Q3 2017 Industrias Bachoco SAB de CV Earnings Call
Oct 24, 2017 AM EDT
BACHOCOB.MX - Industrias Bachoco SAB de CV
Q3 2017 Industrias Bachoco SAB de CV Earnings Call
Oct 24, 2017 / 02:00PM GMT
==============================
Corporate Participants
==============================
* 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
==============================
Conference Call Participants
==============================
* Miguel Ulloa Suárez
BBVA Corporate and Investment Bank, Research Division - Research Analyst
* Miguel Angel Tortolero Casarrubias
* Pedro Leduc
JP Morgan Chase & Co, Research Division - Senior Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Welcome to the Third Quarter 2017 Industrias Bachoco Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Guadalupe Jáquez Martínez. Ms. Jáquez Martínez, you may begin.
------------------------------
Maria Guadalupe Jáquez Martínez, [2]
------------------------------
Thank you. Good morning, and welcome to Bachoco's Third Quarter 2017 Conference Call. We released our financials yesterday after market close. 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 events, future events and performance. These 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 or 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 statements, whether as a result of new information, future events or otherwise.
Lastly, under (sic) [unless] otherwise indicated, the amounts mentioned in this conference will be figures of 2017 with comparative figures of the same period of 2016 in Mexican pesos. As a reference, the exchange rate as of September 30, 2017, was MXN 18.18 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.
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [3]
------------------------------
Thank you, Maria. In Mexico, we continue with relatively high inflation rates. However, the economy continues growing. During the quarter, the Mexican peso appreciated 4.9% of the average when compared with the same quarter of 2016. But it showed volatility at the end of the quarter.
As you know from the news, Mexico was affected by a couple of earthquakes in September. And even if it did not have any material damage to our facilities, it disrupted the economy of several regions of the country, mainly in the Central and Southern regions of Mexico. Our company focused in providing immediately assistance to our employees and their families affected by this event and helped those affected by donating prepared food directly and through some of the food chains we work with, in coordination with Mexican authorities.
In Mexico this quarter behaved in accordance with usual seasonal behavior of the Mexican poultry industry, meaning a more challenging quarter than the second quarter of the year. In the poultry industry, we continue observing good levels of demand for poultry products in all the commercial channels in which we compete in Mexico and in the United States for most of the quarter.
Even though the demand weakened at the end of the quarter in Mexico, the balance was -- the balance -- there was a balance between supply and demand as we estimated normalized growth rates in the Mexican and in U.S.A. poultry industry. According to the information reported by USDA, the U.S. poultry industry grew [as well as] 3% during (inaudible). Maybe we will see more supply in the near future. In general, we observed better chicken prices in both markets compared with the equivalent period of 2016.
Regarding the table egg industry, even as we continued observing other supply conditions for most of the quarter, conditions improved at the end of the quarter. On the raw material side, we saw relatively stable condition in the grain market [adue] as the evolution of the crops behaved as suspected in the U.S.A. and in Mexico. We did not see any material increase of imports of chicken from the United States or Brazil into Mexico.
In regards to our company, in July, we announced the acquisition of La Perla, a pet food company located in Mexico, and Albertville Quality Foods, a company located in Alabama. In this quarter, we have consolidated the result of those companies. Albertville Quality Foods was operating most of the quarter whereas La Perla practically had no effect so far.
We increased sales in our main product lines. So we also increased our total sales for the quarter by 12.7% when compared with the third quarter of '16. Our U.S. operation represented already more than 30% of our total sales in peso terms. Even when we consolidate -- the consolidation was affected by the Mexican peso appreciation, as I mentioned before. Our operation continued delivering positive [impressive] results as we continue improving our sales mix and as we reduce our exposure to the commodities market.
The condition mentioned before and keeping our SG&A under 10% of our total sales has allowed -- allows to reach an EBITDA of MXN 1,440 million in the quarter. This represents an increase of 17.6% versus the EBITDA reported in the same period of 2016. Our EBITDA margin was 10.2% better than the 9.8% we reached in the third quarter of '16. We continue working toward our plans for growth both organically and through business arrangements. Our balance sheet continues to be strong with a net cash nearly MXN 11,000 million, which will enable us to continue supporting our growth plan.
