Grupo Bimbo, S.A.B. de C.V.

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.