators also point to a very stable growth trend of 15% in EBITDA and in net sales since 2019. This sets as a great indicator for us that is the strategy we put forward a few years ago with regards to innovation and adaptation to cultural and lifestyle trends has been successful. In view of our long history in this industry, we remain confident given the temporary nature of the price of the corn in addition to our plans to further increase sales prices well and when it is borrowed, coupled with the normalization of the cost of labor in the next few months. We will generate revenues in a normalized level of EBITDA margin that will help us sustain this trend of operational success I just mentioned. Now let's talk a little bit about our subsidiaries. In the U. S, sales volume remained flat showcasing an earnings effect between volumes sold at the Tortilla business, which decreased 1.8% and that sold at the Cauliflower Millie Business, which increased 2%. The higher comparison again last year, given the pandemic effect on demand, in addition to a change in the sales mix of tortilla products toward to full service channel generated a marginal 1% decrease in net sales relative to a year ago, which was the strongest wallet we have we have had in the company's history. We remain confident about our future performance in the region given the market dynamics that we have seen related to our Tortilla operations. We have been successful in retaining the majority of the client base we generated in 2020, as I mentioned earlier. In addition to that, our focus on continuous innovation on products that match consumer lifestyle changes, such as our Benefit For You product line will fully grow across the U. S. As people keep discovering the benefit and versatility of that particular. Higher material costs other than grains as well as higher labor expenses as a result of the pandemic increased COGS and asset transactions, EBITDA decreased 6% and EBITDA margin declined 100 basis points to 18.3% from 19.2%. At Gimsha, sales volume decreased 2% as in other regions, the comparison base of last year where we had a soft processing demand from the pandemic effect on consumer behavior set a high bar to be overcome this year. Net sales increased 2% as the price increases, which which we have been communicating since the start of the year, have been taking effect with our operations. Some of these increases were put through in the quarter, so have yet to see the full effect reflecting on our price. Similar to other companies in our segment, the highest price of corn has indeed impacted our operations. EBITDA was 5% lower and EBITDA margin declined 130 basis points to 15% from 15.3%. As of June, we have seen that our profitability has been restored as we have finished implementing the price increases, which we communicated during the first half of the year. In Europe, sales volume declined 1% in spite of a solid performance of the tortilla business, both from a retail effort in the region, which has been accelerated progressively and a pace recovery at our food service channel, which have been hit by the pandemic effect last year. Our core million operations were similar by price of corn and some regions are highly price sensitive, decreasing volumes sold by 15%. Nevertheless, our strong network in terms of market penetration in the retail segment in relation to our full service segment recovery and a high margin sales mix in the Mediterranean core market enabled us to grow sales by 36%, which was also reflected in EBITDA growth. EBITDA was fully supported by $6,000,000 in gain in the sense of a piece of real estate. Lastly, in Central America volumes of narrow those of oil coke global focus business in other regions, decreased 7% compared to last year as volume were driven by government welfare food programs coupled with the pandemic holding effect, carrying a high basis of context. This created an 18% net sales decrease in peso terms, driven also by the effect of the stronger Mexican peso. EBITDA decreased 49% to ARS88 1,000,000 and EBITDA margin fell 4 120 basis points to 7.3% or 11.5%. At our other subsidiaries, operating income increased MXN 154,000,000 to MXN 232,000,000 due to a very strong performance at Lumafen in Asia and Oceania during the quarter in addition to higher carportal reserve. In terms of our CapEx during the quarter, we invested approximately $53,000,000 in capacity expansion at our new plants in Indiana, Omaha, Spain and Mexico as well as in waste water treatment systems at our control plants in Evansville, Indiana and Pernod, Texas. In closing, I want to assure shareholders that as always, we are working hard to deliver results to a strategy focused on profitability and through the continuous implementation of the strategy, we expect great results ahead for our company. With that, I would like to open the call for questions for all listeners today. Laura, could you 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 Isabela Simonato with Bank of America. You may proceed with your question. Thank you very much. Good morning, everyone. So I