Morning, ladies and gentlemen. Thank you for standing by. Welcome to Gruma's third quarter 2025 earnings conference call. During today's call, all parties will be in a listen-only mode. Following the speaker's remarks, the conference will be open for questions. If you have a question, please press the star followed by the one on your touch-tone phone. Please press star zero for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. 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 we will open the Q&A session where Mr. Raúl Cavazos , Gruma's Chief Financial Officer and team, will be available to answer additional questions. I would now like to turn the conference over to Mr. Fritz, IRO. Please go ahead, sir.
Thank you. Good morning and welcome to our third quarter 2025 conference call. We're pleased to have you all on the line and thankful for the opportunity to share our results with you. With me today, as always, are Mr. Raúl Cavazos Morales, former CFO, and Rogelio Sánchez Martínez, Gruma's Corporate Finance VP. To start, we'll take a few minutes to discuss the fundamentals and results from the quarter, and then we'll open it up to any questions you may have. In the third quarter of the year, tortilla fundamentals continued favoring operations in Europe, where this segment continues to expand and enhance its retail composition, while in Asian Oceania, stronger performance from all divisions, including China, supported results.
In the U.S., consumer sentiment has been the main factor behind a slow recovery in the food service channel, which has been the main challenge dragging our sales performance to venues across the nation. Given these dynamics, performance in the U.S. food service industry drove Gruma's tortilla volumes down by 2% in the period. That said, global momentum in the tortilla category overall continues with a healthier lifestyle mindset among consumers and its versatility in the form of rep usage as the main drivers behind its current and future potential growth. While its resilience today is being tested by the current context in the U.S. economy, we believe, like all cycles, this will be a temporary effect until the situation normalizes to its usual standards. In the meanwhile, we continue to implement strategies to adapt to the current overall state of the consumer.
In our corn flour business, volumes grew by 1.7%, supported by our division in Central America, which continues to have a solid performance, while in Mexico, volumes grew in line with historical standards, and Europe saw activity pick up for mostly Eastern European countries. With these fundamentals, consolidated volumes grew by 1%, led by Mexico's performance, but also supported by our other subsidiaries, with the exception of the U.S. Gruma achieved consolidated net sales growth of 1% despite the volume decline at the food service channel in the U.S., while raw materials created inflationary pressures in a few divisions. EBITDA grew by 2%, and profitability remained at attractive levels at 17.9% EBITDA margin, while net income increased by 3%. EBITDA from non-Mexican operations represented 80% of consolidated figures, and sales from non-Mexican operations represented 72% of consolidated figures.
Our balance sheet remains in a good place with healthy cash levels and with lower working capital needs relative to June. Our constant vigilance over debt levels, in addition to EBITDA performance, has allowed us to remain at 1.2 x net debt to EBITDA multiple, which we don't expect to drastically change in future quarters. In terms of CapEx, we invested $44 million focused on maintenance across the company, production line upgrades and add-ons in the U.S. and Mexico, respectively, and solar systems in Europe. With these investments, we will have invested effectively $150 million in CapEx year to date, and we don't foresee reaching our start-of-the-year guidance of $320 million, given our efforts to optimize our operation. In the U.S., consumer sentiment has declined over the past three months, and the competitive landscape has not changed relative to what we reported in the past.
These two fundamentals have impacted our business lines in different ways. Most of the changes and the impact we've observed originate in the food service channel, where a lack of consumer spending has led our forecast recovery to be slower than expected. The strategy is already implemented, but its execution has been offset by the perception of an uncertain economic outlook. The decline in volumes that we're seeing as a result comprises 90% of the consolidated 2% volume contraction in the U.S. To counter this, we've already started promotion and discount campaigns on some products, and in parallel, we should be adding on more shelf space with our existing clients in the form of newer innovative products to add on to those they have today or the introduction of existing SKUs that have not been particularly present in the past.
