Grupo Bimbo Sa Spns/Adr

Welcome to the 1Q23 Grupo Bimbo results and conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keyboard. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Daniel Ceviche. Please go ahead.

Thank you very much, and good afternoon, everyone. Thank you for joining us. Connected on the line today is our CFO, Diego Regiola, CFO, Rafael Paneas, 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 results. Our sales reached historic levels for the first quarter. Our EBITDA margin closed at 12.9%. We continue to post double-digit 10-year caps for sales and adopted EBITDA. And our operating margin, excluding the NEP's non-cash benefits, registered during the first quarter of 2022, strongly improved by 70 basis points, reaching 10%. It's a positive volume performance in some business units, including Brazil and Vivo PSI, and strong sales growth in local currencies in all the regions. Our innovation index keeps growing, in fact, We're back to the levels before the pandemic began. I am very proud of the hard work of our associates around the globe and their 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 the results by reading for the quarter, North America delivered strong supply 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 Omicron surge. 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 an ongoing difficult labor environment, and benefiting from the investments we are making behind our brands, as well as available products. We are still expecting a solid 2023. More specifically, in the back half of the year, we hope we will start to see volumes improving as we cycle the pricing cruises, as well as realize the productivity benefits throughout our business. During the quarter, we completed a small acquisition of a bakery, a natural bakery, in Winnipeg, Canada. This company is a one bakery operation, specializing in the production and sale of a variety of rye breads, strengthening our health and wellness portfolio. In Mexico, sales strongly improved by nearly 20% attributable to favorable price product mix, as well as pricing features. Most categories and every channel has a double digit growth, most notably the northern channel. Despite commodity pressure, adjusted EBITDA margin expanded 10 basis points, reflecting the performance and efficiencies in our distribution network, such as 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, especially in March, so we remain optimistic about our performance in the coming months. In EAA, including FX Effect, 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 Belpitar. The adjusted digital margin expansion of 140 basis points resulted from the strong sales performance, lower commodity cost, and productivity initiatives in some countries. We continue to see an unfavorable price-mix effect since consumers are trading down in markets like Spain. 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 has 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 trades, the productivity benefits across the value chain, and the strong results in resume. I would like now to turn over the call to Diego, who will walk you through our financials. Please, Diego, go ahead. 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 at 99.6 billion pesos, almost a 10% growth. And our adjusted EBITDA reached 12.9 billion pesos, while our margin expanded 40 basis points. All this is a trio tool to the strong sales performance and the efficiency across the supply chain. This happened in a quarter where the SX rate played an important role, 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 growth margins. The operating margin contraction was fully related to the non-cash benefit we had during the first quarter of 2022 of $73 million, which was related to the NEPS liabilities. coupled with a substantially lower non-cash 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 MEPS provision. So, excluding these MEPS effects, and even considering what I mentioned about effects and inflation, the operating margin expanded 70 basis points. Our full year – our cost of financing declined by over 7 percent because of a stronger patient, 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 minority income declined 9.4%, but excluding the MEPS effect of last year,

it increased 42% and the margin expanded 90 basis points.

Our return on equity, which does not consider the recolino sale or the next 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 pivotal ratio closed at 1.7 times. And our total debt closed at 93 billion pesos. 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 crate facility, which we recently renewed to redeem these bonds. And I'm sure you saw that yesterday we launched a potential sustainability link bond in Mexico to optimize our financial profiles. 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 perpetual notes payment notification was made in March, but we already paid it with the revolving credit facility, and as of today, it has been moved to the long-term component of the debt. I am pleased to share with you that S&P and Fitch Ratings upgraded Group of BIMBO Global Rating to BBB Plus from BBB. And Moody's also upgraded our rating from BAA2 to BAA1. These reflect our solid business position, strong financial profile, and long-term view. while reaffirming our commitment to investment grades. Our next 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 the equivalent of close to 1.7 billion pesos. Lastly, I would like to mention that given our strong results, our pricing strategy, our market penetration, the brand leadership, and a continuous 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 dividend 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, will result in a slight margin expansion.

