Grupo Bimbo Sa Spns/Adr

Good day and welcome to the Group Obimbo second quarter 2023 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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 keypad. And 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 Daniel Cerviche, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and thank you for joining us. Connected on the line today is our CFO, Diego Raggiola, our COO, Rafa Pamiens, Mark Bendix, Executive Vice President, and several members of our finance team. I'm very proud of the remarkable results of the quarter. Despite the FX rate effect and a highly inflationary environment, we reached record levels of sales and EBITDA more than 4% and nearly 8% respectively. Excluding the FX effect, net sales grew at a double-digit rate, while the adjusted EBITDA margin expanded 50 basis points. The BIMBOK QSR and BIMBOK RACI organizations outperformed, and we saw strong sales growth and EBITDA margin expansion in all four regions, even considering the continued high inflation specifically in commodities and labor. This is a result of the strength of our branch and the hard work of our associates who have done an outstanding job at the execution, at the point of sale, with laser focus on baking and snack industries. We are committed to achieving our year-end objectives, and we continue to invest in our business to expand our brand globally. I would like to share with you that our venture capital arm, Gimbal Ventures, continue to invest across different startups and venture capital funds, all of which help strengthen our position within Foodtech, including Suscende, PickBright, Aleph, Scantec, Polira, Oble, Zero Card Company, Eranova, and the Guild Lab, LATAM. We are very proud to have issued our first sustainability-linked bond in Mexico, which Diego will touch on shortly. Also, 24 countries are now operating with 100% renewable electricity, because BIMBO in China, Morocco, and Kazakhstan holds the quarter, reaching this important milestone. Now, looking into the results by region for the quarter, North America delivered another strong quarter of growth, going nearly 12% in dollar terms, mainly due to the carryover pricing effect and favorable mix. Our dollar share grew across premium bread and snacks, and we saw improved volume trends sequentially for our branded business, while private label continued to increase. Our business has remained resilient as we navigate a dynamic economic environment and an evolving consumer. Like many CPG companies, we continue to experience cost pressures across many areas of our business, from rising input costs to labor. Despite continued inflation pressure, adjusted EBITDA margin expanded 20 basis points reflecting carryover pricing, strong execution, and improved efficiencies. And finally, during July, we have completed the acquisition of Natural Choice Bakery, a Minnesota-based co-manufacturer of bagels for DDU retailers and other customers. In Mexico, net sales grew 12.6%, which was primarily attributable favorable price product mix. We experienced growth across all the categories and double-digit growth in the convenience and retail channels. Despite the higher commodities due to the hedges in place, our adjusted EBITDA margin expanded 20 basis points because of the strong sales performance efficiencies in the distribution network and, for example, digital solutions. In EAA, excluding FX effect, sales increased more than 31%. This was mainly due to positive price mix across the region, most notably Iberia, continued strong performance of BIMBOK-USR following the reopening of China, and the organic contribution of DELTIPAL in Romania and Santiago. Despite continued high inflation and a challenging consumer environment in Iberia, adjusted EBITDA margin posted a 20 basis point expansion, mostly due to the strong sales performance and productivity initiatives. And finally, moving on to Latin America and excluding FX effect, net sales increased about 17%. reflecting roles in local currencies in every organization, highlighting Brazil, Chile, Argentina, and Central America. Available price mix across the region, strong volume performance in Brazil, which continues on a positive trend, and higher saturation. Adjustability of the margin reached a sustainable record level at almost 10% given the strong sales performance, improved product mix, and productivity benefits across the business. Margin expansion across the three organizations, highlighting Latin Sur and a historical quarter for Brazil. I would now like to turn over the call to Diego, who will be working for our financiers. Please, Diego, go ahead. Thank you, Daniel. Good afternoon. everyone, and thank you for joining us today. Our results of the second quarter continue to be very strong, especially when we consider a high inflationary environment. Still higher commodities were 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 strong negative conversion effect from the Mexican peso exchange rate. Moreover, we strengthen our financial profile with the issuance of the local bonds while maintaining a conservative and efficient debt profile, well spread over time with a responsible approach towards leverage, duration, and currency needs management. Our sales reached historic levels for the second quarter. Our EBITDA margin closed at 14%. We posted mid-to-high single digits, 10-year compounded annual growth rate for sales and adjusted EBITDA. And our operating margin, excluding the net non-cash benefit that we had during the second quarter of 2022, strongly improved by 50 basis points. This happened in a quarter where the FX rate plays an important role. Because on one side, we have the strong 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 in countries like Mexico. And as a result, during the second quarter in pesos, we see lower top line and EBITDA growth, and we still have the pressure on our growth margins. Financing costs more than doubled, mainly because of the FX effect and higher interest expenses. The effective tax rate stood at 34%. As a result, our net minority income declined by more than 35%. mainly because of the second quarter on 2022 METS effect. But excluding this effect, it declined by 11%. As we previously announced, Canada Red, our Canadian subsidiary, resolved allegations made against it as part of an investigation by the competition bureau into package red. We paid a 50 million Canadian dollars fine, equivalent to 38 million US dollars, concerning two pricing increases implemented more than a decade ago, when Canada Bread was owned by Maple Leaf Foods, not by Grupo B. In 2022, we recognized a provision in the North America segment because there was a high probability to reach an agreement with the authority. We did not make this provision public because it could potentially have a negative implication on being able to reach this agreement. Having said that, during this second quarter, we did not have an impact from the find. Turning to the balance sheet, net debt to adjusted GDP ratio closed at 1.8 times, and our total debt increased by 16.4 billion pesos, primarily because we temporarily financed our hybrid bonds with our committed revolving facility, and finally, through the successful issuance in the Mexican market of our first sustainability-linked bonds or Certificados Bursátiles, for 15 billion pesos. In fact, it represented the largest corporate SLB in the history of the Mexican market, the fifth SLB for scope three globally, and the first in Latin America, in line with our ambitious global long-term sustainability strategy. I am proud of the hard work of our team as this transaction strengthens our financial position while reaffirming our sustainability targets, especially our commitment to become a net zero carbon emission company by 2050. As a result of these issuance, the currency mix of our debt changed substantially. is denominated in Mexican pesos, 33% in U.S. dollars, 6% in euros, and 4% in Canadian dollars. Our net operating capital, which mainly considers accounts receivables and payable, as well as inventories and suppliers, increased significantly by 2.4 days over the second quarter of 2022, which is the equivalent of close to 2.5 billion pesos. And this was mostly due to increases in inventories. And lastly, I would like to give an update on our guidance for the year with two important effects. First, we are including the appreciation of the Mexican pesos. given that 70% of our business is outside of Mexico. And second, we are seeing better than expected trends in local currency. So, as compared to our initial sales guidance, we have an impact of more than six percentage points. But as in local currency, we are performing above our initial expectation We are adjusting our sales guidance only from mid-to-high single-digit to low-to-mid single-digit rates. This new FX adjustment in EBITDA represents close to 5 percentage points of negative impact on our growth. but also because of our performance being better than expected, we are now adjusting the guidance to the range of mid to high single-digit growth from the previous high single-digit expectation. So, as you can see, we are still expecting a margin expansion, and trends continue to be strong. And we remain confident we will reach our expectations and surpass them in local currencies. Remember that we have passed the biggest impact on our results from commodity inflation. We will gradually start to see tendrines during the second half of the year, but more on the fourth quarter. coupled with the operating leverage coming from sales growth and productivity benefits from past investments in capex and opex, as well as a positive effect coming from FX rate hedges, will result in the margin expansion that we're expecting for the year. We can now proceed with the Q&A session.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Fernando Alvera with Bank of America. Please go ahead.

