Q2 2017 Industrias Bachoco SAB de CV Earnings Call
Jul 27, 2017 AM EDT
BACHOCOB.MX - Industrias Bachoco SAB de CV
Q2 2017 Industrias Bachoco SAB de CV Earnings Call
Jul 27, 2017 / 02:00PM GMT
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Corporate Participants
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* Daniel Salazar Ferrer
Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller
* Maria Guadalupe Jáquez Martínez
* Rodolfo Ramos Arvizu
Industrias Bachoco, S.A.B. de C.V. - CEO
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Conference Call Participants
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* José Eduardo Estrada
* Miguel Angel Tortolero Casarrubias
* Pedro Leduc
JP Morgan Chase & Co, Research Division - Senior Analyst
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Presentation
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Operator [1]
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Welcome to the Second Quarter 2017 Industrias Bachoco Earnings Conference Call. My name is Hilda and I will be your operator for today's call. (Operator Instructions)
Ms. Guadalupe Jaquez will begin the conference today. Ms. Jaquez, you may begin your conference.
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Maria Guadalupe Jáquez Martínez, [2]
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Thank you, and good morning, everyone. Welcome to Bachoco's Second Quarter 2017 Conference Call. We released our financials yesterday after the market closed. If you need a copy of the release, please visit our website or request it from our Investor Relations department.
Before we continue, I will read the cautionary statement regarding forward-looking statements. This morning's call contains certain information that could be considered forward-looking statements regarding anticipated future events and performance. The statements reflect management's current beliefs based on information currently available and are not guarantees of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our annual report of 20-F, which could make our current results differ materially from the forward-looking statements discussed in this call.
Except as required by applicable law, Industrias Bachoco undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Lastly, unless otherwise indicated, the amounts mentioned in this conference call will be figures of 2017 with comparisons to years for the same period of 2016 in Mexican pesos. As a reference, the exchange rate as of June 30, 2017 was MXN 18.14 per U.S. dollar.
Here with me are our CEO, Mr. Rodolfo Ramos; and our CFO, Mr. Daniel Salazar. Now I will give the call to Mr. Ramos.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [3]
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Thank you, Maria. This second quarter began in accordance with the usual seasonal behavior of the poultry industry as it is typically determined of the year.
In Mexico, even though we continue with relatively high inflation rate, the economy continued growing. During the quarter, the Mexican peso depreciated 2.7% when compared with the equivalent period of 2016.
When compared to the end of the second quarter of ‘17 versus the end of 2016, the Mexican peso strengthened versus U.S. dollars, I think, appreciating around 12%. The poultry industry conditions were very similar in the market we participate in Mexico and the U.S. We continued observing good orders or demand for poultry products in all the commercial channels in which we compete.
There was balance between supply and demand as we estimate and wrote around 2% to 3% in the Mexican poultry industry and wrote around 1% to 2% in the U.S. industry. According to the information reported by USDA, chicken [poised] in the U.S. poultry industry grew at the level of 2% to 3% in the quarter. (inaudible) that's observed by our markets we didn't see neither over supply conditions or high inventories in the industry in general. We observed and discovering chicken prices in both markets, compared with the equivalent period of 2016.
We [continued] the table egg industry, recently observing over supply conditions. According to the USDA, imports of chicken from the United States into Mexico are not increasing and we don't see the (inaudible) imports increasing either.
In regards to our company, we increased our sales volumes across most of our main product line. These volumes and price recoveries allow us to increase our total sales for the quarter by 13.1% when compared to the first (sic) [Q2] quarter of 2016.
We also want to mention the performance of our U.S. operations. We increased our total sales in U.S. dollar terms and continued delivering solid positive results as we are reducing our exposure to commodity markets. The conditions mentioned before and keeping our SG&A under 10% of our total sales had allowed us to reach an EBITDA of $2,596.8 million in the quarter. This represents an increase of 11.5% versus the EBITDA reported in the same period of 2016. The largest amount for a quarter in our history. Our EBITDA margin was 17.2%, which is very close to the 17.4% we reached in the second quarter of ‘16.
