Q2 2017 Grupo Nutresa SA Earnings Call
Jul 28, 2017 AM EDT
NUTRESA.BG - Grupo Nutresa SA
Q2 2017 Grupo Nutresa SA Earnings Call
Jul 28, 2017 / 09:30PM GMT
==============================
Corporate Participants
==============================
* Carlos Ignacio Gallego Palacio
Grupo Nutresa S. A. - CEO and President
* Catherine Chacón Navarro
Grupo Nutresa S. A. - IR Director
* José Domingo Penagos Vásquez
Grupo Nutresa S. A. - CFO and VP of Corporate Finance
==============================
Conference Call Participants
==============================
* Andres Soto
Santander Investment Securities Inc., Research Division - Head of Andean Research
* Carlos E. Rodríguez
CrediCorp Capital, Research Division - Analyst of GEA and Infrastructure
* Daniel Guardiola
Banco BTG Pactual S.A., Research Division - Director of Equity Research
* Felipe Ucros Nunez
Scotiabank Global Banking and Markets, Research Division - Analyst
* Sergio Takeshi Matsumoto
Citigroup Inc, Research Division - Research Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
[Audio Gap] José Domingo Penagos, Vice President of Corporate Finance, Director of Corporate Finance; and myself, Catherine Chacón, Director of Investor Relations. Following the presentation given by the President and the Vice President of Corporate Finance, are the results of the second quarter of the year. We will proceed to a Q&A session. The questions we receive through the webcast will be read literally. Those connected to the English call, please send your questions through the chat option of the webcast.
Lastly, those that wish to follow the slides in Spanish, given that they are in English by default, please download them from the webcast screen.
Please remember to provide your name and company when you ask your question, either through the audio or through the webcast.
With you, Carlos Ignacio Gallego Palacio, President of Grupo Nutresa.
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [2]
------------------------------
Good morning to you all, and welcome to the conference of results of the second quarter of Grupo Nutresa. To begin, we'd like to share with you some highlights of last period. So I invite you to please look at Slide #2.
On Slide 2, you can see that for the second year in a row, Grupo Nutresa was chosen by Monitor Empresarial de Reputación Corporativa - MERCO, as the second best company to attract and retain talent in Colombia and the most attractive in the food sector of Colombia. This acknowledgment confirms the strength of the human talent of the business model of the group and its value within our corporate strategy.
Now let's move on please to the next slide, Slide 3. And in terms of innovation, we'd like to share with you that Grupo Nutresa was chosen among the 10 -- top 10 innovative companies of Colombia through Andi and magazine Dinero. This acknowledgment also ratifies and commits us to innovation through our corporate sustainability model. Likewise, we'd like to share with you some innovations that we've made recently. Bénet is the new nutritional expert brand of Grupo Nutresa. We have opened this category, it's a new powdered beverage that offers all the necessary nutrients for balance and wholesome being. This was recently launched in Colombia, but it's something that we'll be seeing soon in other markets of Grupo Nutresa.
We're very happy about our initial figures with Bénet. And at the bottom of slide 3, you can see 2 new launches under Tosh, we see the baked snacks and infusions with natural ingredients that are free of additives and they're great for healthy snacking for convenience and nutrition.
Also, when it comes to innovation, Nutresa, we're talking about 18.6% of our figure. This is very representative and it really is a result of the work done, not only products but also in innovation and processes in the business models.
Please move to Slide 4. And here, we can start discussing the sales. The commercial area during the second quarter of 2017. We can see that Colombia in sales reached COP 1.335 billion, up 2.9% and this is mainly explained by an increase of price, an average of 7%. Most of these prices were made the year before, not this year. We told you about this in our last conference that we're very prudent when it comes to our price variations. Also this is a result of the change of our mixes through a higher value per kilogram. And here we're seeing a decrease of volume of 4.1%.
In the past teleconference, we've voluntarily told you how we dropped the volume of some of our products in Pasta and Crackers. So if we look at this, our total increase is basically of minus COP [0.2.6], with a price change of 5.7%. This decision that we took of reducing products of less added value is really a winner on a long-term basis and it's good for a company with brands like Nutresa. It's also interesting to underline that this month or this quarter had 3 fewer working days because of holy week. So in our case, here you can see in international sales that we grew 7.4%, in terms of price, but our volume grew less. So here you can see the seasonality because of holy week.
Looking at the lower dynamics of consumption that we saw in the semester in Colombia, we think that these are very good results. The business of chocolates, coffee, Retail Food display higher-than-average growth. Here you can see also the growth of our best. If we really reduce all the volumes, it would really show a change of 0.4%. When it comes to Crackers or Biscuits, we are doing well and their reduced volume is mainly because of removing the byproducts.
Also in Pasta, if we look at this item, we also look at the volumes reach 0.9%. When it comes to Cold Cuts, which have a higher disbursement, these were hurt 4.8% has to do with the dynamics of this category in the period.
A good news is that Ice Cream has been increasing its total sales, especially during the first 2 months of the semester. But in conclusion, you can see that there is good dynamics in Colombia with consumption -- it's really a good quarter. And you can say that the first-- the very best month of this quarter is June, and really July is showing very good results as well. When it comes to international sales, as we told you in prior teleconferences, we can see that after October 2016, we see that Venezuela is accounted for as financial instruments.