It is a strategy that will take time and fine-tuning to reach the benefits we're looking for, but we do expect sequential improvements as we gradually implement this in the market. With this landscape, net sales declined by 5%, while EBITDA was impacted by 4%. In Mexico, we've indicated in the past that the operation overall is pretty much stable, with demand from tortilla makers as well as from industrial clients driving volume growth of 1%, while prices have not moved to maintain the symmetry with the traditional methods' pricing dynamics. One point to note, however, is the current inflation of raw material costs, which is a result of supply and demand conditions in Mexico. Although there were some cost savings achieved, EBITDA contracted 4% relative to 3Q24.
In Europe, we'll continue to execute our strategy of expanding retail tortilla across the continent and favoring the composition of retail over food service. This quarter, specifically, a recovery of demand in Eastern Europe helped support volume growth of 4%. Our retail expansion strategy that I just mentioned was evidenced in the 15% growth in net sales, which highlights our focus on growing retail tortilla and on optimizing this by offering more value-add tortilla in the continent, which was not part of our SKU offering in the past. For this offering evolution, the subsidiary reached EBITDA growth of 16% in 3Q25. We're excited to see the future offering evolution and how it is accepted in those countries where we expand further and in those where we're optimizing through innovation. In Central America, we saw excellent performance in all channels of subsidiary reserves in spite of still lacking capacity.
As we have communicated in the past, we're investing additional capacity in the subsidiary to cope with incremental demand for corn flour. The new mill is set to start production by the start of the next year and will expand capacity in the division by approximately 10%. Even without this additional capacity, we're able to increase volumes by 5%, while sales grew by 2%. While there was inflation in some items across the cost structure, we were still able to raise EBITDA by 31% and yield EBITDA margin of 20.5%. We're very pleased with this performance and looking forward to seeing how it evolves with our future investments. In Asian Oceania, results reflected higher activity in China, while Malaysia and Australia continued with their stable upward trending performance. The value-add from increasing production in China yielded 10% volume growth, while net sales expanded 6%.
EBITDA grew by 3%, yielding EBITDA margin of 13.7%. EBITDA growth is still being slowed down by fixed costs from a newly constructed plant in China, which has not reached operational leverage, but as it does, financial performance should also improve. In sum, we have our share of challenges that are currently being addressed in the U.S., while the rest of our divisions have been able to perform remarkably well. Cycles are just part of business, and it will be up to the execution of our intended strategy to mitigate and overcome the challenges that are being presented to us today. We're pleased with how the company is performing in this environment, and we're ready to adapt and overcome the circumstances that we may face in quarters ahead. With that, I would like to open the call for questions. Can you help us with that, operator, please?
Thank you. We will now begin the question and answer session. As a reminder, if you have a question, please press star followed by the one on your touch-tone phone. If you would like to withdraw your question, press the star followed by the two. If you are using speaker equipment, you will need to lift a handset before making your selection. Our first question comes from the line of Lucas Mussi with Morgan Stanley. Please proceed with your question.
Hi, everyone. Thanks for taking my question. I have two quick ones. The first one related to the U.S. I know that you mentioned, Adolfo, about competitive dynamics still very challenging in the third quarter when compared to the second quarter, but I wanted to pick your brains a little bit about the specific details of your discounting activity and how you're seeing competitors playing out the game regarding the portfolio of better-for-you products versus the mainstream tortilla ones. If you could provide any more detail regarding where is your discount activity more focused today or your pricing initiatives? Are you seeing more competition on the better-for-you portfolio? Are you seeing more competition on the mainstream portfolio?
If you think that looking forward in the context of perhaps a pickup in grain costs that we are seeing, if we are bound to see maybe a more rational competitive environment, or if you think that we're going to see a persistent challenging scenario even as we look into 2026. That's my first question. My second one is a quick one on Central America. Margins were very strong, up significantly over a year. Maybe if you could provide any more detail on the drivers behind that 450-bps margin expansion, if it is more related either to channel mix, product mix. I know that a little bit of cost efficiency played out as a factor in the quarter. Maybe a little more detail as to how to think about Central America going forward. It's been a very strong division this year. That's it. Thank you.