Hi, good afternoon. Thanks for taking my question. Diego, very quickly, I need your EBITDA guidance. If you can repeat that, I will appreciate it. And my first question is how the volume elasticity has evolved across your territories now that you are not being aggressive on pricing or that you are not increasing prices at all, and how do you expect this to evolve in the second half of the year? That's my first question. I have a second one. Thank you. Yes, thank you for the question in two parts. And Daniel, if you're okay, I can take the first part. The expectation that we now have because of the appreciation of the Mexican peso, it's a need to high growth for the full year. Remember that the initial guidance was more on the size in the building. We have a bigger than five percentage point impact. And again, as I said, our results have been above our initial expectation. So the negative consequence of the appreciation of the Mexican peso, it's five percentage points, but we are adjusting less than five percentage points. Great. Yes, regarding the second question, Fernando, I would say that we have experienced elasticity in particular categories. I would say mostly on the sliced bread category, and it depends country by country, but that is where we are. And we are reacting to this with the particular programs in each country on restoring the opportunities that we find in this and in some channels. Okay, great, Daniel. And if I may, just the last question. I mean, Diego, can you comment what explains the increase in interest expenses and what should we expect in coming quarters? Thank you. Sure. On interest expenses, we have two effects. On one hand, at the end of the first quarter, as you probably remember, we call the perpetual hybrid bond. So since that day, the bond was considered there, and the interest expenses of these $500 million became also interest expenses instead of the equity treatment that they used to have for the previous life of these instruments. So that created this accounting effect on our interest expenses as well as in the debt. Remember that this in the first quarter had a 0.2 times increase on our net debt leverage. Second, we have a higher debt today because we have had a negative free cash flow because of the capital and the acquisitions that we have been able to conclude in the first six months. And third, also relevant, the increase that we have seen with the rates. So the combination of these three things is putting some additional pressure to the cost of financing on our resource.