We can now proceed with the Q&A session.

Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Your first question comes from Ben Thera from Barclays. Please go ahead.

Thank you very much, and good evening, 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? I mean, FX neutral 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 that, just staying at that high Mexican peso level where we are right now, or what are you factoring in? And what if that's just going to be the case given the start in one queue? 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 would be my first question, and then I have another one just on capital allocation. Yes, sure. Thank you, Ben. Let me tell you, there are factors why we're still maintaining the initial guidance. One has to do with the effects. So we're assuming that we will continue to see a strong peso, at least on the consideration for the guidance, not necessarily speaking for the whole strategy from financial decisions in the companies. 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 on 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, it is big. The effect was, I don't know, 6% at funds. So without that effect, it would be like 40% growth, which, I mean, including 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 these negative effects on the total. Now, another factor to take into account is that the second quarter and third quarter of last year were also outstanding. But we're going to start to lose, as months go by and quarters passes, we will start to lose the effect, the carryover effect of the price increases. I'll say that today we're seeing Almost the full effect, even in some operations that we increase prices at the very end of last year, we see the effect. But in many others, we have several price increases. So as time goes by, the positive effect from previous past price increases is going to be less and less. So keep that in mind because it can be a little misleading when we see First quarter, with this growth, almost 10% in Mexican pesos, and again, a mid-team growth without the effects, I think people are going 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 digits. That's what I'm talking about. I don't know if that was clear. Now, that makes sense and I think it's just along the lines, so goes profitability. Now, my other question, not sure whom of you 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've gotten to the point where it's about to maybe return some of that cash to shareholders? Yes, if I may, Ben, I mean, we see a lot of opportunities here. in the grain-based fruits business in which we are. Definitely, our business is not local. It's not only Mexico or the U.S. It's global. And with the way we are organized, we see that we have a lot of opportunities for organic and also for from non-organic growth. And that's why we're 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 not can we do so that whatever future path of growth it's done in a way in which we can take it from one position strength to another. Okay. Thank you very much. Congrats again. Let me just compliment Daniel with your question. Yesterday we had the general meeting, the shareholders meeting, where we declared a dividend for 78 cents. This is a 20% growth. as compared to the regular dividend of last year, because remember that we then had an extraordinary dividend with the same of Ecolino. 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 standing in the same positions. Priority number one is to have and use that flexibility for our own CAPEX needs, either for maintenance and for growth and productivity. And second, we have several opportunities in the pipeline. And remember that it is not only a one year of intensive CAPEX. Many of the projects that we are starting today

will continue to demand resources in 2024. Okay, perfect.

Thank you. Your next question comes from Ricardo Alvarez from Morgan Stanley. Please go ahead.

Thank you very much. Hey, Danielle, Diego, thanks for the call. Congrats on the numbers. 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 supportive? I believe that you raised prices recently, right? So just curious about any reaction here, any elasticity whatsoever. Maybe some qualitative 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 surprising 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 margins that we could work on Latin America going forward. Appreciate the time. Thank you. Yes, Ricardo. There was some in Mexico talking about pricing increases. They were not right. So, I mean, we did have very minimal pricing increases in very few products, but we haven't had any other pricing increases this year. That's just my comment, but I would like to let Rafa Pane to address both of your questions. So, Rafa, if you want to join in, please. Yes. Hello, everybody. Can you hear me? Can you guys hear me? Yes. Yes. Well, to begin with the first question, I mean, we are quite happy with the resilience of BIMBO Mexico. We have a good Q1, 23 results, as you have read it. I mean, 20 is 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 barrel 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. And this would be applicable to most channels and most categories, because on innovation, we have lots of channel slash 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 two things. The first one is the confirmation already after one or one and a half 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 two countries that had been falling behind for many quarters. And we reset the ambition, the strategy, and the teams, actually. And we still feel quite confident that in those two 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 LAC or Latin Central, basically from Guatemala to Ecuador. And in there, we have traditionally strong brands, presence in all categories, strong sales and manufacturing footprint, and good teams. And they keep over delivering, even in the middle of the pandemic and even in this quarter. So I would say, yes, we feel comfortable that those maybe the levels should be sustainable.