have two questions that are somewhat correlated, right? So first, how do you feel about the annual guidance after the first half is concluded? I mean, what are the opportunities and risks you see for each division in the second half of the year? And in line with that, specifically in the U. S, you mentioned labor costs are impacting margins, right, during the quarter. This pressure is expected to continue in the coming quarters. What are the alternatives here to offset this going forward? Thank you. Thanks, It's Isabella, of course. Well, talking a little bit about the guidance, of course, it's a little bit hard to sustain the guidance we gave you in the last conference calls because, of course, we've been challenging this half of the year and we're seeing kind of reductions in some of our figures. Then in order to update this guidance, what I want to tell you is that in NUMA Corp in the U. S, in terms of volumes, we are expecting it to be flat from flat to minus 1% by the full year. Since we are expecting that we will get it, we have to recover the volumes lost during the first half. And of course, since we are also announcing price increases for the second half, then maybe when I mentioned a question, maybe later from Q2 or some more, we are not sure what will be the impact on the volumes. But talking about that maybe flat to minus 1% is going to be a good number. In terms of sales, we are talking about 2% to 3% higher. Of course, there's going to be because of the price increase in that we are expecting to increment during the rest of the year. And in terms of EBITDA margin, we are expecting to be flat this volume. We are expecting to recover what we are short in this first half and we are expecting to recover this EBITDA margin by the end of the year. If we talk about GSM, volumes we were talking about 1% to 2%, however, because of lack of sales to some environmental problems during this first half of the year and as well as because of the revision in the cloud support from development to some programs. We are expecting to be flat by the end of the year in terms of volumes. However, since we also already implement under price increase starting July 1, we are expecting to be in terms of net sales in the high single digits in growth for the full year. However, in terms of EBITDA margin, margins since also we are expecting to have a higher cost per year in the second half, we are expecting something above in between minus we were talking about minus 100 basis points compared last year. We are expecting now from about minus 100 or in between minus 100 basis points, 150 basis points for the full year. Europe, we were talking about 2% growth. However, given that year ago volumes base, we expect strong double digit growth in the Tiete business and some construction in the contract. We are expecting to be higher than this 2%, maybe in the high single digits growth. Just to give you an idea, in the last year business, we grew in volumes about 45% during the Q2 of the year compared with last year. Then we are expecting a second as a double digit growth for wholesale volume. In terms of sales and sales, we are expecting also double digit growth for the European division. In terms of EBITDA margin, we are expecting something about 7%. We want to keep this margin Even we are expecting to be a little bit lower, we want to be a little bit conservative, giving you the same Dubai guidance we gave you last quarter. Central America is a little bit different. In Central America, we're expecting the single digit reductions in volumes. Last year, the program, the Eiffel program were active, very active last year. This year has been slowing down and even we are replacing those with the consumers. We expect to be a little bit lower in volumes compared with last year as well as in this mid single digit reductions on net sales. And in EBITDA, we are expecting something between 100 basis points 150 basis points lower than last year in terms of EBITDA margin. And now all in all, talking about the transferability figures, we are expecting in terms of volumes in Germany, we are expecting to be basically flat compared with 20 20. That would be by far the highest volume showed by the company on a per share basis, really very good 2020, it will be flat during the year. That implies that the effort of the company to have these sales volumes is quite remarkable. In terms of sales, we are expecting low single digits and we're going to be even with price increases. Keep in mind the effect on the issuance rate of the Mexican peso, the strongest peso we have during this year. However, if you see you compare those figures in dollar terms, you're going to see that we've been growing on the indicators since 2019 to or 2018 to now, we've been growing consistently in terms of absolute dollars in the company. And also talking about the margin, the EBITDA margin for the year, we are expecting to be something between flat and 50 basis points lower than last year. This is the annual guidance that we want to share with you for this full year and at the light of this first half