Now I will turn the call over to Daniel for a discussion for the financial results.
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [4]
------------------------------
Thank you, Rodolfo, and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company's third quarter of '17 net sales increased 12.7% in the quarter as compared with 2016. This increase is mainly a result of poultry price improvements during the quarter. This led us to an increase in sales of 13.8% for the 9 months of the year as compared with the same period of 2016.
As Rodolfo mentioned before, sales in our U.S. operations represented 30.2% of total sales, an increase of 25.2% that we reported in the equivalent quarter of 2016, mainly as a result of the consolidation of Albertville Quality Foods sales for most of the quarter. The cost of sales in the third quarter was MXN 11,732.3 million and MXN 34,727.8 million for the 9 months of the year. This represents an increase of 10.1% for the quarter and 12.9% for the year. These figures are results of increases in volumes sold and in particular for the quarter, higher unit costs in peso terms as we move away from commodities in our U.S. operation.
Gross profit for the quarter was MXN 2,483.9 million with a gross margin of 17.5%, an increase of 27.1% over the gross profit reported in the third quarter of 2016. For the 9 months of the year, we reached a gross profit of MXN 8,289.6 million with a margin of 19.3%. This amount is 17.3% higher than the gross profit reached in the equivalent period of 2016. Total SG&A for the third quarter of '17 was MXN 1,346.7 million and MXN 3,905.6 million for the first 9 months of the year, representing a 9.5% and 9.1% of total sales, respectively. We will be working to keep our expenses at the same level as a percentage of total sales.
Operating income for the third quarter of '17 totaled MXN 1,160.9 million, an operating margin of 8.2%, slightly better than the 7.9% margin reached in the third quarter of 2016. The operating income for the 9 months of '17 was MXN 4,420.7 million, an operating margin of 10.3%, higher than the operating margin of 10% reached in the same period of 2016. The EBITDA margin for the third quarter was 10.2%, an improvement when compared with the EBITDA margin of the third quarter of '17 -- '16, sorry. For the 9 months of the year, EBITDA margin was 12.2% versus the 11.9% reached in the same period (inaudible).
The net financial income for the quarter was MXN 193 million and MXN 220.3 million in the 9 months of 2017. This compares with MXN 136.2 million and MXN 470 million for the same period of 2016. Our total taxes were MXN 356.2 million for the quarter, 11.6% higher when compared with the total taxes reported in the same period of 2016. For the first 9 months of the current year, our income taxes were MXN 1,267.4 million, very similar to the income taxes that we reported in the same period of 2016.
All of the above led us to a net income of MXN 997.9 million for the quarter with a net margin of 7%. This income is 23.1% higher than the net income reached in the same quarter of 2016. For the first 9 months of the current year, net -- the net income totaled MXN 3,373.6 million with a net margin of 7.8% and 13% above of the net income of the corresponding period 2016. The net income per share was MXN 1.66 for the quarter and MXN 5.62 for the 9 months of the year.
Going into our balance sheet, we kept a healthy financial structure with an increase in total assets of 8.9% when compared with the year-end of 2016. Our net cash was MXN 10,787.5 million at the end of the quarter. Our CapEx was MXN 2,937.6 million, more than MXN 1,000 million above the previous year. We include here the property, plant and equipment of our last 2 acquisitions. The remaining was used to support our organic growth and maintain our facilities at high levels of productivity.
Well, that's it. And thank you, everyone. And I will turn the call back to Rodolfo for final comments.
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [5]
------------------------------
Thank you, Daniel. We are satisfied with the results achieved in the quarter. We are entering a challenging fourth quarter, where chicken prices are showing weakness in the U.S.A. and in Mexico. In the U.S.A., this is typical at this period of the year. And in Mexico, we expect prices to recover as we approach the end of the year. We expect the poultry industry continuing with a normalized growth rate in both markets in which we participate for the remaining of 2017.
According to the USDA, evolution of the U.S. corn crop is good, leading us to think that the corn future will remain at similar levels in the following months. Also we are observing good corn crops in Mexico. We expect volatility in the Mexican peso, depending mainly of NAFTA negotiations. Even so, we expect to continue with our CapEx above maintenance levels while keeping an eye on the Mexican's micro economics [rate].