So during this first quarter of 2017, we are not including Venezuela sales, and the result of this decision is seen mainly in the Cold Cuts business. So if we can compare both years, we can see it with and without Venezuela. When we make these adjustments of the year, you can see there are sales for COP 269 million -- billion, great growth in dollars of 7.4%. In pesos, it's COP 781 billion, up 4.7%.
We'd also like to highlight the good results outside of Colombia of our operations, but also the increase of exports. We display in the first quarter exports of COP 56 billion, up 22%, compared to the year before and this is quite significant. And here we're building a very significant pillar of growth for the company. The Cold Cuts business had great results in its operation in Panama, but it also grew because we had exports of flank cuts. Biscuits, good dynamics as well especially in the U.S. and Chocolates, we see a growth of 0.8%, but basically because of the lower sales of cocoa butter, because in Peru, we've been growing in local currency. TMLUC, very good performance both in Chile and internationally, especially in Mexico. In Coffee, our growth is great, 24.3%. It's a company that exports the most, the most of Grupo Nutresa, mainly to the U.S. When it comes to retail food, it's a [market] growth because of the rain falls in Central America, which hurt the business in the region.
When we combine them, all the sales in Colombia and international, moving on to Slide 5, you can see their total sales were COP 2,117 billion, up 3.6%. If we exclude Venezuela, it would also grow 0.8% and this is important to keep in mind. Unlike the first quarter our total sales including Venezuela are still positive. So all of the businesses are displaying great performance, but if we remove the byproducts, our growth would not be 3.65% and pasta, would also show something different.
In the quarter, sales of innovation were 20.2%, which is still higher than the total weighted average of the year. So it's a quarter which is quite positive for us, and towards the end of the month improved even more and prepared us for the second half of the year.
Now looking at Slide 6, we can see the accumulated sales of the quarter or the semester. You can see that for the first semester in Colombia, sales were COP 2,650 billion, growing 3.9%, moving from 3.6% in price and minus 3.6% in volume. By excluding the sale of flowers and byproducts, we're talking about 4.4%, with volumes decreasing 1.5% and prices growing to 6% as you can see. I would say that this is a figure that's quite close to what we anticipated and when we look at the results of the business, there are good dynamics in Biscuits, Chocolates, Retail Foods and Coffee. When it comes to the Biscuits, if we exclude the byproducts, growth is 7.6%. In Cold Cuts, we have a lower growth because of the dynamics of consumption of this category, and in Ice Cream we have the first quarter, which was quite complicated and the second quarter, which was good, so that minus 7.2% moved from minus 13%, so it was good improvement.
When it comes to international sales on Slide 6, you can see that the accumulated sales reached 5.5%, reaching $516 million, and in pesos, COP 1,509 billion, dropping 1.3% because of the revaluation in one of the quarters. But it's quite positive, this performance that we can see in local currencies. We see performances that are very good exports from Colombia. If you consider the entire semester grew 21.5% and 54% of those exports are into the States.
I'd like to highlight here the TMLUC in Chile and in Mexico, which displayed a very satisfactory performance in Cold Cuts, in Panama and exporting from Colombia did well. In Coffee, which was 12.8% leveraged on the exports made to the States.
When you combine the sales of Colombia and International on Slide 7, you can see total sales of the quarter of COP 4,159 billion, up 2%. At the end of the first quarter, the figure was much lower and with significant growths in the different businesses. Look at TMLUC it moved from 7% -- minus 0.7%, but both in Chile and Mexico the operations now are showing positive performance. And in Pasta, you can see the accumulation of the first Q that was quite complex. But the second Q is showing recoveries.
Total sales of innovation are 18%, which I discussed in the highlights at the beginning of this presentation.
If we look at Slide 8, you can see sales by region. In Colombia, it stands out with 63.7% of sales. The second part is Central America with 9.3%. It decreases a bit because some countries in Central America have had devaluations that didn't have before. And then third and fourth place are tied between the States and Chile with 1.8%. Also I'd like to highlight that Venezuela appears with 0%. As we announced before, there is no sale here related to Venezuela. And we believe, as we announced before, that this facilitates the evaluation of the company and that it provides transparency to the sales of the company.
Moving on to Slide 9. You can see the last market share, you can see that there is a drop of 1.6%. Here TMLUC and Chocolates is quite positive, but especially when it comes to Biscuits and Cold Cuts, we have drops in market share. When it comes to the objectives of Grupo Nutresa, our core objective is to increase value and to be more profitable, but another objective relates to market share. To reach these 2 objectives, there are moments in which you look at the market share to leverage the profitability. We announced this -- of course, it doesn't mean that we are happy with this, but we do believe that's what market share is to leverage the company entirely. And we're making plans of each of the references to assume more positions, which are to lead, but when it comes to the economy, there're some migrations toward private brands or with lower value, so we believe that we can cover these positons.
It's also important to keep in mind that this has to do with Nielsen sources in which we see that these are not recorded.
Moving on to topics that have to do with the profitability and raw materials as their performance.
If we move onto Slide 10, you can see in second quarter of 2017, the commodities indexes downtrend -- showing a downtrend, you can see oils and sugar, but in some cases and in some countries like Colombia, these increases of international prices are not seen in the Colombian peso because of the tariffs -- local tariffs. What we see overall is a trend that's relatively positive when it comes to commodities. The component that has the highest weight are packaging materials, which is 14.3% of total and the other 3 are Coffee with 9.5% and Pork was 6.9%.