We continue working towards our [transfer] growth both organically and through business arrangements. In July, we announced the acquisition of La Perla, a pet food company located in the state of Queretaro in Mexico. This is a strategic step as it will allow us to (inaudible) sales mix with increasing significantly our pet food capacity.
Also, on July 17, we announced the acquisition of Albertville Quality Foods, a further process company located in Alabama. With this acquisition, we will continue entering into the further processed products segment, while continuing to diversify from the commodity markets.
Our balance sheet continues to be strong, which will enable us to continue supporting our growth plan.
At this point, I will turn the call over to Daniel for a discussion of the financial results.
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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [4]
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Thank you, Rodolfo. And good morning, everyone. As a result of the conditions Rodolfo mentioned before, our companies took second quarter net sales increased 13.1% in the quarter as compared with 2016. This increase is a result of net volume sold and [larger] covering our main product lines during the quarter. This led us to an increase in sales of 13.2% for the first half of the year and as compared with the same period of 2016.
In the quarter, sales of our U.S. operations represented a 24.7% of total sales, an increase from the 24.3% we reported in the equivalent quarter of ‘16.
The cost of sales in the second quarter was $11,502.1 million and $22,995.4 million for the first half of the year. This represents an increase of 14.1% for the quarter and 14.5% for the year. These figures are the results of increases in volumes sold and higher raw material costs in Mexican peso terms.
From this increase about 8.9% was due to the consolidation of our U.S. operation from dollars to Mexican pesos and about 4% due to volume growth. The remaining was due to a higher billing cost in peso terms, due in part to the depreciation of the Mexican peso and as we move away from commodities in our U.S. operations.
Gross profit for the quarter was $3,614.2 million with a gross margin of 23.9%, an increase of 10.1% over the gross profit reported in the second quarter of 2016.
For the first half of the year, we reached a gross profit of $5,805.8 million, with a margin of 20.2%. This amount is 13.6% higher than the gross profit reached in the first half of 2016.
Total SG&A for the second quarter of 2017 was $1,297.6 million and $2,558.6 million for the first half of the year, representing an increase of 9.5% and 8.9% when compared to the same period of the previous year respectively.
We will be working to keep these expenses the same level as the percentage of the total sales.
Income for the second quarter of 2017 totaled $2,330 million, and operating margin of 15.4%, slightly lower than the 15.7% margin reported, reaching the second quarter of 2016. The operating income for the first semester of ‘17 was $3,259.8 million, and operating margin of 11.3%, slightly higher than the operating margin of 11.1% reached in the same period of 2016. The EBITDA margin for the second quarter was 17.2%, very close to the EBITDA margin of the second quarter of ‘16. For the first half of the year, the EBITDA margin was 13.2%, an improvement when compared with the 12.9% reached in the same period of 2016.
In the second quarter of ‘17, the net financial income was $96.8 million and $27 million in the first half of the year, both lower than those for the same period of ‘16. Those decreases are mainly attributed to lower exchange rate again as the Mexican peso recovered versus the U.S. dollar.
Our total taxes were $703.9 million for the quarter, slightly lower when compared to the total taxes reported in the same period of ‘16. For the first half of 2017, our income taxes were $911.2 million, which is lower than the income taxes for the same period 2016.
All of the above led us to a net income of $1,722.8 million for the quarter, with a net margin of 11.4%. This income is 9% higher than the net income reached in the second quarter of 2016. For the first half of ‘17, the net income totaled $2,375.7 million with a net margin of 8.2%. The net income per share was MXN 2.87 for the quarter and MXN 3.96 in the first half of 2017.
Going into our balance sheet, we keep a healthy financial structure with an increase in total assets of 3.3% when compared to the year-end of ‘16. Our net cash was $13,056.3 million at the end of the quarter. Our CapEx was $1,092.9 million, similar to the previous year and used mainly supporting our organic growth and maintain our facilities at high levels of productivity.