All right. Thank you so much, Gero.

The next question will come from Alvaro Garcia with BTG. Please go ahead.

Hi, good afternoon, good evening. Two questions on my side. The first one on capital allocation, sort of you mentioned how your debt has shifted significantly to peso, obviously to a higher peso mix. I was wondering sort of this would be a new normal going forward or if you'd expect that to fall going forward. It seemed it sort of surprises on the upside there. And then my second question would be on mix. in the context of your gross margin. Is there anything that we should be aware of in the U.S. or in Mexico in terms of something that might be sort of helping you on the mixed front or hurting you on the mixed front in this quarter? Thank you.

Yes, hi, Alvaro. Let me tell you first, the way that we manage the currency mix on our debt is not necessarily fixed on the percentage basis. So this means that we don't necessarily have a perfect match between the percentage of revenues or profit from the different operations or segments versus the composition of the percentage that we have on the debt profile of the company. What we basically take care is that we do not run any risk from a currency perspective having an exposure to a specific currency that we do not have either the assets or the cash flow in the company. And that is why we feel happy with the profile that we have today, having 6% in euros, 4% in Canadian dollars. And yes, we saw this very important increase in the Mexican peso mix, but as you know, We have a very important component of our profits coming from Mexico, so it makes sense to have this component. There was also this good opportunity to tap the market with a local Certificados Bursátiles. It was a very successful transaction. We went all the way, raising 15 billion pesos. So it's not that this will continue to be the case. What I can assure you is that we will always have a responsible way to manage the currency mix on our debt. So that, on one hand, again, is not that we have some specific targets in this regard, just to have an alignment. In terms of the mix on the different regions, I would say that, I mean, there have been Not necessarily a big pressure, although private level has started to grow, as we mentioned, and we have a higher cost of sales and, of course, a lower gross margin. There are some other categories that have continued to grow that have slightly better margins. So today we're not seeing really a big impact from the revenue mix. I would say that the negative effect on our gross margin that was substantially lower than the previous quarters, has to do 100% with the inflation that we're seeing from commodities because of the hedging strategy. So it's going to take time in our P&L to see the positive effect, and this for sure will happen during the fourth quarter.

Very clear. Thank you.

The next question will come from Ricardo Alves with Morgan Stanley. Please go ahead.

Hello, everybody. Thanks for the call. I wanted to go a little bit deeper on the U.S. top line. Question on competition. We noticed, at least in our data, a little bit of more competition or intensified competition, if you will, on sweet snacks. This would be obviously beyond the private label, not that relevant for this category. So I just wanted to get an update from you guys on the competition environment in the U.S., maybe taking into consideration more specifically the sweet snacks category. And then the second part of the question is we noticed in the second quarter a better top line in the U.S. than what we expected to some extent than what we've seen in the recent scanner data. So just wanted to see from you guys, specifically in the U.S. or in North America, what category or maybe brand that you'd care to highlight specifically Appreciate that Southeast Max has been booming. I don't know if there was a couple of categories or brands that you could shed a light on. I have a follow-up, but thanks for now.

