Grupo Bimbo, S.A.B. de C.V. (GRBMF) Q1 2023 Earnings Call Transcript

Grupo Bimbo, S.A.B. de C.V. (OTCPK:GRBMF) Q1 2023 Results Conference Call April 27, 2023 7:00 PM ET

Company Participants

Daniel Servitje - Chairman and CEO

Diego Gaxiola - CFO

Rafael Pamias - COO

Mark Bendix - EVP

Conference Call Participants

Ben Theurer - Barclays

Ricardo Alves - Morgan Stanley

Alan Alanis - Santander

Alvaro Garcia - BTG Pactual

Fernando Olvera - Bank of America

Operator

Welcome to the 1Q ‘23 Grupo Bimbo Results and Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Daniel Servitje. Please go ahead.

Daniel Servitje

Thank you very much, and good afternoon, everyone. Thank you for joining us. Connected on the line today is our CFO, Diego Gaxiola, COO, Rafael Pamias; Mark Bendix, Executive Vice President; and several members of our finance team.

We kicked off the year with a very strong first quarter. We continue to see the benefit from the pricing strategy implemented during 2022, which enabled us to surpass our expectations and last year's results. Our sales reached historic levels for the first quarter. Our EBITDA margin closed at 12.9%. We continue to post a double-digit 10-year cash for sales and adjusted EBITDA. And our operating margin, excluding the net noncash benefits registered during the first quarter of 2022, strongly improved by 70 basis points, reaching 10%. We saw positive volume performance in some business units, including Brazil and [indiscernible] and strong sales growth in local currencies in all the regions. Our innovation index keeps growing, in fact, year back to the levels before the pandemic began. I am very proud of the hard work of our associates around the globe and our resilience to navigate in a difficult, high inflationary environment. We will continue to invest behind our brands and assets to capture growth opportunities and fully expect to continue gaining efficiencies throughout the supply chain. So, we remain optimistic about the remainder of the year.

Now looking into our results by reading for the quarter. North America delivered strong coat performance, growing 15% in dollar terms, mainly due to the carryover pricing effect since we experienced a volume pressure as we cycled last year's onions. Despite the challenging inflationary environment and a difficult comparison base, we were able to maintain our adjusted EBITDA margin at 10.3%. This reflects an outstanding effort from our teams successfully navigating unprecedented inflation and ongoing difficult labor environment and benefiting from the investments we are making behind our brands as well as favorable product mix. We are still expecting a solid 2023, more specifically in the back half of the year, we hope we'll start to see volumes improving as we cycle the price increases as well as realized productivity benefits throughout our business. During the quarter, we completed a small acquisition of a bakery, natural bakery in Winnipeg, Canada. This company is a one bakery operation specializing in the production and sales on a variety of white breads, strengthening our health and wellness portfolio.

In Mexico, sales strongly improved by nearly 20% attributable to favorable price product mix as well as price increases. Most categories and every channel posted double-digit growth, most notably the mobile channel. Despite commodity pressure, adjusted EBITDA margin of standard 10 basis points, reflecting the strong sales performance and efficiencies in our distribution network such as the implementation of digital solutions. Although during the fourth quarter of last year, we saw some volume pressure in Mexico, we're starting to see positive trends sequentially, especially in March. So, we remain optimistic about our performance in the coming months.

In EAA, excluding FX effects, sales increased 31%. This was mainly due to the implementation of price increases and the recovery of our QSR business, most notably in Asia, coupled also with the acquisition of St Pierre and VelPitar. The adjusted EBITDA margin expansion of 140 basis points resulted from the strong sales performance, lower commodity costs and productivity initiatives in some countries. We continue to see an unfavorable price/mix effect since consumers are trading down in markets like Spain.

Finally, moving on to Latin America, excluding FX effect, net sales increased 24% due to positive price mix and strong volumes in Brazil. Almost every country posted double-digit growth in local currency. And as I mentioned, the performance of Brazil and the Latin central division were quite notable. We reached a record adjusted EBITDA margin for the third quarter, and this was attributable to several factors, including the operational leverage from incremental sales, the productivity benefits across the panic chain and the strong results in the I would like now to turn over the call to Diego, who will walk you through our financials. Please Diego go ahead.