At Grupo Nutresa, we handle a strategy, something solid, in which we coordinate -- everything has to do with fiscal, the positions, make it feasible and we also make some trends on a long-term basis with providers that give us stability. So in terms of raw materials, I would say that this was a favorable quarter and now I'd like to look at these raw materials from here on.
To disclose this type of information on profitability, José Domingo Penagos will speak.
------------------------------
José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO and VP of Corporate Finance [3]
------------------------------
Thank you, Carlos Ignacio. Good morning to everyone, I'd like to discuss profitability. So let's move to Slide 11. Here you can see, in the second quarter of this year for the entire group, we can look at each business model.
First, let's look at the margin, 12.4%, which is higher to the -- of the same period of the year before, which was 12.1%. Some of you even highlighted this in your reports. For the commercial challenge, I think it's a good margin, it's in a good range. And I'd like to highlight also is growth, 8.4%, which is higher to the one we had in the prior quarter. With a group of businesses in terms of growth, I'd like to look at Biscuits. Look at Chocolate, almost 66%. Even in Ice Cream, 35%. This generates the EBITDA for the period. It's a good group of businesses, which display good growth of the EBITDA, generally.
I'd like to give you some comments -- general comments, when it comes to the commodities. Carlos Ignacio already discussed this. We have good performance especially with hedges. But excluding pork, everything is showing very good performance and our hedges are showing very good performance. So I think the profitability levels really provide us an expansion of gross margin. And second is the control of expenses especially of administrative expenses and sales expenses. However, the commercial area we're investing in the market and we are in an economic cycle in which we have to keep in mind all the categories. So this is overall.
So now let's look at each business. Let's start with Cold Cuts. It's on a lower part of the range, but it's doing well, especially with its raw materials, pork. We can growth of double-digits of these raw materials even close to 20%, like -- which is quite relevant to its structure of the cost. And after that challenge, you can see Biscuits as well, 12%. It's on a lower part of the range, but it's got a good commercial dynamic. As I said before, all of its strategy to focus on value-added products had good results so far and a good margin.
Chocolates, almost 13%, 12.9%. Everything that we've mentioned with Chocolates in the past, you can add its good cocoa performance and this gives good profitability levels. The same -- In the same period last year, it was at 8%, so I think it's showing great results, when it comes to the EBITDA. In proportion and growth, Tresmontes is 14.1%, the result of the entire adjustment of everything that we made last year, in Chile and in Mexico, this is a great formula for such an important EBITDA.
From the top of the range, Coffee, it continues showing great dynamics and results if we combine the positive commercial dynamics that it shows and the decrease of the value of some of its raw materials. In Retail Food, similar to what we saw in the prior period, we see an EBITDA margin of 12.8% in Colombia, it's been basically hit a bit because of the raw material prices and what's happening with the rain in Central America. So it's kind of a decrease of 1.8%, but we ratified that our main purpose here is to defend the transactions during this period and that's why the activity is quite moderate.
In Ice Cream, although the margin is below the proper level of this, it is higher than what's seen before and you can see in this quarter particular compared to the prior quarter, we look at the growth of 35.2%. In Pasta, it's quite stable in terms of margin of value, it's grown 2.3%. That's when it comes to each of the businesses of each business.
Moving on to Slide 12. You can see the EBITDA reach of units. We have an EBITDA of the entire group of -- for Cold Cuts of 12.3%. It's above what's seen during prior semesters excluding Ice Cream. We have all the businesses within the range and even again, we see a significant growth. I think it's not worth looking at each business because we can see some common denominators, which was -- were discussed already. But I would say again, that overall, when it comes to -- with the Cold Cuts, because of the pork, every business unit shows great performance in the semester. And that's why we can provide EBITDA of COP 527 billion, up 2.7%. That's the EBITDA that we see on Slide 12.
Now let's look at the Slide 13. Again, we have 2 sections, the operating, which has great EBITDA that we explained and the operating profit. Here we can see that in the semester, you can compare it with the second half of last year, which included Venezuela, that's why our revenues grew 0.8%. When we look at the same page with Venezuela and without it, that's where you can see the difference. And in the costs where we have 1.7%, you can see an expansion of the gross margin of 150 basic (sic) [basis] points, which have to do with the productivity plans of the organization. Also, we have an expense control especially in administration that dropped 0.7% -- 1.7%. We're very controlled also in sales production expenses and when it comes to sales expenses, which grew 7% -- 7.6%, but really it grew -- it dropped from 27.6%.
So again we're investing in the markets because of the economic cycle and we think that everything has to do with profitability. It shows the final results that we are reporting to you today. Really the equation of profitability has been good. Also, we see exchange differences that are negative compared to the prior half of 2016, which remember that these are -- we have included here our suppliers and other operating expenses. We have recoveries from insurance and also the EBITDA that I told you of COP 262 billion, which is above 30 basic (sic) basis points of last year and growing 27.3%.
In the post operating, here we can see a growth of 0.2% in financial expenses. This is a result of a debt strategy and later on I will be explaining to you a bit more. We negotiated about 50% of the debt in this semester and we managed great rates of the profile and the cost, and this will be capitalized in our cash flow and here we are seeing the first growth of the financial expenses of 4.2%.