figure, we review and maybe it will depend about how we are taking into consideration, let's say, reactivation of lockdowns because of the for some of this pandemic. But we are not expecting to have any kind of important emotions because of as of today, the activities have been recovering along. In terms of labor cost, what happens in Venezuela, what happens is because of the pandemic, we have some people which have been affected or is not affiliated to the company on some of the operators. Then what we have been doing is have a time, let's say, additional cost with the pending the shift just to supply the whole demand. But in light of these issues, what we've been doing is we are launching and we're struggling supported by we are contracting regional and areas, managing new conditions for to attract new people. And we are expecting that during the second half, we will be basically, in the labor cost of the company. The overtime, we will be paying mainly that we will pay as usual, but not as much as we did during this period. And then we are expecting during the second half of the year, basically stabilize the cost of the lower particular activity in OomaCorp. This is super helpful. Thank you very much. Sure. It's over. Thank you. Our next question comes from the line of Ben Theurer with Barclays. You may proceed with your question, Ben. Yes. Thank you very much and good morning. Just following up a little bit on the outlook. I remember last quarter, you an update on your hedges on the corn side. If I remember right, it was somewhere like the 4.50 range. Can you give us an update where you stand right now and how far out you're currently hedged? And what your expectations are in terms of where commodity prices are heading just looking beyond 2021 and what your expectations are maybe for next year? Thank you. Sure. Sure. Well, let me tell you that we already faced the full corn for 2021. And actually, we already faced the full corn for Ruma Corp for 2032 as well as about 80% of the wheat for the first half of twenty twenty two also in Ruma Corp. Also, even we already faced the price the cash of the comp for the second half of the year here in Mexico at the 100% and we already have the 100% requirements of the crown for the second half of the year and 50% of 2020, excuse me, and as well as 50% of the crown for the second half of twenty twenty three in Mexico. CACs are higher. At this point in time, I don't want to disclose because we already are working on the price increase implementation. We already announced price increases in the process to be approved by all the 4 clients. In Mexico, we increased pricing in July by MXN 15.50 per ton, which is in place about 14%. It was already implemented. Of course, keep in mind that we always last about a month just to implement or implement this price increase. And what I can tell you is that the decrease that we already did for this first half of twenty twenty two, Since we already hedged the price of the corn and we already hedged about 40% in the exchange rate and we are expecting to have kind of the opportunity to hedge the remaining amount in dollars. We are expecting to benefit this price in 2023 in Giza or we do not have really as light in the price increase. However, in the States, we are very as I told you, we are very hedged at the rate of the 2021 and the whole 2018 corn as well as 80% of the of 20 22 on wheat. And what we already did is that we made the exercise of this cost increases to achieve the cost of the company. And we already take into consideration not only because of these commodities, but the cost increases some other materials and some other inputs we require in the processes. And we already launched or maybe communications to price increases in both businesses, cornflour and tortilla. In the beginning in this quarter. For cornflour, we are announcing pricing finishes beginning over the 15. For the Tresia and the full service, we are expecting to have this price increase by September 1 and for the year by the end of September. Those price increases already include all these cost increases we are very, very weak and as you can imagine because of commercial topics and because the value of the sensitive information we're going for our competitors, open or tell you what are the percentages we are expecting to increase. But what I can tell you is that most of the whole time are quite comprehensive on that. And they know that what is happening in the market in the telecom economy side, but also in some other materials as well as in distribution and transportation. And there are quite conscious that all those cost increases. All these price increase is taken into consideration all these cost increases, then the company feel quite comfortable that we will be accepted because we are very very well sustained and supported this price increase. And we are expecting that all of our clients will be assessed this price increases. And then by the end of the year, we are expecting to recover this solution across the categories, this market for the company. Okay, perfect. Thank you. Sure. Our