Thank you. And I will turn the call back to Rodolfo for final comments.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [5]
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Thank you, Daniel. We are satisfied with the growth achieved in the quarter. We are entering the third quarter of the year, which is historically the weakest quarter of the year. We expect the main raw materials to be [held] in productivity, but then remember it will determine the costs in the United States and Mexico.
We have been following closely to make the proper decisions. We expect the poultry industry to continue to get that normalized growth late in both markets in which we participate. We expect to continue with our CapEx above maintenance level while keeping an eye on the Mexican micro economy scenario.
We will work to integrate quickly our 2 recent acquisitions in our normal operations and begin to capitalize the benefits from them. We will continue focusing on those things we can control and managing the others as best as we can, depending on the market condition in our industries.
With that, we will now take your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And your first question will come from Pedro Leduc from JPMorgan.
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Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [2]
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Two quick ones from me. Starting in Mexico we saw that overall COGS are still being pressured by higher grain costs this second quarter, now as we understand, Mexico's corn harvest just ended. And so looking to understand from you how you're purchasing this, how are COGS per kilo for this upcoming harvest different, if at all, from the one that you were consuming in the first half of the year? Really just trying to understand this if thanks to the harvest the COGS will be a lesser pressure in the second half of the year.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [3]
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The price of the corn for the second quarter is more or less in line with the first quarter because the harvest here in Mexico starts at the end of the quarter. So the impact is going to be in the third and fourth quarters.
More than it is the prices than we acquired the harvest here in Mexico for a little bit cheaper than it takes with the program of (inaudible) contractor we use here in order to acquire the grain that we need in terms of our operations.
So we are expecting not very relativity in the corn price for the Mexican operations than depends with the domestic grain.
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Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [4]
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Okay, understood. So slightly better than for the second half. And the lines are maybe should be as bad, so you guys maybe stay closer in this (inaudible) or it's just my line. I'll go back in line for a follow-up.
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Operator [5]
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The next question comes from [Pablo Carrillo] from BBVA Bancomer.
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Unidentified Analyst, [6]
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I have 3 questions. If you could give us maybe a little bit more color on what you're expecting the operating margins are going to be in facing 2018. Also, if you have any information regarding the sale of assets in the U.K. and the [JNS Brazil]. And also maybe if you could provide a little most information and color on the synergies of the recent acquisitions.
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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [7]
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On your first question, it is difficult to predict the margin for the next year, but we expect probably slightly more pressure in terms of the production type. So with the [impact], the margins for the next year probably would be lower than the one that we are expecting for this year.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [8]
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It's probably accurate to say that probably no more than 1 percentage point below the margins that we are expecting for the year.
Regarding your second question, well it's too early to predict the final synergies that we can get from our acquisitions, but, oh this is the third part. Can you repeat the second one?
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Unidentified Analyst, [9]
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Yes, the second was the sale of assets, the U.K. and the [JNS] in Brazil.
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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [10]
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We are now focused on the Americas. We are not interested in acquiring assets in Brazil, neither in U.K. So we are very focused in expanding our operations in Mexico and the U.S. And probably second priority in Latin America.
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Unidentified Analyst, [11]
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Okay. And my third question was if you expect any synergies from the…
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [12]
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As I mentioned before, it's early to predict the total synergies that we can get, but of course there is in the case of Albertville Quality Foods, there are significant synergies because there are not overlapping markets from products between the healthy foods market and other big quality foods. In that regard, we expect to consolidate the business in the very short term, probably less than a year. And with this, we do try to increase our margins in our U.S. operation. And also we expect to have some synergies coming from the (inaudible) as well.
In the case of La Perla, the most important synergy is increasing it in the capacity because with this acquisition we practically doubled the capacity that we already had in our pet foods core operation. Remember that this company was in kind of chapter 11 in (inaudible). So that means that the company, it's actually without any production. So we will start very quickly, probably in the next month we will start with the production. And we expect to double our current production in less than 2 years.
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Operator [13]
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We'll go to the next question. It's from Miguel Tortolero from GBM.