Hey, Lucas. How are you? Thank you for your question. In regard to your first question, in reality, we've been seeing a very good performance of our better-for-you products. They're still within historical trends, and according to the historical performance they've had thus far, as we've been trying to convey to the market, we do service different types of consumer profiles. Those consumers that are more prone to buy better-for-you products are not being affected by all the narrative out there about the future U.S. economic outlook. That price sensitivity there, it's harder to perceive. Where we are seeing more price sensitivity has been in core standard products that are more bound to be exchangeable if there's economic pressures, depending on what type of customer is the one that's buying them.
Those are the ones that I would tell you that are the products that are prone to have our strategy of discounts and promotions being put upon them. In regards to better-for-you, right now, we don't see that happening there. As far as mainstream, as you call it, or core products go, that's where most of the strategy will be taking place. To your point, and I think that's a very good one, as corn prices cease to be in backwardation and they start being either stable or in contango, I think that that will mitigate a lot of the competitive environment that we're seeing just because, as the prices of corn start being in that contango curve, there are a lot of fewer places where people can compete on. I think that will put at ease the competitive environment that we're seeing today.
We'll have to wait and see how the fundamentals of corn are next year and the year that follows. Your point is noted, and it's a very good one. In terms of your second question, in Central America, we've communicated this in the past as well. We're selling there, we're putting a lot of innovation in our products, and we're selling our products that were not there before on the shelves. They've been accepted very, very well, as you can see from the margin increase. That's really a question of mix relative to the mix that we had before with innovation in these products. It's not on par with innovation that we have in the Tortilla channels. Nevertheless, relative to the standard products that we used to sell there, they're much more sophisticated.
That's been the one factor that has enabled us to have a richer mix offering for our clients.
Thank you very much, Adolfo.
Thank you, Lucas.
Our next question comes from a line of Ryan Lavin with Barclays. Please proceed with your question.
Hey, this is Ryan filling in for Ben today. We have two quick ones. Starting off, you mentioned in your prepared remarks that you have new SKUs that you haven't had in the mix in the past, and we were just looking for a little bit more color on that. Is it more affordable or smaller packaging, trying to get down to the more cautious consumer, and what do the margins look like on that? Shifting over to Asia, you mentioned the Chinese plan. What's the timeline look like to get that to full operations? Thank you.
Hey, Ryan. How have you been? Thank you for your questions. In regards to your first question, the products that we have available for consumers across the nation vary depending on the region. We're trying to get more innovation in those shelves where we are able to do so. It's not about getting cheaper products into higher shelf space. It's more about getting more innovative products into those markets that allow them to be put on. It's more a question of selling those items that we see demand for that are not necessarily prone to discounts. The discounts, like I was saying before to Lucas, are more prone to be seen in mainstream or core items that are being sold already in shelves across the nation.
The newer shelf space that we're hopefully getting will be intended for those products that are a mix of better-for-you, maybe value-add or within the value-add category, maybe not necessarily going up to the point of better-for-you, but value-add where we see demand for them and where we haven't been able to supply as we would like to. We're shifting, if you will, from the targeting of that production to areas where they were not present before, and hopefully, that will help us in our future results. This, of course, as I was pointing out in the opening remarks, will take time, but it is something that we are executing today and that we'll probably see in future quarters for sure.
In regards to your other question, the plant in China, that plant was open or, yeah, was officially open or started production back in last year's summer, around that time. Plants normally are constructed, and then we start adding production lines accordingly, depending on how we see demand and what production lines are necessary for that specific plant. We're just increasing the production lines as we see fit. As you know, China has been on and off in terms of commercial activity over the last few quarters, if not a couple of years now. It depends on the demand to see how fast we can absorb that demand with that new plant, but nevertheless, we're excited about the opportunity given on how much value we can create in the region with our products there and with this new plant in China.