Also we can see revenues from this semester, the most important revenue here is (inaudible) in the first semester and we'll see in the financial statements ahead about this. And when it comes to the operating profit, you can see everything has to do with the exchange differences has a big effect. Also, the income tax, the deferred tax also, you can see the effect on the column and also the fiscal benefits, that we have discussed in prior talks, show good performance and also a net result of 96.5%, which have an EBITDA of 3.7%. That's when it comes to the quarter that was shown.
Now let's move to Slide 14. Here we see the accumulated results, which shows a decrease of 1.1% and this has to do with Venezuela again. If we include -- if we exclude Venezuela, we would be growing 2% and also the cost or expenses have dropped because of the improved EBITDA margin of 50 basis points, which is a similar performance. Also, we see a good discipline in our lower expenses, and when it comes to the operational part, we have contributions to some projects in England and the States, which has expenses that are capitalized in this account. In the post operating part, we have the financial expenses of 9.8%, which we already discussed with the quarter and also, as we anticipated, we have the dividends of [Sur and Arcos] , so really this gathers the effect of both quarters, with similar performance and we have a net profit of COP 237 billion.
And lastly, let's look at the debt. The consolidated net debt that has to do with the cash flow of your [inflation].
Moving on to Slide 15, you can see the net debt -- let me show you the indicator, 2.98x in the last quarter. In this quarter, we have 2.83x, which goes hand-in-hand with our objectives and again, with the level that we entered in December 2016. The average rate because of the renegotiations of the debt is at 8.1%, and last year in December, it was at 9.5%. Here you can see the significant reduction because of the renegotiation and decrease of the reference rates in this semester. That has to do with the debt, good coverage, good generation.
Lastly, I'd like to share with you the CapEx -- remember we have to-date 50%, we are at COP 91 billion of exclusion, which, with a very proper performance this year, I would say that -- yes, I will ratify that our budget of CapEx of the year is doing well. With this, we end the section of profitability.
Now let's listen to Carlos Ignacio, who will share with us the outlook for 2017.
There's another event of the semester and also we were rated by Fitch Ratings and again we were given a AAA for the [month] of Colombia. I just wanted to mention this rating.
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [4]
------------------------------
Thank you, José Domingo. When it comes to outlook, I'd like to mention that overall, in all of the countries where we operate we're seeing lower inflation and it's very important, in Colombia for instance, where we ended the first half of the year with very low levels, really the adjustment of the inflation was quick and we believe that the rest of the year will be quite stable. Also we see lower financing rates.
So overall we have a good dynamic -- commercial dynamics for the rest of the year. As we told you the first month of the second quarter was a great month. Today, we're ending July, I think it's going to be even better than June. And with this commercial dynamic in Colombia and overseas, we have an intense activities in innovation and categories. So I think that overall, commercially, we are doing well.
In terms of commodities, we see some mobility. I think some prices will be bouncing up, but when it comes to our inventories, I think that this will allow us to have relative stability in the consumption costs. This added to the internal control, our supplies, our marketing, the arrival -- launches to different markets will help us reach good profitability levels, according to what we have desired. So I would say, they have good commercial dynamics, some commodities that will be bouncing up a bit in their price and this will be reflected in the consumption because of this coverage of the strategies that we have.
And combined with this, I'd say that we will be reaching the profitability levels that we have set forth by 2020, with 12% and 14%. So now let's begin the Q&A session.
==============================
Questions and Answers
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [1]
------------------------------
Thank you, Carlos Ignacio. So this begins our Q&A session. We'd like to remind you that we have the option of chat in the webcast to receive your comments and questions. And we'll be reading literally and in the order that we receive them. So let's begin with the questions that we received in the conference.
(Operator Instructions) Our first question is Andres Soto -- from Andres Soto.
------------------------------
Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [2]
------------------------------
My first question has to do with the improved commercial dynamics observed in Colombia, in June and July. I'd like to understand in this context, are you expecting a better performance in the second half of the year? And if so, if the priority of the company will be to continue improving its profitability or to recover the market share it lost in the first half of the year?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [3]
------------------------------
As I mentioned before, at Grupo Nutresa, the core purpose is to increase its value but also to have a profitable growth, but also that of its market share. The second half of the year, you can say that the drop of the market share that was seen in the first quarter, it really was something that we saw coming since the end of last year. If you remember, the third quarter in Colombia, last year in Colombia was hit by the paralysis of the transportation sector. And there were some sales in that quarter that had difficulties. So I believe that we will have 2 things: First, third quarter in which you do not see problems like the transportation sector; and second, that the total inflation in Colombia will be lower and therefore, it will provide more cash flow for the consumers. So that's why we've been active in the market, working with different channels because we want Grupo Nutresa to capture that money that's in the pockets of consumers. So I believe we will continue being prudent with our prices. Even in some references, we've been reducing prices and as the desirable probability is found, we are willing, if convenient, to reduce our prices. So again, we're not going to let go of our objectives. We want to improve our profitability, but also we will be gaining our market share in different markets. We think that the second half of the year will be better than the first and we'll be working on this hard.