Diego Gaxiola

Thank you, Daniel. Good afternoon, everyone, and thank you for joining us today. I would like to start with a summary of our financial results for the quarter, which continue to be very strong, especially when we consider the challenging comparison from last year. A high inflationary environment is still higher commodities when compared to last year because of the hedges we implemented during the back half of 2022, a complex operating environment in some markets and a negative effect from FX rate. Net sales reached a record level of MXN 99.6 billion, almost a 10% growth. And our adjusted EBITDA reached MXN 12.9 billion, while our margin expanded 40 basis points. All this attributable to the strong sales performance and the efficiencies across the supply chain. This happened in a quarter where the FX rate plays an important volume. Because on one side, we have the negative translation effect on our financials. -- while on the other, we haven't seen yet the benefit from a strong peso in our cost of sales due to the hedging strategy. As a result, during the first quarter in pesos, we see a lower top line growth and we still have the pressure on our gross margin.

The operating margin contraction was fully related to the noncash benefit we had during the first quarter of 2022 or $73 million, which was related to the net liability [indiscernible] with a substantially lower noncash impact of $3 million from the remaining net liability that we had during this quarter. Remember, the volatility in our P&L created by this liability will lessen substantially, because the ARPA rescue enabled us to significantly reduce our net provision. So, excluding these mix effects and even considering what I mentioned about FX and inflation, the operating margin expanded 70 basis points.

Our full year our cost of financing declined by over 7% because of a stronger peso. And the effective tax rate stood at 33%, which reflects the needs of countries with a lower effective tax rate as well as the benefit from our turnaround businesses that have been performing substantially better than in previous years. As a result, our net majority income declined 9.4%, but excluding the mix effect of last year it increased 42% and the margin expanded 90 basis points. Our return on equity, which does not consider the Ricolino sale or the net effect closed at a record level of 16.4%, 220 basis points higher than the first quarter of last year.

Now turning to the balance sheet. Net debt to adjusted EBITDA ratio closed at 1.7x, and our total debt closed at MXN 93 billion. higher when compared to December 2022. This is because given our outstanding performance and solid capital structure, we call in full our subordinated perpetual notes on the first call date. We temporarily used our $1.93 billion revolving credit facility, which we recently renewed to redeem these bonds. And I'm sure you saw that yesterday, we launched a potential sustainability-linked bond in Mexico to optimize our financial profile. It is important to clarify that at the end of the first quarter, our short-term debt increased 20% of the total. This is because the potential notes payment notification was made in March, but we already paid with the revolving credit facility. And as of today, it has been moved to a long-term component of the debt. I am pleased to share with you that ISP and Fitch Ratings operated Grupo Bimbo global rating to BBB+ from BBB -- and Moody's also upgraded our rating from Baa2 to Baa1. This reflects our solid business position, a strong financial profile and long-term view while reaffirming our commitment to investment ready. Our net operating working capital, which mainly considers accounts receivables, inventories and suppliers, has improved significantly by nearly 1.5 days over the first quarter of 2022, which is an equivalent of close to ARS 1.7 billion.

Lastly, I would like to mention that given our strong results, our present strategy, our market penetration, the brand leadership and a continued strong demand, we are maintaining our guidance for the full year. We believe that sales will increase at a mid- to high single-digit rate. We are still expecting adjusted EBITDA to grow at a high single-digit rate, which will translate into a slight margin expansion. Remember that we are expecting an impact on our results from inflation, particularly during the first half of the year, which will gradually lessen, and we will see tailwinds during the second half of the year in this regard. So, this coupled with the operating leverage from our sales growth and also our productivity benefits from past investments in CapEx and OpEx as well as a positive effect coming from the FX rate, we have resolved in a slight margin exposure. We can now proceed with the Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Ben Theurer from Barclays.

Ben Theurer

Yes. Thank you very much, and good evening, and Daniel and Diego, Congrats on the strong results here. To begin with, Diego, maybe one for you on just the guidance you reiterated and obviously, the mid- to high single-digit sales growth. Now the question really is, it seems like that in the first quarter, FX was a clear headwind, right? The main FX net would have been almost double the growth than what you reported on top line. So, if we think about it go forward, that guidance for the year, mid- to high single digit, what are like kind of your FX assumptions behind is that just staying at that high Mexican peso level where we are right now? Or what are you factoring in? And what is -- is that just going to be the case, given the start in 1Q, where do you see it essentially coming down just in order to make it to the guidance because so far, you're running ahead -- that will be my first question, and then I have another one just on capital allocation.