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Miguel Angel Tortolero Casarrubias, [14]
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I have 2 questions. The first one is regarding volumes in the U.S. We saw a 15% top line increase in the region, but we also know that chicken prices are growing double digit in the U.S. Could you give us any color of volumes during the quarter and where do you see them for the remainder of 2017?
And the second one is on the U.S. as well on the recent acquisition. You mentioned that you should probably start consolidating within a year. Should we assume that by the end of the year we will start seeing the numbers of the recent acquisition?
And also, could you give us any color of where do you see margins for the Albertville acquisition?
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [15]
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Could you repeat the first question please?
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Miguel Angel Tortolero Casarrubias, [16]
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The first question is regarding volumes in the U.S. I mean we saw a 15% increase in top line, but we also know that chicken prices have been growing double digit. So just a bit of color of the volumes in the U.S.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [17]
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Well, remember that in our U.S. operation we absolutely (inaudible) our volumes due to the change of mix that we decided to perform in our [C&R] operation. So that's the reason we expect to pass into this year (inaudible) growth (inaudible) and 5% in terms of volume. But we will continue consolidating this strategy in order to resume our overall strategy, trying to grow above the industry.
Taking your second question, regarding the outlook of the operation, we expect to have margins something in the range from 20% to 25% of EBITDA margin. This is our [goal] once we -- sorry. I'm talking about the amount. Something between $20 million to $25 million. That's probably a percent around 7% to 8% of the EBITDA margin.
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Miguel Angel Tortolero Casarrubias, [18]
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Okay. Just to make sure I didn't get it wrong, you said 17% to 18% of EBITDA margin in the Albertville business?
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [19]
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7% to 8%.
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Operator [20]
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Our next question comes from Pedro Leduc from JPMorgan.
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Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [21]
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A follow-up. On the Alabama operating margins you just mentioned 7% to 8% EBITDA. Is that why you believe the consolidated ones will be lower for next year or is it then ongoing business which you think will be on tougher comps? That's just a quick follow-up on that, verification.
And then the second question was really if you can comment on how the other businesses are faring in Mexico; eggs, pet food that you saw investing a lot. And then also how you are foreseeing organic CapEx for the remainder of the year where you were targeted?
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [22]
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We think that we will take probably 2 years to reach this level of margins in the Alabama operation. And in your second question, we expect to continue having levels above $100 million per year in order to continue maintaining our activities in good shape and alleviating some bottlenecks in some part of our integration in Mexican operations.
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Operator [23]
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Our next question comes from Eduardo Estrada from Citi Banamex.
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José Eduardo Estrada, [24]
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Just a follow-up in Albertville, you mentioned that they have sales of around $200 million per year. What kind of growth are you expecting for this company?
And also, if you can tell us if sales are relatively stable through the year or do they have some seasonality? And the same I could ask for the margins.
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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [25]
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The market that this company has is very stable, that it's very focused on the full service. And we expect to increase this level of pace around 3% to 4% in the coming years.
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Operator [26]
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(Operator Instructions) The next question comes from [Guadalupe Diaz] from Credit Suisse.
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Unidentified Analyst, [27]
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I was also wondering about the margin because since you're acquiring a company that generates added value, I would have imagined that the margins were higher and since we are seeing a higher price in chicken prices. So that was also my question. And really my question is what kind of margins are you foreseeing in the long term for these kind of companies that generate this added value. And if you're expecting to raise the percentage of EBITDA margin that you have currently?
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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [28]
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Actually the margins in the Alabama operation that we expect are higher than the ones that we have in the foods facilities. At least we expect to increase it 2 percentage points above what we already have.
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Unidentified Analyst, [29]
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So if you're having 7% to 8% EBITDA margin, you expect it to increase it to around 10% EBITDA margin levels?
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Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [30]
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That's right. In the long run, that's right.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [31]
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The synergies that we are seeing with operation in [packaged] foods and (inaudible).
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Operator [32]
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There are no further questions at this time. I will turn the call back to Mr. Rodolfo Ramos.
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Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [33]
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Thank you, everyone, for joining us this morning. If you have any further questions, please contact our investor relation area and we'll be glad to assist you with your questions. Thank you.
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Operator [34]
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Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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