------------------------------
Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [4]
------------------------------
Perfect. Thank you. And specifically, when it comes to Cold Cuts, there are several factors that are hurting it, yes. But in Colombia, how do you see this? With the context that we have and with the current profitability levels in Cold Cuts, how do you see it for the next half of the year?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [5]
------------------------------
To recover the market share, you have to have some more attractive factors, especially for your distribution. I believe that the fact that Grupo Nutresa has a portfolio of categories that allows it to make sustainable growth in time. In fact, we've seen businesses like Chocolate, in which for some time, we had to support below the quarter 1 and also with Tresmontes Lucchetti and some transformations we've made. So we can say that we need both. I believe that while the pressure of costs, especially because of the Cold Cuts of -- is going to be high, we will be working hard in prices and we are going to try to recover our position in the market and we'll also try to meet the productivity levels that we need because remember we are not only focused on price, but also we need to have -- to be leaders and innovation in that category in Cold Cuts is very important. So we have to stand out with more of an offer with value. It's got to be higher than any market. So it's a category in which we will be a very active. So our assessment is not only on a short-term basis. The thing is, the idea that the group must reach the levels it desires and as such, Cold Cuts is really a category that provides a lot of value. Although right now it's on a lower range of the EBITDA, we will continue to seek full terms.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [6]
------------------------------
We have Sergio Matsumoto from Citi Group.
------------------------------
Sergio Takeshi Matsumoto, Citigroup Inc, Research Division - Research Analyst [7]
------------------------------
My question is, what do you expect the EBITDA margin for 2017 and when it comes to the expansion of the margin in the quarter, can you stand out what's sustainable and not recurrent?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [8]
------------------------------
Yes, Sergio. You are aware that we cannot provide you some information for the quarter, but we can say that we are projecting to end the quarter within the quarter promised or desired by Grupo Nutresa for its [manga]. With regards to the efforts, which are sustainable and not, I would say that those results are shown because of the many capabilities that Grupo Nutresa has. That's why we are talking not only about the commodities, which is something particular, and as you are aware that it's very common to have some commodities go up and go down in price. So if we have the proper inventories, the impact will have a lower risk for Grupo Nutresa. But that's only 1 side of the story. When it comes to productivity, we've been very active in global supply. Also, we also use different channels, geographies, not only to increase but also decrease our prices. And to -- and we make different analysis of scenarios to take different decisions. We're working on making more returns of investments. And when it comes to the go-to-market of different categories, we're making a huge effort with Ice Cream. So everything that has to do with the productivity that I mentioned are things that you see in time. It's not something that you do for a specific problem. These are things that are implemented and allow the group in a turbulent setting, like the ones that emerging countries face, will show the results that we've been showing in the past years and that we hope to show in the future.
------------------------------
Sergio Takeshi Matsumoto, Citigroup Inc, Research Division - Research Analyst [9]
------------------------------
Now that you mentioned Ice Cream, let me ask you, was there a change in the strategy, when it comes -- when you discuss prices, you talked about the go to market. Why did you seek this increase of price in this quarter and not in prior quarters?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [10]
------------------------------
No, Sergio, the prices that we see in Ice Cream come from increases made last year. What we see there is a reflect of increases made the year before. Like in all businesses, there are some variations of the mix of sales, but we have not increased prices this year. We believe that this is a very sensitive category, and if you touch prices there, immediately you have lower volumes. So what we've been doing there is a different revision. We're looking at the channels that offer the value. We're looking at the brand itself. We're launching, making some launches, so consumers may have more facilities to access Ice Cream but really, what -- last year, when we looked at prices, that's -- we have the hit in volumes and that's what we're saying now that in this last quarter, we've had some recovery in sales and we aspire for the rest of the year to fill out that gap.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [11]
------------------------------
We have (inaudible) from Colombia.
------------------------------
Unidentified Analyst, [12]
------------------------------
I have 2 questions. Please tell us what is your viewpoint on a short-term basis, because last year you make an innovation of all your points of sale, your layout. You made some changes on your menu and you're launching new types of products. I'd like to know how the market has reacted to this. And second question, what strategies do you have to control a bit that growth of price of raw materials because that, of course, has had a negative impact on this division?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [13]
------------------------------
Thank you, (inaudible), for your questions. I would begin by saying that what we're showing for Retail Food is a combination, namely, of 3 main activities: one, is the Ice Cream in Dominican Republic and some islands in the Caribbean that -- and Central America with POPS Ice Cream and the acquisition that we made in Colombia of Grupo El Corral, which is not only burgers El Corral but other brands like El Corral, Papa John's and others. So when you look at the results, you're looking at the combination of every -- of all of these 3. In terms of the shops -- the ice cream shops, I would say the [barn] is doing well. It's quite strong, it's growing. In terms of profitability, it's way above. It's really sound. When we talk about the international sales, we've had -- both did hurt a bit in Central America because of the rains, but really it's a strong brand and it's really strong in the region, but it's been hit, because of the rain falls over the historical levels and also it's been hit because people don't move, don't go out so much. In Colombia, instead we have like a combination of everything. As José Domingo said before, we have focused on serving in Colombia transactions. So that's why we have now transferred to the consumer what we've been having to pay, more especially with the pork. And also because of the high inflation of last year, we had to increase our salaries. And also, some of the leases we have are tied to inflation. So to protect the transactions, we have not transferred this to the -- these values to the consumer. When it comes to strategies, I'd say, first, before increasing prices, we've been concerned to look at the entry lines, where you can facilitate for the consumer to taste our new products, to compare, to fall in love with our brands and then buy. Also, we have the internal productivity strategies. So remember, price is not the only thing we focus on. But also for mass consumption products, we'll have to look at productivity, returns and controls of expenses are also important. Also in the prior talk, we talked about opening 34 new points of sale this year. But also, we've been closing those that are not feasible. We've been improving the mix of all of these points of sale. When it comes to El Corral burgers, we focus mainly in the first region of Antioquia and the result has been good. I mean, the sales of the points of the renovated points of sales of this burger place has grown way above others and that shows that our strategy of renovation has been profitable. It has been proper and will be part of our plans, it's normal. And it's included in the budgets of our investments. So when it comes to Retail Food, what you see is the blend of all this. And the efforts made for productivity and to reach the consumer will be very significant. The arriving to the consumer entails using IT and using the smartphones and applications, and this will be a strategy that we'll be using for the second half of the year. So again, we've given importance to the transactions and profitability, while the demand was pushed. So we can then reach our better levels.