Diego Gaxiola

Yes. Sure. Thank you, Vic. I want to tell you, there are several factors why I mean we're still maintaining the initial guidance. what has to do with the FX. So, we're assuming that we will continue to see a strong peso at least in the consideration for the guidance, not [indiscernible] speaking for the whole strategy from financial decisions in the company. But just as an assumption to arrive with a number in Mexican pesos. We believe that the peso will still be strong, and this will play against the top line growth. You mentioned that it was almost double the effect of the first quarter is less because yes, the peso is appreciated close to 10%, and we have around 70% of our revenues. So, I mean [indiscernible], the effect was, almost 6 percent of sales. So, without that effect, will be like a 40% growth, which -- I mean in -- excluding these effects, effect, it's huge, it's definitely substantially above our expectation. As Daniel mentioned in local currency, Latin America expanded double digits and North America, also 15%. So, it was a very strong performance in local currency, but we're still having these effects. And we think we will continue to face this negative effect on the topline.

Now another factor to take into account is that the second quarter and third quarter of last year were also outstanding. We're going to start to lose most go by and quarter passes, we will start to lose the effect the carryover effect of the price increase. I'll say that today, we're seeing almost the full effect even in some operations that we increased prices at the very end of last year, we see the effect that in many others, we had several price increases. So as time goes by, the positive effect from previous price increases, it's going to be less and less. So, keep that in mind because it can be a little bit misleading when we see first quarter with this growth, almost 10% in Mexican pesos and again, a mid-teen growth without the FX, I [indiscernible] to take all this into account. And that's why we think that we're going to land on a conservative perspective between mid- to high single digit. That's I don't know if that was clear.

Ben Theurer

No, that makes sense. And I think it's just along the lines, so goes gross profitability. Now my other question, I'm not sure who view wants to take it. But given the strength of the balance sheet, given that you've already laid out that you're obviously going to invest a lot into the own business, reinvesting into the business to drive growth to be prepared, expecting a fairly high CapEx for this year. But aside from that, it seems there's still a lot of financial flexibility. So how should we think about what else can you do to support growth at the Bimbo level? Is it looking for more smaller inorganic growth opportunities? Or do you think you're getting to the point where it's about to maybe return some of that cash to shareholders?

Daniel Servitje

If I may, then, I mean, we still see a lot of opportunities in the grain-based foods business in which we are. So definitely, our business is not local, it's not only Mexico or U.S., it's global. And with -- the way we are organized, we see that we still have a lot of opportunities for organic and also from nonorganic growth. And that's why we are continually looking at opportunities on both ends. But having said that, we will remain also reasonable in terms of what can we digest and what retail do so that whatever future path of growth, it's done on a way which we can take it from one decision is going to another.

Diego Gaxiola

Complement, Daniel. I mean, with your question, yesterday, we had the general meeting, the shareholders meeting with the declared dividend for EUR 0.78. This is a 20% growth as compared to the in the regular [indiscernible] year because remember that we then had an extraordinary dividend with the sale of Ecoline. And this is close to $200 million. So yes, we are increasing the amount of cash that we're giving back to shareholders, but on the capital allocation strategy of the company, regardless of the leverage, we're still starting in the same position. Priority #1 is to have and use that flexibility for our own CapEx needs, either for maintenance and for growth and productivity. And second [indiscernible] we have several opportunities in the pipeline, however, that it is not only a 1 year of intensive CapEx. Many of the projects that we are tasting today will continue to demand resources in 2024.

Operator

Your next question comes from Ricardo Alves from Morgan Stanley.

Ricardo Alves

Thank you very much. Daniel, Diego. Congrats on the numbers. Mexico, my first question is on Mexico. Very strong revenue performance, again, quite remarkable. When you look at the margin, I don't mean profitability, sorry, but on the margin, like April, how is the consumption environment -- is it still support? I believe that you raised prices recently, right? So just curious about any reaction here, any elasticity whatsoever. Maybe some volitive commentary. If you can provide that, we noticed the convenience store commentary. So, I don't know if maybe the channel had a positive effect for your volumes in Mexico, maybe volumes on the margin are recovering or perhaps some specific commentary around the main categories of products that are surprised you to the upside? Second question I had was Latin America. Latin America surprised us positively again, 11% margin. So, if I recall correctly, we're getting closer and closer to what you viewed as a long-term sort of target profitability. So just wanted to make sure that that's the case. We're getting closer or maybe if there was something that was a one-off benefit that you saw in Latin America, maybe there could still be some volatility throughout the year? Or maybe that's it. We're already there, and this is the kind of level of sustainable margin that we could work on Latin America going forward. Appreciate the time.