Cool. Sounds good. Thanks so much.
Thank you, Ryan.
Our next question comes from a line of Renata Cabral with Citibank. Please proceed with your question.
Hi, everyone. Thank you so much for taking my questions here. The first one is a follow-up on the U.S. operations. Regarding the food service segment that remains soft, my question is if you see signs of stabilization or if promotions would remain necessary throughout 2026 if there's this visibility. The second question is more towards Mexico and raw material prices and how are you hedging on and with exposure for 2026, particularly in Mexico and Central America. Thank you so much.
Hey, thank you so much for your questions. In regards to your first one, yeah, the food service industry overall is going through a rough time at this time. The U.S. economy is not allowing for the expansion that was forecasted for the industry as a whole. As such, and as suppliers that we are for that industry, we are also, as a derivative of that, we're also seeing a slowdown, as you can see in our results. That slowdown has been more than we had expected at the beginning when we saw it happening and we saw the consumer being a little bit more cautious with their spending. I would say that as long as the U.S., the future or the evolution of the U.S.
economy is still uncertain in the consumer's eyes, and you can see that in consumer sentiment reports month after month, as long as that persists, I think that we'll still have some weakness in that channel. However, it is our intent strategically, as you know, globally, to expand retail further rather than food service. We will keep focusing on that, obviously servicing the existing food service clients that we have with the same quality and service that we always have. As that strategy as a whole, as a global strategy, we want to focus more in expanding retail. We're hoping that the situation will stabilize once consumer sentiment starts being back on track where it was prior to all this uncertainty taking place. Even if it stabilizes, we want to focus a lot more on retail going forward.
In terms of your second question, in regards to Mexico, raw materials are subject to supply and demand dynamics based on an international corn price. That supply and demand dynamics increase the price through a premium because of those supply and demand dynamics. That's something that it's out of our control, obviously, but it is something that we're trying to mitigate in the future. As you know, our hedges or the hedging that we're doing in the U.S. is one year forward. The efforts that we do here in Mexico have more to do with hedging or negotiating contracts on a six-month forward basis.
What we're trying to do is probably to mitigate this increase in costs, start importing more non-GMO corn from the U.S., which after the premium that's being applied because of the supply and demand dynamics here in Mexico tends to be cheaper than the corn that we're buying here currently. If we see it necessary, we'll go that way. We are thinking about ways in which we can make that premium a little bit lower than it is today. We need to negotiate the supply of corn here internally with the local farmers. In addition to that, we'll see how much corn we can import to mitigate that cost in future quarters. Other than that, I would say that that premium that we're paying today has always existed. It's just a matter of corn price fundamentals and the dynamics that are taking place in Mexico.
It tends to vary, but we're doing everything we can in our power to mitigate the cost, obviously.
Thank you so much. That was very clear.
No, thank you.
Our next question comes from a line of Felipe Ucros with Scotiabank. Please proceed with your question.
Thanks, operator. Good morning, Adolfo. Quick couple of questions. On Central America, a follow-up about margins. I thought it was pretty interesting to see how SG&A actually came down while you were seeing this very solid performance and premiumization of the portfolio. I'm wondering if you have done any changes to your marketing approach here, given that you're at full capacity and there's enough pull from the consumer. Perhaps you're not having to spend as much on marketing. Also, whether we should expect SG&A to behave this way going forward. Obviously, a lot of it was very helpful for margins. On the EU, you talked a little bit about focusing more on value-add tortilla. I guess it's a little bit of gearing that region towards where the U.S. has gone.
I'm just wondering if you can provide more details about this added focus, how you're rolling it out, which regions are first, how far you're going into the better-for-you category, or if this is just simply a little bit of value-add without really getting into better-for-you. Just wondering what color you can give us there. Thank you.