------------------------------
Unidentified Analyst, [14]
------------------------------
And if you allow me to ask you also, let's look at the debt, the re-profiling that you talked about. Could you tell us what was the average interest rate and what was the time frame for this?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [15]
------------------------------
Yes, of course. As I told you before, we're talking about 50% of the debt was renegotiated in the semester and the optimization of the interest rate was from 9% in December to 8.1% today. So we're talking about 150 basis points used in that rate in cost. And also, we have a mean of a duration of 3 years. It was more on a short-term basis, moving it towards a medium basis. But we're talking about 150 basis points in terms of cost.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [16]
------------------------------
So we have a question that we received as we have mentioned. We are going to read it first in English. We'll be paraphrasing it in Spanish for our guests. The question says, what are you working on that will help you improve? How much is the focus in ROC in sales, market share, et cetera? In Spanish it says: In projects -- what projects are you working to improve your ROI? How important is it in your sales, market share, et cetera?
------------------------------
José Domingo Penagos Vásquez, Grupo Nutresa S. A. - CFO and VP of Corporate Finance [17]
------------------------------
Let's begin by the end of the question. The ROC, it's very important when you balance all the variables that we've mentioned. Market share, it's been growing profitably, so it's really to close the equation, keeping in mind all of these variables. Overall, I would say that it's -- we've got 4 chapters that we're working on to improve our returns. One is a sustained growth. We've been working a lot on innovation. You saw the innovation of the percentages of the group. Also we're looking at the different categories of -- in the different geographies. We're talking about different alternative channels used by group, such as key alternative channels that we'll discuss ahead. As you can see in the period result, we look at margins as well and these were reached mainly through the raw materials. Everything has to do with the hedges of the commodities, productivity. We record on the efficiency of the group. Marketing expenses, which is key for these types of companies. Our marketing is profitable. Everything that we seek for is to reach higher profitability, and the other variable has to do with distribution. We reached 1.2 million points throughout the region. So the idea is that distribution is key for us. So then everything has to do with cash flow, working capital. So with CapEx, we work with discipline, best investments, to use our best installed capacity. We have different plans for the group and the assignment of capital that competes with the returns, provided the prior 2 chapters are met. And lastly, working capital and overall, we have an efficient account receivable of 35 days and that's basically because of the proportion we have, in which the low stores we sell right away. So basically, we're looking at inventories, suppliers. So it's not just one thing, one matter. They're different chapters and for each chapter we have an ongoing follow-up, so that we could have better returns.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [18]
------------------------------
We have [Maria Ballista] from (inaudible)
------------------------------
Unidentified Analyst, [19]
------------------------------
I have 2 questions. One, could you give us a follow-up on the market share? You were telling us -- but, really I'd like to understand, what was really the purpose of this market share drop? And what can we expect with the market share topics, especially for the second half of the year? And second, I'd like to know if you have any concern because of the aftosa breakout and how this can help -- can hurt your Cold Cut business?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [20]
------------------------------
I'd like to begin to answer the second question on the aftosa. The first thing I'd like to say so that those who are listening to us, aftosa is another zoonosis. Zoonosis is a disease of the animals that can be transmitted to human beings. I mean, aftosa is exclusively a disease among animals, especially those that have paws. And it was present many years in Colombia. It's controlled mainly through a proper vaccination of the animals and the countries -- some countries have aftosa and don't have a good control. There are others that have good control and are almost free -- aftosa-free. And that (inaudible) that Colombia recently reached and allowed it to export Cold Cut -- meat to many countries unfortunately, and we think because of the pressure there is in the frontier between Colombia and Venezuela and due to what's happening in Venezuela, that's not controlling its countryside and seeing that an animal is sold in Colombia, almost 7x the price than what it is sold in Venezuela. It's hard to control and probably that led to have confirmed aftosa breakouts. And that's why in Colombia we have to do some quarantine to liberate those areas, and we have to be more demanding, especially in the frontier between both countries to increase the value. So first, aftosa is only a disease for animals that does not affect human beings. As an animal, when it's got the disease, it shows it has pain when it eats. So the animal is more malnourished and it can die. But it never makes human beings sick. Obviously, this type of disease hurts exports because -- but this is just beginning in Colombia. Every Grupo Nutresa, because I told you that we made some exports. So what will happen probably? Those exports will suffer because there are some countries that will immediately close their frontier, not all do. There are some countries that have a criteria that say that aftosa does not hurt human beings, so there's no problem and so perhaps some countries will close, but sure this will hurt first exports. Grupo Nutresa's most affectation could be something that won't surpass $4 million in exports of meat. So it's something small for the size of the group. However, we have to keep in mind that given that this will hurt exports, there can be cattle in Colombia that will make the internal price vary. So the final effect could be really relatively neutral. Especially after the quarantines, we will have cattle that won't be easy to export as much as it would be before -- as before. So there could be lower revenues, but also, there could be a drop in price. We believe firmly that Colombia must improve its internal control, especially in the