next question comes from the line of Felipe Yucroz with Scotiabank. You may proceed with your question. Thank you. Good morning, Raul, Rogelio, Adolfo. Just a quick one on my end, and it relates to price volume elasticity in the U. S. So I just wanted to ask you about what the consumer elasticity isn't on Tortilla, in particular in the U. S. I'm calculating that in order to maintain the EBITDA margins in the U. S, the price increases would have to be around double digits to offset the pressure in early 2022. So the first question is, have you ever increased the prices that much in the U. S? And the second one is, what do you expect as a reaction from the consumer? Because it's very clear that the consumer is highly inelastic in Mexico. But just wondering how the consumer usually reacts in the U. S. It's been a long time since you raised prices. Thank you. Sure, Felipe. Well, talking about the pricing piece, there would be a distribution of course that's different than ours. But again, I can tell you, guys and then, Troy, maybe in the next conference call, we can discuss about what large percentage of price increases we implemented, but not at this point time. And please ask for your understanding because we can offer this information in this point time because our competitors will take advantage of that. But no, no, we are we are very far from our estimations of price increases. And our price increases calculations again includes the recovery of our cost increases as well as recovery of the margins for the company. In terms of driving the less of the behavior of the consumer in the U. S. Because of these price increases, we cannot you I mean, we are not expecting to have any major impact since the this is not only for the tortilla, but it's for all the industry and on the commodities. We are not talking about only corn, but we're talking about everything in the lineup and everything is more expensive and all the producers as increasing prices and they're going to be the option. What I can tell you is since the company embarked in the product development, particularly on value for you, you have seen an important switch from regular products to benefit you probably paying more. And that can give you an idea about what we can expect the consumer is expecting to pay more to this term due to provide the high quality and add value products. And that's okay. Then back in the respect, we are not expecting to have any kind of disruption on the consumers. But however, this is the main reason to say a little bit more about that in the next conference call just to launch the projects implemented, amortization. No, that's really Peter. I will now. Thanks a lot for the color. Sure, Peter. Thank you. Our next question comes from the line of Luis Willard with GBM. It's regarding free cash flow and especially working capital this quarter. Can you walk us through the dynamic that you saw regarding working capital management this quarter and so far in 2021? And how do you see this evolving in the rest of the year? And in the same line, how do you feel about CapEx for the full year? Thank you. Sure. Well, this second quarter, it was a little bit different because we have an important recovery from working capital since last year. The full service companies in the U. S. Asked Grundarcourt to for additional period of time for additional term for the payment because of the situation they were having. Of course, we can be with them and we agree to extend that period of payment. And this require we have an important recovery on working capital because of the erosion, particularly on the accounts of the accounts of service. This have a very good incremental lag. But for the rest of the year, we already bought Macron from Mexico. We will manage in a very good way. So we've been doing that In Luma Corp, talking about the pork and talking about the wheat also, we are doing well. We are not expecting important amounts of requirements of working capital for the company to extend the industry. Keep in mind that in the U. S, we basically push the full corn in 1 corn harvest. Let's say from September to October November basically, we are very finished in some small part of the call during March. However, that price of the call is keep or is maintained in some cases in the silos of our suppliers and we are providing us the cold one, we are requiring that. Then we have not the kind of issues of taste as well as in Mexico. We already hedged the full corn that we would require for the 2nd quarter to have to be, let's say, to have enough corn to finalize the year. Of course, we have some import into the corn and that we will have during September. And as part of that is, we have a very small amount and we are not expecting any fees on working capital. The second, that's a good question. We're talking about the second topic you were asking for, talking about the CapEx. As of today, we have something a little more than maybe $120,000,000 or $25,000,000 in CapEx. These CapEx have been really invested mainly in the U. S. And certainly in European operations. But you remember, I