Hey, Felipe. Thank you for your questions. In regards to the margins in Central American SG&A, SG&A came down because of the inflationary pressures that we had been under because of freights and because of fuel, or I would say because of fuel and as a result of that, freights overall. That has come down, and that helped us, as you may very well say, in terms of margins. However, really the importance of the significant component of the margin expansion has been that shift towards a richer mix. Just to be clear, that's corn flour solely that has nothing to do with tortillas and has nothing to do with better-for-you or anything of that sort of products.
There, we're trying to add value or have value-add corn flour and have a corn flour that's more sophisticated, that's softer, that has a different formula depending on different tastes that we're currently identifying in the regions that we serve through that division. The ones where we're selling or the two countries where we're selling the most of that product have been Guatemala and Honduras. We've been very successful there. It won't be until we can have the other plant up and going when we start thinking about penetrating other countries with different products or the same countries with different products. Right now, that sole softer corn flour where the different formula is the one that has been allowing us to reach the success that we've reached through the last few quarters and all through the last year as well.
We hope that our intent is for that to continue, and hopefully, we'll be able to do so.
Great. The question for the EU, the one about expansion into value-add tortilla and what you're rolling out there, just I think you perhaps joined the questions in Central America, but one was about the marketing in Central America, and the other one was about the value-add tortilla in the EU.
Yeah, you're totally right. I understood you were asking about tortilla in Central America. In Europe, we are starting to introduce some value-add tortillas there. They don't go up to the point of better-for-you, but they're in the middle point between better-for-you and the basic value-add tortillas. We've started with the basic, you know, fewer carb tortilla category, if you will. It's been a huge success. We obviously started in the UK, and we've expanded it to Spain as well. We're hoping to expand it further. Right now, the demand that we're seeing there from that sole item in those two countries has been more than enough for us to reach the margins that we have and the growth that we've been able to provide. We'll see how the demand goes in terms of where we can identify further market points where maybe a different product is needed.
As of now, that category is the one that's being demanded the most. If there is a need for better-for-you, top-of-the-line better-for-you products, then we'll be gladly selling that type of product there as well. Right now, the demand is more for the quote-unquote "middle of the packs" value-add tortilla.
Very clear there. Any idea you can give us about the marketing in Central America? Did you reduce the marketing spend for your new value-add corn flour or not?
Marketing in Central America has been constant. We've been supporting the brand and these new introductions of this new corn flour formulas and presentations. Marketing has been in line with, I would say, the last few, the last three quarters that we've been marketing that product. The one factor that allowed us to see efficiencies in SG&A were freights more so than anything else.
Super clear. Okay. Thanks a lot for the clarification on those, too, Adolfo. Appreciate it.
Oh, thank you. Take care.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from a line of Regina Carrillo with GBM. Please proceed with your question.
Hi. Thank you for taking my question. I'm not sure if you addressed this in your initial remarks, Adolfo, but I believe you are ahead of your EBITDA margin expansion guidance for the year. I was wondering if you are targeting something different thus far or how should we think of the fourth quarter in terms of profitability? Thank you.
Guidance is staying the way it is. We already adjusted it in our last quarter. Guidance is the way it is. We feel pretty good about it, as you very well say. Right now, we're just focusing on next year and the strategies to implement everything that we can in order to mitigate the consumer sensitivity or the consumer price sensitivity that we're seeing in the U.S. and the outlook that we saw, the outlook in terms of the economy that we saw perceived from the consumer this year. That's what we're focusing on. In the rest of the fourth quarter, I would say the same trends that you saw in this quarter will continue, given the state of the economy in the U.S. will continue as well.
I would say, to answer your question, guidance stays the same, and we look forward to, right now, we're looking forward to next year to see how our strategies pan out.
Okay, thank you very much.
Thank you.
Thank you. Mr. Fritz, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments.
Thank you so much, everyone, once again for being with us this morning. We look forward to seeing you in future market events or in a future conference call. Take care. Bye.
Ladies and gentlemen, this concludes Gruma's third quarter 2025 earnings conference call. Thank you for your participation. You may now disconnect.