frontier with Venezuela and because of the availability of land and the climate of Colombia, this is something that everybody that's involved, we must recover. It was a window that was opened by Colombia to grow and to create revenues and that Colombia should recover. So we believe that this is the main impact. It's very important to keep in mind this information, because of misinformation, this could hurt our cold cuts. It could happen. But we think that when it comes to the guild in the government, there could be campaigns to disclose and people should understand that this topic has to do with only diseases of animals. It does not affect human beings and should not hurt at all consumption. Perhaps on a short-term basis, something will happen, but I'd like to clarify that Colombia is aftosa-free for -- has been aftosa-free for decades, and we've got to go back to those levels. That answers your aftosa questions. When it comes to market share, what I said before is that, when the consumer is exposed to having less pocket money, the consumer goes to lower value brands and of course, that makes us lose our market share. I also pointed out that the sales through some channels is not doing that well. So it really depends of each category. We believe that market share like Cold Cuts are great in these channels. And we're seriously competing with the competition and when we can innovate and set ourselves apart, it's harder for the lower competitor -- lower-priced competitors to gain our market. Also, we have other products in which we can make a balance. We have to see what it costs to be playing in Colombia and outside of Colombia. We have areas in Central America where we are, for instance, leaders in Biscuits. So if we look at the profitability of the marketing dollars that we're investing, we have to study that well. But obviously, we don't like to lose market share. It's a cultural thing, as I told you before, and we're defending those points of sale and we're trying to keep them as high as possible and to earn through all of the channels, not only those of Biscuits, so that's like a summary to your questions.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [21]
------------------------------
Our next question is from Felipe from Scotiabank.
------------------------------
Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [22]
------------------------------
Most of the questions -- no, your investments made in -- how long do you think that you will be reaching the levels that are higher than those seen in the first quarters of last year, for instance, that could give us an idea to model what will happen afterwards? And also can you talk about the exports? You said that they grew 32%, which is quite high. The base, obviously, is quite slow. Can you give us more information about the exports, perhaps, what are the margins of those exports and the different products and segments and how they're doing?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [23]
------------------------------
Let me answer your first question. When it comes to marketing expenses, the first quarter was great. It was extraordinary. We -- it really depends, if we will change things, it really depends on the cycle. We believe that we'll have a better second half of the year and so we'll be improving surely, our investments in the market. But it really depends on the commercial dynamics. I'd say that overall, we ended last year and in this quarter, it is more particular. I'd say, we're going to be doing very low in the market share for the rest of the year. And when it comes to exports, Felipe, we have great dynamics. The accumulated has grown and here I can give you more visibility. Though businesses that export the most of Grupo Nutresa is Coffee, Chocolates and Biscuits. The largest is Coffee, almost 60% of the total exports of the group and I would say that Chocolates and Biscuits represent the 40% remaining. Exports of cold biscuits are just beginning. That's why the affectation is quite low, as I said in the prior question that I was answering. So that's where we stand, we're just beginning with that. Something that's important, when it comes to 54% of our exports are to the States. That's something very important for us. Other markets of interest are Ecuador, which is after -- which is second; Mexico third; Puerto Rico, which is fourth; and Japan is fifth. We have sales to many other countries, which are made more on exploratory basis. But the idea is that this dynamic will be quite positive. Last year, we were asked many times, why Colombia with an exchange rate that's so good, compared to 2 years ago we -- our exports are growing. And the answer was that the customers didn't wait for us, but we had to know the customer to provide solutions for them. They are very different to Colombian consumers. We have to study them more. We took the time to study them. But these figures are quite good, and we believe that these businesses will continue receiving that growth. In terms of profitability, we don't have marginal exports. We demand the same range from 12% to 14% of returns. But what I can anticipate is that many times it's above the Colombian market. So that's the movement that we make. We have a company in the free trade zone, not only to export, but also import goods competitively and here we're only talking about exports from Colombia. Remember, we also make exports from the other countries, Chile, Costa Rica and Mexico. And soon, we'll be making exports from the U.S. So that's, Felipe, our vision in terms of exports from Colombia.
------------------------------
Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [24]
------------------------------
Can I ask you a last question regarding the discussion of the debt? You had an exposure that was relatively high to floating items. How does this change with the renegotiation that was made?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [25]
------------------------------
Yes, Felipe, I can give you more details on this, on the type of rate. We had about 30%, 31% exposures to ABR and I perceive 16%, 17%. So it's quite similar with the renegotiation. What we did was capitalize market opportunity and this includes -- but when it comes to type of debt, it's really quite similar.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [26]
------------------------------
Thank you. We have a question from CrediCorp.
------------------------------
Carlos E. Rodríguez, CrediCorp Capital, Research Division - Analyst of GEA and Infrastructure [27]
------------------------------
I have 3 questions. One has to do with taxes. I'd like to know more. If I'm not wrong, the tax last year, this year in Colombia, it's 40%. Please explain to us that decrease.