Ricardo, this is Mark Bendix. What you're seeing in our volumes in the U.S., category volumes have been soft with the evolving economy and the consumer behavior, but we've got the pricing that has been part of the carry-in that you're seeing the benefit of. But there is a favorable mix in terms of product that we have in there. So salty snacks and premium have delivered for us in the second quarter. So you are seeing a favorable mix. And in terms of more competition, I think on sweet baked goods, there's always good competition in the U.S. on sweet baked goods. In this quarter, I think it's a little bit – A little bit complicated in that across most categories, you've seen some decline because all of the categories, if you look at just edibles in total, are down 4.4%. We're maintaining our shares in those categories, but there is a net volume decline because of the challenge consumer.

I hope that makes sense for you. That makes sense.

Thanks so much for the detail. My last question would be on the profitability. On the SG&A versus gross margin, we noticed that in pretty much all of your divisions, we saw some gross margin pressure maybe with the exception of LATAM, but then for all divisions, the EBITDA margin was actually stable to slightly up. So we've been discussing this for a while. I think that Diego went pretty deep into details on what's driving the SG&A and efficiency measures that you've guys taken across the regions, but maybe mostly significantly in the U.S., in North America. So I just wanted to hear your latest thoughts on SG&A. you know, if there's more that we could see from here, you're still clearly reaping the fruit. So maybe to the point that Diego was making fork water, better cog strands, do you see significantly bigger room for EBITDA margin expansion maybe on the back of SG&A? Thanks for the time.

Hi, Ricardo. This is Diego. Yes, we will continue to work on finding opportunities to improve the efficiency and the profitability and find a productivity initiative that can allow us to be a more profitable company. It's something that we have been doing for the past several years. Of course, now it's becoming harder and harder because there is no low-hanging fruit that we can quickly do like a big investment and have a big return. It's a little more granular. But we do feel very confident that the different operations across the group of INBO will find those opportunities that will help us on continuously improving our margins.

Thanks, Diego. Appreciate the time.

The next question will come from Louis Willard with GBM. Please go ahead.

Hi, guys. Good afternoon. Thanks for taking my question.

So I wanted to ask, how do you assess your overall price structure in the market in both Mexico and the U.S., especially when you compare versus your most relevant peers? And more importantly, especially in the U.S., are you seeing any incentive or any push from mass retailers to reduce or to, you know, get you to be a bit more promotional or more aggressive on rollbacks, especially entering 2024 or the next negotiating cycle.

I hope that was clear, thank you.

Rafa, would you want to take the Mexico question and mark the US one? Yes, can you hear me?

Yeah.

Can you hear me now? Yeah. We do not expect higher pressure in Mexico when it comes to lowering prices. I think that both retailers and ourselves, we are on a search for going back to volume growth. So what we're privileging here is value pack promotions, portfolio adjustments, some price pack architecture changes in order to get back home those consumers that left us for a while. But also we're pushing a lot on added value innovation. So the point in here is to ignite back some excitement in the category, but doing it in a way that our price per kilo is not affected.

Thank you, Raphael. That's very good. Yeah. The next question. Can I ask a question?

The next question will come from Giorgio Matamato with Citigroup. Please go ahead.