We will continue focusing on our growth plans and efficiencies initiatives. We will continue working to finish the complete integration of our 2 recent acquisitions into 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 [while] as best that we can, depending on the market condition in our industries.
With that, we will now take your questions.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions) And the first question comes from Pedro Leduc from JPMorgan.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [2]
------------------------------
A few here from my end. First, you mentioned a price decline or a price adjustment at the end of the quarters in the release. You just mentioned it in the call again for Mexico and the U.S. Is it above what you were imagining before, a? B, is it not tied up to perhaps lower corn prices both as Mexico and in the U.S.? And that will be the first one.
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [3]
------------------------------
We are seeing the price reduction in line with where we are expecting for this period of the year. Normally the beginning of the fourth quarter is typically the weakest month of the year. So it's in line what we were expecting. And we are expecting a recovery in -- on prices at the end of the -- on the quarter.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [4]
------------------------------
Okay, that's very useful. And then in the [stir in the South], did you face any earthquake-related disruptions both in Mexico -- well, mainly in Mexico? And in the U.S., did weather disrupt your operations? Anyhow, in other words, is there any nonrecurring negatives here in this third quarter that was already reported?
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [5]
------------------------------
We don't have any issue in our facilities. The disruption was in terms of the reach the market because some roads, some highways, some small towns were severely affected. And the consumption in those areas, mainly in the [live] market, was affected by no more than a week. And right now, the market and all the situation is running normal.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [6]
------------------------------
Okay. So from the 5% growth that you reported for Mexico this quarter, net sales year-over-year, would you say -- would you be able to quantify how much it would have been without these distribution-related disruptions?
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [7]
------------------------------
No, I think there was nothing relevant. I can say not more -- it's less than -- 1% or less. I think it's not there...
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [8]
------------------------------
It's not significant.
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [9]
------------------------------
[Wasn't relative] And after that, we recovered the market again and everything is running normal again.
------------------------------
Operator [10]
------------------------------
Our next question comes from Miguel Tortolero from GP -- GBM.
------------------------------
Miguel Angel Tortolero Casarrubias, [11]
------------------------------
My question is regarding the others category. In the last quarter, we have witnessed double-digit growth in net revenues. However, during this quarter, we see volumes growing over 4%, but revenue declining 1.4%. Could you give us more detail on the performance of the division?
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [12]
------------------------------
Well, the poultry volume in this quarter was -- in Mexico was -- the total was 2.8% in terms of volume in the quarter. And let's see then. That is for the 9-month period. The expansion was 2.7% in this quarter. More of it -- we have a reduction in compound feed. But in chicken and in total poultry, we had an increase in sales of 13.8% in the quarter compared with the last quarter. That is just in the chicken market. But [let's compare this] with the reduction in compound feed because these tons are too many tons in compound feed -- affected the total growth rate of that in terms of percentage of sales, and in volume.
------------------------------
Operator [13]
------------------------------
Our following question comes from Miguel Ulloa from Bancomer.
------------------------------
Miguel Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Research Analyst [14]
------------------------------
Just a quick one regarding volumes in the chicken industry here in Mexico. Could you provide some color on how was the behavior and what you're expecting heading into the fourth quarter?
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [15]
------------------------------
Well, our -- we consider that the growth in the chicken industry in this quarter was in line with the expansion of the chicken industry. So we calculate that the chicken industry in Mexico in this quarter is around 2.5%. And I see the fourth quarter a little bit above this level, around 3%. And we are going to expand our production in terms of volume, around 3%. Taking in account that the month of December, we have a very good demand normally, so we expect that the expansion of the industry and the expansion of the company around 3%.
------------------------------
Miguel Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Research Analyst [16]
------------------------------
Sorry, this is volumes or this is total sales?
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [17]
------------------------------
It's volume. That is volume. Total sales is going to depend [of the] -- on the prices of the end of the month of November and December. But we are expecting a price recovering compared with the last month of the third quarter and the first month of this quarter.
------------------------------
Miguel Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Research Analyst [18]
------------------------------
Okay, that's helpful. And regarding hedges, do you have any hedges in place for the coming quarters? Or do are more like...