That's very helpful. Very helpful, appreciate. Thank you.

Your next question comes from Alan Alanis from Santander. Please go ahead.

Thank you so much for taking my question, and 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 corn, which is one of your main sweeteners, and 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 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 context of your guidance? That would be my question. Thank you so much.

Thank you, Roland. We have here Mark Bendix, and he's responsible for North America. And I don't know, Mark, if you want to address Alan's questions. Yes, Danielle, thanks so much. And Alan, 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 while 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. 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.

Yeah, that's very clear.

Are you seeing any downgrading so far or no? 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. Thank you so much. Let me jump in just with an additional comment that has to do with the decrease in the cost of wheat and some other commodities, but you're right, as I usual, Consider that a year ago, we had the crisis from Russia-Ukraine. So it's not a fair comparison. It was a peak in the cost of commodities. We're working with today. Yes, it is dramatically below a year ago, but it's still at a high level. I mean, just to give you some numbers, before the pandemic, we were trading more on the range of $4 to $5 per bushel. It went up to $14, $13, $14 a year ago. Now it's trading around $8. So it's still high. I mean, we're talking about 70%, 100% increase as compared to three years ago. So I don't think this is a price that will create an excess offer in the market because wheat is cheap. I am cheaper than a year ago, but it is not cheap to feed.

Yeah, that historical context is very useful. Thank you so much, and again, congratulations on the results. Thank you.

Thank you. Once again, if you wish to ask a question, please press star then 1. The next question comes from Alvaro Garcia from BTG Petrol. Please go ahead.

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 Ian. We've seen a lot of news from the KSCs and McDonald's of this world ramping up growth again. On your last call, you were still relatively cautious with regard to potential investments in China. Has your thinking there changed? And I'm referring to QSR specifically. Yes, actually, I mean, we are investing in China and it's a growing business for us in the TSR China. And we're investing in our customers as much as we can. But it's not a, I mean, in the context of is not necessarily the main point of investment for us. Great. And then just one quick housekeeping item for Diego. There was a significant sort of one-time 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? Thank you. Well, no, definitely, Andrew, it's included in the guidance. The full year is not as material in the fourth quarter. It's going to help on the compliance. But I would say that in the full year, within the range, that we're providing the guidance is not making a difference, but it is included.

Great. Thank you very much. Thank you.

We have a follow-up question from Ricardo Alvarez from Morgan Stanley. Please go ahead.

Thanks for the follow-up. 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 again. It was the lead material part, Ricardo.

We have basically two M&A transactions playing in the numbers. One is Sampier that was done at the end of last year, September, if I recall correctly. Half of the earnings, more or less, are in Europe and another company in the U.S. So it is not very big. And the other one with a little bigger effect is Beltita, the entrance of Romania, which, of course, helped in terms of the growth and the profitability of the region. I would say it's small as compared to the size of the whole region, which is almost 10% of our revenues. So it's helping but not entirely making the difference.

Thank you so much. Thank you.

Your next question comes from Fernando Olvera from Bank of America. Please go ahead.

Hi. Good afternoon, everyone, and thanks for taking my question. I just have one related to Mexico. Can you elaborate around the efficiencies that you obtain in the distribution network any color about the savings you obtain and how sustainable are these, that would be very helpful. Thank you. Maybe I can take this one, Daniel. Yes, go ahead. Yeah, 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 developing 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 a better place our sales model. We have good results in top line and bottom line.

Great. Thank you. Thank you.

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

Well, I think that's all. Thank you very much for attending the call. And as always, the Investor Relations Group is totally up and close. Any questions or comments you might have, I'm hoping to see you in the next quarterly session. Thank you very much.

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

You may now disconnect.