Hi. Good evening. To answer the previous question, Mark, do we take it? Yeah. Just a quick comment on what's going on for us in the U.S. We continue our disciplined pricing execution because we've got the face of ongoing inflation, so it hasn't – mitigated yet in the U.S. And our retail partners, they understand that and they're seeing it. So we're not feeling that pressure, but we'll continue to look at our demand elasticity trends and our channel mix so that we can adjust and meet our evolving needs of both of our customers and consumers so that we continue to drive margin management through our business in the U.S. So generally, we're not seeing any of that pressure, but we've got to keep a keen eye on all of those dynamics as we go forward. Okay. Thank you, Mark. And thanks for making the space for my question. It's Sergio Maximoto from Citi. My question is about Mexico. And if I'm reading the press release correctly, there may be a diversion in the channel performance. perhaps considerably faster at C-stores and modern channels than the traditional channel? And if so, what does that say about consumers as it relates to baked goods category, and how are you responding to that in Mexico? That's my question. Yeah, I guess it is back to me. This is Rafael Paneas. I would like to say that in order, we're fairly satisfied with the performance in Mexico ahead of planned double-digit growth here and there. But I agree with you that in some categories, we're seeing softer volumes. But first, let's clean up something from the equation. In Q2, those who live in Mexico, They have experienced a very unseasonable hot weather in June, and that affected directly sweet baked goods in the traditional channel. So your appreciation is good. In modern trade, we have had and we continue to have positive growth. And in June, we had some softer volume in sweet baked goods in DSD. So what we're doing now, and we started in July already, is a special programs to ignite volume in sweet baked goods and DSD. It is unclear yet to see whether the weather, which is more seasonable now, is going to have a substantial effect. What can I say is that versus June, our sweet baked good volumes are better. But we're not going to wait longer. We're going to be pushing for activities to grow volume anyway. Okay, great. Can I ask another question on LATAM? Please. Yeah, okay. How do you view the LATAM segment's stepped-up performance? Do you see it as maintaining today's margin or actually having another leg up in margin from this point onwards? you know, perhaps closer to the other regions. And how much is Brazil's, Daniel, you mentioned saturation in your prepared remarks. How much is that responsible for the improvement? And can you give us more color about your recent operations in Brazil? Yeah, I'm going to take that one too. I will start with LATAM and then I will focus on Brazil. On LATAM, we do have momentum, especially some geographies such as Brazil, but also Central America, Argentina, and some other countries. So I would say that we are bearing the fruits of what we call a full potential program across the regions. It started two years ago. where the objective was a comprehensive effort to reset targets and ambitions. And on the other side, upscale the organization where necessary. And we still have a long way to go, but I would say that we have better growth equations, number one. And number two, we still have a fairly solid pipeline of activities. So what I would say is, that we still feel that we're going to be enjoying in second semester good activity, both in net sales and margin-wise for a couple of reasons, and then I will elaborate more. We still see Brazil performing well. We also are heading towards a second semester, which in many of our geographies is high season. So, for example, in Argentina, We're going to have more capacity available. It is high season, which is more volume for us. And we're going to be enjoying better costs like everybody else. So I would say good prospects for the second semester. That's what we expect. When it comes to Brazil, this is actually the first country where we started our full potential program. And this is where we could believe that it has been working more thoroughly and deeply. As of today, as I said previously, we have come out stronger when it comes to value equation. We have more brand power. We have changed our go-to market. And we still have productivities to be cashed. So I would say that there is still good momentum ahead for LATAM. Very clear. Thank you very much. Thanks.

The next question will come from Antonio Hernandez with Barclays. Please go ahead.

Hi, good afternoon. Thanks for taking my question and the results. Quick follow-up on Ricardo's earlier question regarding profitability across basically all regions. on an adjusted basis. As you just mentioned in the last answer, the lockdown opportunity is still ahead. I wanted to get a better sense on where specifically do you see more, if not the low-hanging fruit, but still more room for improvement in terms of profitability across all regions?

Thanks. Daniel, do you want me to take that one? Could you repeat it again, please?

Yes, regarding the profitability across all regions, will there be more room for improvement? Well, I mean, definitely Mexico is doing very well on the margin side, as you can see, and the regions that have been improving over the past two years are the EAA and the LATAM regions. I would say that, all in all, I feel comfortable on the different regions performing in the way they have been. So, I mean, this quarter was, I would say, a quarter that was similar to your expectations. I don't foresee in the next quarter or two a big change from what we're doing right now.

Okay.

And in terms of competition, anything worth highlighting in a specific region where using maybe consumer trade-down and competition is tougher? I have a lot of respect for all our competitors and I wouldn't say that we have a harsher or an easier path on any market. The structure of the market changes from one country to the other and we might have more fragmentation and probably more micro competitors that do their job. Like, for example, in Mexico, the tortilla, the tostada, the tostopo industry is super fragmented, and competition is quite intense. And in others, we have strong private label brands that do command a very respectable share of the market. And in those cases, we have to play We have competitors that are global in nature and that they favor more innovation. And in that sense, I mean, we have to play a different ballgame in each market, and we have plans for it. But I wouldn't say that besides my earlier comment on private label and sliced bread, In general, I would say that the competition is more or less what has been in the backwaters in each market.