Diego Gaxiola

Yes, Ricardo, there were some first months in Mexico talking about price increases. They were not right. So, I mean we did have very minimal price increases in very few products, but we haven't had any other price increases this year. So -- that's just my comment. But I would like to let wrap up -- as to address both of your questions. So, Rafael, do you want to join any piece?

Rafael Pamias

Yes, everybody. Can you hear me? Can you... Yes. Yes. Well, to begin with the first question, I mean, we are quite happy with the resilience of Bimbo Mexico. We have Q1 '23 results, as you have read it, I mean 20 in net sales and EBITDA. I mean, we were beating our expectations. And what is good about it is that we are gradually correcting our volume trend. So, in Q1 2023, we sold more than Q4 '22. March is flat. And we are starting already a lot of programs to grow volume, and they are already in place, and we see some good spikes in volume where we have started them. Just to remember or remind you, it is about saturating our distribution. We still can have the opportunity to sell in more places.

Additionally, we are quite good at activating where we are with better exhibitions. And as Daniel said before, our innovation index is back to pre-pandemic levels. So, we do feel that we have the muscle in place to beat, I would say, somehow flattened categories. So, I think that we're going to be having better results in Q2 and Q3 on the volume side. This would be -- and this would be applicable to most channels. and most categories. Because on innovation, we have lots of channel category-specific innovation and activation. So that would be on Mexico, if you are okay. If we jump into LatAm, yes, we're very pleased with the results in LatAm. I have to tell you 2 things. The first one is the confirmation already after 1 or 1.5 years of the positive turnaround in Argentina and Brazil. You might remember, maybe this has been shared in previous calls that we engage ourselves in a full turnaround -- full potential turnaround program in these 2 countries that had been falling behind for many quarters. And we resetted the ambition, the strategy and the teams actually. And we still feel quite confident that in those 2 geographies, we're going to keep enjoying a positive trend. The second thing is that we have a bunch of countries that we put under the lack of Latin center, basically from Guatemala to Ecuador. And in there, we have traditionally strong brand presence in all categories, strong sales and manufacturing footprint and good teams. And they keep overdelivering even in the middle of the pandemic and even in this quarter. So, I would say, yes, we feel comfortable that those EBITDA levels should be sustainable in the midterm. That would be it.

Operator

Your next question comes from Alan Alanis from Santander.

Alan Alanis

Congratulations, great results. My question has to do with the United States. And let me give some context. I mean we're seeing a very steep decline in the price of wheat, 40% year-over-year. We're also seeing a decline in the price of coal, which is one of your main sweeteners in oil, energy, 24%. What's the risk that we can start getting into some sort of price wars in the United States? That would be the question. And if you -- the second question would be, are you seeing any down trading or increase in the private label consumption with the weak economic data that we're getting from the United States? And are you obviously considering all of this within the [indiscernible] guidance. That will be my questions.

Daniel Servitje

Thank you, Alan. We have here Mark Bendix he's responsible for North America. I don't know, Mark, if you want to address Alan's questions.

Mark Bendix

Yes, Daniel. Thanks for your question. We are seeing a little bit of relief in the commodity markets, but remember that we're looking out and we're trying to hedge forward. But our business has really remained resilient. Obviously, you've seen we've delivered another strong quarter, but we still have to be vigilant about mitigating inflation. So that includes looking at strong execution, cost savings initiatives and initiatives to have productivity improvement in everything we do. And then tying in with your extended question, this is, well, experiencing elasticity that's well below historical levels. So, we do think that commodities will moderate in the back half, but we haven't seen really any pressure to that extent yet, right? So, we're still optimistic, and we'll still continue to work against all of those initiatives to offset. But we do need to remain vigilant because it is a dynamic environment with commodities right now.

Alan Alanis

Yes, that's very clear. And are you seeing any downgrading so far or not?