was showing you that we were planning to build a new facility in Minneapolis. And some of contractors, the contractors, we are in the case to build this new facility in Minneapolis. They have been facing kind of issues with people, let's say, with personal and they are spending a little more than the construction of this to have a larger construction of this facility. Then we're were expecting to start operation during the 2nd quarter to plus in 'twenty two. Then now we are expecting to start operation by the 4th quarter to plus in 'twenty two of this facility. And then we will deliver you a little bit more our CapEx program for the year. The other facility where we were the full issue was to restart operations in the Yamaha facility that we drilled down last 2015. This facility will restart operations, we are expecting next August, next month. That will allow us to increase our production capacity as well as to save some money in terms of distribution since we will produce by the Northeast as well as Midwest Instead of importing from, let's say, Ghana, so California and the province, we will provide from Omaha and Rafiki on a very short business for that. Then for the full year, if you remember, we were in guidance guiding you that we were expecting to invest something about $150,000,000 or something about it for this year for now, maybe for the rest of the year. We are expecting to spend something about $250,000,000 Our next question comes from the line of Alvaro Garcia with BTG. You may proceed with your question. Hey, Raul. Hope you're well. I have a couple of follow ups. Just one very quickly, just the CapEx you figured you just mentioned was $225,000,000 to $250,000,000 for this year? Right. That's correct. Perfect. Just wanted to clarify that. And then you mentioned in the release less legal expenses in the U. S. I was wondering if that was a one time sort of thing or it may be recurring going forward? Well, onetime, onetime, we should be in some receipt process with workers compensation issues in the States, where we take on those events. That's a one time charge. One time. Okay. And then just one on Europe then one on Mexico. The one on Europe is, you mentioned, I mean, profitability seems nice and high, even adjusting for the one time real estate gain. And you mentioned the core Mediterranean region was doing well. Can we assume that sort of your margin there in the Mediterranean region is higher than 2019 levels at the retail level? Is that retail that's really driving that margin this quarter there? Absolutely. We've had a couple of benefits in the Nokia, let's say, in European operations. One of them is that the pandemic, we took advantage of that in recent stage of your presence on the retail channel in a lot of, let's say, supermarket chains. Now we have the presence as well as we are providing them some of the travel level. But Vision brand is working or not. I mean, now you can find out in a lot of countries, in a lot of chains of Vision brand in Europe. And of course, that allow us to have a better place. But just for you to even earlier, during last year, the lockdown and the shutdown of the full service vessels. Maybe the mix of retail in full service was about 70% or 60% on retail and 40% full service. Now even during this year, we are recovering on sales on full service. We already increased prices and we've been gaining the accounts and the mix is going down a little bit. It's more, let's say, 45% between 55% full service. But both of them are giving us more money, and we are recovering a lot of revenue instead of maybe 2018. We have about 80% on full service in QSR and 30% only maybe on GP now. That being quite well, we're expecting better results for Ruma Europe, where in the right frame, profitability in Singapore for you. Then you tell you that we are increasing production capacity in our Spain facility. We are reaching a production line. We are adding few production lines to produce Sofia, with Sofia. We already have sold those production basically because we are growing in a very good way in the European operations and with the most better profitability for us. That's wonderful. Just to clarify that number, you mentioned 2018, roughly 80% foodservice and then obviously peak of the pandemic, maybe that came down to 30% foodservice, 70% retail. And then now you're at 45% retail, 55% foodservice. So I'm doing well. That's right. Awesome. Wonderful. Thank you very much, John. Sure. Thank you very much. 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. Cavazos for closing remarks. Okay. Thank you, Laura. Once again, I want to thank you all of you guys to be with us today. We really appreciate your time. And please feel free to call us if you have some additional question. We'll be able to address any kind of questions. Going up again. And we need to be quite careful in order to avoid any kind of orders. We appreciate you all and thank you very much. Ladies and gentlemen, this concludes Gluma's 2nd quarter 2021 earnings conference call. Thank you for your participation. You may now disconnect your lines.