Perfect. Thanks again for the colloquial measure.

The next question will come from Felipe Ucris with Scotiabank. Please go ahead.

Thank you. Good evening, Daniel and the everyone team. Thanks for the call. Maybe a follow-up on a question that was asked about volumes. The question was a little focused on elasticity, but I was wondering if generally whether you could comment if volumes were flattish to positive across regions. And then my second question relates to EAA. Very good pulse, 31% growth on sales in local effects. Obviously, a lot of moving parts in there. We have CDC comps in China, the QSO recovery, and inorganic forces among others. I'm not sure if you have a number or approximation with you, but what does EAA look like in an organic basis? Just wanted to get a sense of that. Thank you. I'll take the first one, and I don't know, Rafa or Diego, if you want to take the second one. On the first one, What I would say is that the only category that we're missing, importantly, is sliced bread. And all in all, our volumes drop a little bit more than 1%. So that's where we are in volumes. But, I mean, we compensate some categories that were up and some that were down. And the temporary basis, as I mentioned, sliced bread was the one that was generally hard to see. Not in all regions, not in all markets, but in many of them. I can take, if it's okay, Rafa, the second question regarding the organic growth. Let me put it this way. As it was mentioned, the growth on local currency was 31%. The FX impact that we have during the second quarter was slightly above 15%. So having said this, the organic growth in local currency was more than 16%. Okay, that's a very good post. That's exactly what I was looking for. Thanks so much for that, caller. Maybe a last one, if I could. You mentioned how sea stores in modern are growing particularly strongly in Mexico. Just wondering if that could cause any negative mixed effects. Thank you.

You want to say anything about that?

Yes. Actually, no. Without getting into detail, we have robust profit margins in both categories that you mentioned. So what do we see is that it is helping out in the overall profitability. Obviously, we want to put our bread and sweet baked goods in the hands of everybody. So we're doing similar exercises of volume growth in DSD2. We're pretty fine with the mix so far. Okay. Thanks a lot, guys, for the station.

The next question will come from Alejandro Fuches with ETAL. Please go ahead.

Hello, Daniel, Diego, and Tim. Thank you for the time. Congratulations on the results. Two quick questions from our side. First, could you please maybe provide some color on the proportion of the hedges that you're taking today, maybe on the FX and on the raw materials side into next year, into 2024?

Then I have a follow-up after that. Thank you.

Sure. Hi, Alejandro. Well, let me answer partly on the two big components. On one side, the commodities, and the other, the effects. In terms of commodities, we have fully hedged the commodities that we hedge. For 2023, we already started to take some positions for the first quarter of 2024. Still, I'll say, a fraction of the commodity needs that we will have for the first quarter of next year. The point here, as compared to a year ago, we are re-extending the length of the hedges that we're taking as the cost and the volatility have been coming down. Still, bonds are high as compared to historic levels, but we are starting to feel a little bit more comfortable and confident on taking longer hedges. For the FX, we are fully hedged, operationally speaking, for 2023 as well, and we have continually taken some positions, hedging the peso versus the USD. I'd say that we have approximately nine months today, so if not fully, very close to being fully hedged for the first quarter of 2024. Thank you, Diego. Maybe just a quick one, the second one. Given the potential changes that we're seeing maybe on the working days in Mexico going from six days to five days that should most likely be discussed in Congress soon, I wanted to ask maybe how is the company thinking on these potential changes into next year? And maybe if you have thought about maybe potential impacts on the SG&A front, you know, given these changes. Thank you. Alejandro, we don't speculate on things that are out of our capacity. This is just one proposal on the Congress, so we don't have any comment on it. Okay.

Thank you very much.

The next question will come from Ulysses Argot with JP Morgan. Please go ahead.