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [19]
------------------------------
In terms of the raw materials, corn and soybeans, we just hedge the contracts that we have a fixed price with some customers. We don't hedge any other thing than that. We have acquired grains here domestically and imported. So it -- the only hedge that we have is for customers sales at a fixed contract or fixed price. And the other hedge, I don't know if you can mention...
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [20]
------------------------------
Yes. Complementing the answer, we also have a exchange rate hedge for our main rotisserie customers during the year. We typically fix some contracts with them, around no more than $30 million from the beginning of the year for the rest of the year, and -- but we start our hedge positions at MXN 20, MXN 20-something per U.S. dollar. And that's the reason because you probably are looking in our results a significant -- well, not significant but an important amount in our -- the mark-to-market valuations. And we expect to have this similar [force] for the next quarter if we maintain the same level of exchange rate. If not, we think we will reduce the level of impact in our P&L for the next quarter.
------------------------------
Operator [21]
------------------------------
Our final question comes from Pedro from JPMorgan.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [22]
------------------------------
In respect to the U.S. operations, and I'll break it into 3 parts. First, you reported net sales in pesos up 35% year-over-year. Obviously, this has been inflated by the consolidation of the new operations in the 8-K. Can you give us a sense of how your organic or ongoing operations performed in dollar terms? That's the first part for the U.S. And then the second, we previously understood that the U.S. [trade just] coming with lower margins than the consolidated business. Does that hold? And give us a sense of how much it diluted your overall margins. In other words, where would your reported 10% EBITDA margins be more or less, excluding the new U.S. operations?
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [23]
------------------------------
Well, our U.S. operations, the acquisition of Albertville Quality Foods represents around 25% to 30% of our -- before current operation in the U.S. That means that with this operation, we increased around 15% of our total volumes in the quarter. This operation is mainly value-added food and processed products. So that means that the prices of those products are a little higher than the mix that we have in our U.S. operation in total. So it represents an increase in dollars, around 10% -- sorry, 30% of our current operation.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [24]
------------------------------
Okay. So your ongoing operation -- you reported 35%. This is a 30%. So your ongoing operations were up about 5%.
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [25]
------------------------------
Yes.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [26]
------------------------------
Yes, okay. And Daniel, the profitability here, it's -- we can understand that it's lower than the consolidated figures that you have reported, similar or above?
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [27]
------------------------------
Well, the Albertville Quality Foods is mainly for the complete quarter in our figures. So we expect to have similar levels of revenues in the next. This is 2.5 months, so we expect similar, probably a little higher but similar amount of revenues and profitability.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [28]
------------------------------
Okay. But in terms of EBITDA margins, it's around the 10%? Or did it bring down the consolidated figure?
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [29]
------------------------------
Around 10%, I would say that.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [30]
------------------------------
For U.S. and Mexico, it was similar, the margins in the quarter?
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [31]
------------------------------
No, higher for Mexico. 10% for the total, the consolidated results.
------------------------------
Pedro Leduc, JP Morgan Chase & Co, Research Division - Senior Analyst [32]
------------------------------
And then higher Mexico [and lorder]. And in the U.S., are you seeing any significant shifts in pricing as well?
------------------------------
Daniel Salazar Ferrer, Industrias Bachoco, S.A.B. de C.V. - CFO and Comptroller [33]
------------------------------
Well, remember that the Albertville Quality Foods is a nonintegrated operation. And that means that the seasonability of this business is quite opposite of the integrated operation that we already have in the U.S. operation. So that means that in this particular quarter, we saw probably lower results than the regular that we want to see. We expect to have a recovery in the last quarter of the year.
------------------------------
Operator [34]
------------------------------
We have no further questions at this time. I'd like to turn the call back over to Mr. Rodolfo Ramos for final remarks.
------------------------------
Rodolfo Ramos Arvizu, Industrias Bachoco, S.A.B. de C.V. - CEO [35]
------------------------------
Okay. Thank you, everyone, for joining us this morning. If you have any further questions, please contact our Investor Relations area. They will be glad to assist you with your questions. Thanks.
------------------------------
Operator [36]
------------------------------
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
------------------------------
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.
------------------------------