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [28]
------------------------------
Carlos, I'd like to remind you that when it comes to taxes, we have a basket that reflects the different geographies where we operate. And you can see movements in different countries. Indeed, we have capitalized benefits as we've explained in other talks to have some of our companies with legal stability and that's something we capitalize and that's reflected in this. And also, I'd like to say that, there is a tax reform and that has given us some benefits that we've capitalized from throughout the semester. So these are the effects that lead us to optimize significantly our income tax.
------------------------------
Carlos E. Rodríguez, CrediCorp Capital, Research Division - Analyst of GEA and Infrastructure [29]
------------------------------
And another question, when it comes to the prices in Colombia, is there an increase of price by the end of 2017? Or when will you start to transfer to the consumer, the IVA 19%?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [30]
------------------------------
Carlos, in the last talk we had, where we extensively talked about this, we said that the tax -- that our decision was not to transfer to the consumer the higher price. The idea was to make adjustments. Also, when we look at the reference, the SKUs that Grupo Nutresa sells, in Colombia, 58% of these were with the 16% IVA, which climbed to 19%. So there's a significant percentage that was not affected by the tax reform. We do not foresee to touch prices for the rest of this year. We believe that this year is more to focus more on productivity than on price. As I said before, there are cases in which profitability and changes that you can see will give way. If profitability allows it, we are even willing to drop prices because we're interested in dynamics. When we talk about how to reach the MEGA of Grupo Nutresa, we've always said that we should provide consumers the best ratio between price and the value received. So we'll be focusing on productivity, on reaching the best -- reaching products -- best products for our consumers. But we are not thinking about touching prices now. Significantly, we do want to sell more, we want to participate in more categories and to launch categories that consumers are willing to pay more for, but the idea is not to focus only on price.
------------------------------
Carlos E. Rodríguez, CrediCorp Capital, Research Division - Analyst of GEA and Infrastructure [31]
------------------------------
Okay. Last question has to do with Retail Food and the 12.8% margin. This is a lower margin than in other quarters. Is this because of what's happened in Colombia or overseas?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [32]
------------------------------
I would say both, Carlos. When it comes to the economic cycle in Colombia, this has an impact of the El Corral and also the rainfalls in Central America. Both of these have hurt our products and of course, the capability of the business, obviously, to absorb the fixed costs has been hurt. So I'd say that these 2 things, what's happening in Colombia and also the rain falls in Central America.
------------------------------
Carlos E. Rodríguez, CrediCorp Capital, Research Division - Analyst of GEA and Infrastructure [33]
------------------------------
And another last question please. The ROC, could you give us guidance, now that you have a MEGA for your sales in 2020, have you calculated ROI? Do you have an objective and towards what levels?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [34]
------------------------------
Carlos, our MEGA is a big challenge. At Grupo Nutresa, we have a 13% ROIC ahead and for that, we have to move every -- all the things that José Domingo mentioned, that's something in the future. And it's done gradually. But we don't -- we can't change our MEGAs year by year. Really it combines many efforts. But let me discuss something, because it was asked also before. One of the best things about Grupo Nutresa, was in emerging markets, is our growth. We're not going to renounce to our growth, just to show a pretty figure. Really, we have been good in acquisitions. On a short-term basis, it does provide value and we look at the weighted value. What you receive overall in your reports it's 8.1%, but that includes acquisitions. So our challenge is soon to reach that area of creating value, but really we want to continue growing. We are in emerging countries that have consumptions for capital that are below the global average and that growth is key, and I would be wrong if I want to only improve on a short-term basis my ROIC. So we'll be really chasing that dream.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [35]
------------------------------
Daniel Guardiola from BTG.
------------------------------
Daniel Guardiola, Banco BTG Pactual S.A., Research Division - Director of Equity Research [36]
------------------------------
I have a simple question on hedges. Looking at the low prices today, in certain commodities, I'd like to know if the hedging strategy will be modified? Will you expand it in time? And what methods do you use? And what's the average cost of this strategy?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [37]
------------------------------
Daniel, I could say that now we're working on 2018. In 2017, we are 75% covered, and looking at the current commodity prices, we see some rebounds in the market that confirmed that this strategy is something that we'll continue using. In terms of costs, we always seek a balance in profitability. All the costs of the commodities have to do with the operating margins. And it's got to have a net effect on our profitability. But as you can see on the EBITDA margin, there's a good result of all the methods that we're using and I can tell you that now we're working on 2018. It's not only in 2017 that we are looking at. Now we're working on -- our strategy involves 2018.
------------------------------
Daniel Guardiola, Banco BTG Pactual S.A., Research Division - Director of Equity Research [38]
------------------------------
And a follow-up question. When it comes to the debt, where can you see the effect on the 120 basis points less on the income statement? When can you see that impact?
------------------------------
Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. - CEO and President [39]
------------------------------
Indeed we have that already. So for the second half of the year, you can see the impact and we will capitalize this in 2018.
------------------------------
Catherine Chacón Navarro, Grupo Nutresa S. A. - IR Director [40]
------------------------------
Okay, with this we end the teleconference of the results of the second quarter of 2017. We'd like to thank you all for attending and having interest in Grupo Nutresa. Again, if you have any questions, please contact our office of relations with investors. Have a nice week. Thank you.
------------------------------
Operator [41]
------------------------------
Thank you for attending this teleconference.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------