Hi, guys. Thanks for the space for questions. Just a follow-up here on capital allocation and M&A. So how should we think of M&A kind of for the rest of the year, given the activity we already saw in the first half of the year and your comment, Diego, there on the impacts around free cash flow generation? I know the match has been for small acquisitions. We're just looking for any additional color here. And also kind of on those same lines, if you can remind us there on the kind of capital allocation preferences between like inorganic growth, buybacks, dividends, and where you feel comfortable there in terms of leverage given the 1.8 times where we are right now. Thank you.

Sure. And let me start by the second part of your question. Our capital allocation preference hasn't changed. The priority of the company has been and will continue to be to give money back into the business. As you know, we are in the middle of the most intensive year for CapEx projects. We have a plan to invest between $1.7 to $2 billion. Close to $750 million were already executed as of the end of June. So that is the priority. That, of course, includes the three big buckets, maintenance topics, which within the three buckets I would say is the priority number one. We will always make sure that we have available resources that are required by the different operations, either if it's manufacturing or distribution. Growth topics and also the productivity initiatives that require an investment. So that's a preference. It can be and it will continue to be. The second one, in order to continue to advance with our strategic plan and with the opportunities that we see in many different markets, we will continue to look and to be able to conclude inorganic growth, some M&A projects. None of them are going to be transformational. It's not that the projects are going to move the needle in terms of the leverage of the company. As you know, we already concluded three acquisitions during the year, and I can tell you that we have a very robust pipeline of potential targets across the different geographies, either if it's markets in which we are already present or even new markets. So hard to tell and give any specific expectation because, as you know, There are too many things involved in order to be able to conclude a transaction. What we can say is that we're going to continuously and actively look for opportunities. In terms of the leverage of the company, 1.8, I'll say it's even below the target zone that we have. We're coming from a 1.5 after the leverage process and also because of the sale of Ricolino at the end of last year. Then we have this pickup of 0.2 times because of the conversion of the hybrid from equity to debt. Some cash flow needs that we have had during the first six months that have both delivered at one point date. We feel very comfortable. We believe that we have the right capital structure to be able to conclude the organic and the inorganic opportunities and continue the growth path of the company.

All right, Diego. Super helpful. Thanks for the color there.

The next question will come from Federico Galassi with TRG. Please go ahead.

Hi, guys. Thank you for taking my question, and congrats for the results. Two quick questions. The first one is, Diego, in the original guidance, I believe you used 19.5 of effects. What is the level that you're using now?

Yes. Hi, Federico. Yes. Effectively, at the end of last year, we did consider that The FX was going to be slightly above 19 pesos between 19 and 19.50. We are now having an expectation that the average for the full year will be below 18 pesos between 18 to 17.50. So that is why we have this negative effect on the expected growth in top-line and EBITDA.

almost 10% of lower effects, and the effect in the guidance is only 2-3% if you take the middle of the range. Is it logical to say that?

Okay, perfect. Yes, it's a little bit less than 10%. It's like $1.50 what we are adjusting, which is only 7%. And yes, as you mentioned, we are lowering much more less than that the guidance because as you've seen, all the regions have been performing better than expected. I mean, we were seeing EAA 31%, Mexico, of course, in local currency, 12%, and then the U.S., North America growing almost 12%, low mobile digit, and then Latin America, 17%. So all the regions during the quarter and first quarter was a little similar, have been performing very positive in local currency. So because of this performance, we feel confident that we do not need to adjust the full effect of the FX on our guidance. So basically, including the FX, we're operating the guidance to bottom line.

Right, perfect. And the second question is, in Latin America, you expand cross-margin 120 basis points. This is one country in particular. This was in all the regions. If you can say your thoughts on that.

Yes, this has to do a lot, Federico, with the turnaround process of Brazil that Rafa was commenting on that has positive impacts across the whole PML, including the cost of sales. We changed the way that we're going to the market, the portfolio, and all these actions have helped substantially on an improvement on gross margins and also on being more efficient on SG&A in Brazil. Because of the size of Brazil, this is material on the Latin segment.

Great.

Thank you for taking my question, and congrats again.

This concludes our question and answer session. I would like to turn the conference back over to Daniel Cerviche for any closing remarks. Please go ahead, sir.

Thank you very much, all of you, for your time today. And as always, please do not hesitate to contact us with any further comments or questions you may have. Thank you very much.

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