Mark Bendix

Yes. That was the second part. So, we saw through the end of last year, we did see some trade down to private label that has flattened out. But I would tell you that we're seeing consumers still under pressure because of inflation. But we're also still seeing really nice growth in our premium products and snacks. So, we need to be vigilant and continue to look and see, but it hasn't been the migration that you necessarily would have expected to private label, and we've all been a little bit surprised by that.

Alan Alanis

Thank you so much.

Diego Gaxiola

Let me jump in just with an additional comment that has to do with the decrease in the cost of grid and some other commodities, but you're right. Consider that a year ago, we have the crisis from Russia, Ukraine. So, it's not a fair comparison. It was the peak of the cost of commodities. We're working with today, yes, it is dramatically below a year ago, but it's still at a high leverage. I mean, just to give you some numbers, for the [indiscernible], we was trading more on the range of $4 to $5 per bushel. It went up to $14, $13, $14 a year ago, now is trading around 8%. So, it is still high. I mean we're talking about 70%, 100% increase as compared to 3 years ago. So, I don't think this is a price that will create and excess offer in the market because it is cheap is cheaper than a year ago, but it is not cheap as this.

Alan Alanis

Yes, that historical context is very easy. Thank you so much. And again, congratulations on the results. Thank you...

Operator

Thank you -- your next question comes from Alvaro Garcia from BTG Pactual.

Alvaro Garcia

Hi, gentlemen, thanks for the space for questions. One question on China. I'm not sure if maybe Mark wants to take it, maybe then [indiscernible]. We've seen a lot of news from the KFCs and the downs of this world ramping up growth again. In your last call, you were still relatively cautious with regard to potential investments in China. Has your thinking the change? And I'm referring to QSR specifically.

Mark Bendix

Yes. Actually, I mean, we are investing in China. It's a growing business for use in the PSR channel. And we are investing to support our customers as much as we can. But it's not -- I mean, in the context of group oils is not necessarily the main bunkering for us.

Alvaro Garcia

Great. And then just one quick housekeeping item with [indiscernible]. There was a significant sort of onetime expense in the fourth quarter in Mexico this past fourth quarter. Is it fair to consider that for your guidance for this year in terms of margin expansion? Or should we not consider that for the margin expansion?

Diego Gaxiola

No, no. Basically [indiscernible] included in the ride. The full year is not as material in the fourth quarter is going to help on the comparison. Now what I will say that in the full year within the range that we're providing the [indiscernible]] is not making the reasons, but it is incur.

Alvaro Garcia

Great. Thank you very much.

Operator

We have a follow-up question from Ricardo Alves from Morgan Stanley.

Ricardo Alves

Very quick one. Europe revenue is also surprised to the upside. Just wanted to -- can you help us assess how much of that was M&A driven? That's it. Thank you...

Diego Gaxiola

It was the least material part, Ricardo. We have basically 2 M&A transactions claimed in the numbers. One is St Pierre that was done at the end of last year, September, if I recall correctly. Half of the revenue is more or less in Europe and the other companies in the U.S. So, it is not very big. And the other one, with a little bigger effect is vel Vita, the entrance of oven, which, of course, helps in terms of the growth and the profitability of the region. What I would say it's small as compared to the size of the whole radio, which is almost 10% of our revenues. -- helping or not early making the refer.

Ricardo Alves

Got you. Thank you so much

Operator

Your next question comes from Fernando Olvera from Bank of America.

Fernando Olvera

I just have one is related to Mexico. Can you elaborate around the efficiencies that you obtained in the distribution network? Any color about the savings you obtained and how sustainable are this? That would be very helpful.

Mark Bendix

Maybe I can take this one, Daniel. Yes. Please go ahead. Yes. What I can say is that, I mean, the Mexico distribution system is phenomenal, a monster machine serving more than 1 million point of sales. So, when we talk about efficiency, we talk about it gradually, okay? So, we have started our change of model, and we're seeing good waves in increasing volume and reducing costs. And we believe that we have enough pilots develop in different geographies and different channels that would show that when we deploy 100% the new model of sales that those efficiencies are going to stand. So, we feel quite comfortable and quite happy of mutating to better place our sales model. We have good results in top line and bottom line.

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Daniel Servitje

Well, I think that's all. Thank you very much for attending the call. And as always, the Investor Relations group is totally open for any questions or comments you might have. And hoping to you in the next quarterly question. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.