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

Good afternoon and welcome to the Groupo BIMBO fourth quarter and full year 2023 results conference call. All participants will be in 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 touchtone phone. 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. Please go ahead.

Good afternoon, everyone. Thank you for joining us. Connected on the line today is our CFO, Diego Arqueola, our COO, Rafael Pamez, and Mark Bendix, Executive Vice President for North Americans. and several members of our finance team. 2023 was a great year with historic financial performance. We reached $22.5 billion in net sales and $3.1 billion in adjusted EBITDA, and we posted 5% and 9% 10-year compounded annual growth rates, respectively. We made record capex investments for $2 billion, grew our grants through innovation and replication initiatives, strengthened our revenue growth management capabilities, completed six acquisitions, issued $1.8 billion, including our first sustainability-linked bond in Mexico, and strengthened our debt profiles. Regarding our sustainability strategy, we closed the year with 27 countries out of 34 operating with 100% renewable electricity. And we were recently recognized with an A rating by the Carbon Disclosure Project for our actions to mitigate the effects of climate change. I am very proud of the dedication and hard work of our associates who have worked tirelessly to overcome the headwind of this challenging global environment. Specifically for the fourth quarter, despite the effects of a very strong Mexican peso, we were able to increase, moderated, we had increased but moderated inflationary pressures. The calendar effects of having an extra week in North America in 2022 and the MAPS non-cash benefit registered also in the fourth quarter of 2022, which makes the comparison in some metrics tougher. We were able to reach record levels for net sales, of course, excluding the FX rate impact, and we were able to maintain our EBITDA margin at 13.4%. Now, Looking into 2024, while we continue to see the benefit of lower commodities, this year will be marked by a transitional phase as we navigate through a diverse consumer environment, witnessing a blend of cautiousness in certain markets and resilience in some others, emphasizing the significance and importance of diversification our company is strategically positioned to navigate this environment. Throughout the year, our commitment to growth and improving our profitability will manifest through continuous investments in CapEx projects, fostering both expansion and productivity initiatives. And a key focus will be on restructuring investments in countries such as the U.S., aligning with our proactive approach to identifying opportunities that resonate with our philosophy and strategy to be a sustainable, highly productive, and deeply humane company. Diego will share more details on what we expect for this year. At a time when we are gradually seeing a global normalization of costs, inflation, and consumer demand, Let me show my deepest appreciation to our associates for these four years of outstanding effort and resilience. It is thanks to them that this company is 37% bigger in Tesla terms and even more so in dollar terms and has delivered 2.2 percentage points additional of EBITDA margins. We are well positioned to pick the away-from-home trends that is happening in countries like the U.S. with our food service and QSR division, which grows strongly across the market with double-digit growth rates in several of them. We will also continue to work on becoming stronger in our healthier offerings with our major focus in grain-based solutions. In fact, Today, 42% of our sales have a healthy profile. Now, looking into the results by region for the fourth quarter, North America top line was slightly positive. If we exclude both the FX effect and the effect of the 53rd week in 2022. mainly because of a positive price next effect from the previous year across the region. The food industry has been facing consumption headwinds from consumer pressure. As we look ahead, we expect some of this pressure to dissipate, particularly as a result of lapping the reduction of SNAP benefits. We are excited about our innovation, particularly in breakfast with baked goods and sliced bread. We have received positive feedback as we have gained also traction. Adjusted EBITDA margin contracted 130 basis points, mainly to the effect of the strong peso impacting product costs imported from Mexico, and it continued but moderating inflationary environment. We continue to evaluate and optimize our assets, ensuring we have the capacity needed to meet the customer and consumer demands. As such, we have announced the closure of a bakery in Albuquerque, New Mexico, US and registered restructuring expenses as a result of that. In Mexico, Sales improved by over 6% due to the positive price mix performance. We experienced double-digit growth rates in the convenience and retail channels. In fact, every channel and category grew as a reflection of a strong execution at the point of sale. Adjusted EBITDA margin strongly expanded 240 basis points reflecting the strong sales performance, lower commodity costs, lower administrative expenses, and the one-time write-off registered in the fourth quarter of 2022 related to a prepayment to a supplier. In EAA, excluding FX effect, sales increased more than 12%. This was mainly due to good performance in local currency in almost every country, most notably in BIMBO QSR, coupled with the inorganic contribution from the acquisition of Belpitar in Romania. And remember that this will be the last quarter that we have this effect. The adjusted EBITDA margin, contraction of 150 basis points, resulted from soft results in China. which is already undergoing a turnaround process in our branded business. This was more than upset by the good sales performance and efficiencies in our distribution network. I would like to share with you that we successfully completed the acquisition of Amarita Foods in Spain, a company that specializes in research and development for gluten-free bread. This acquisition will enable us to continue gaining know-how in this category and lever from this technology and capitalize it in high growth potential in that market. Moving on to Latin America, excluding FXFX, net sales increased 7% as a result of strong results in Brazil and our Latin Sur division. Most notably, Argentina, Paraguay, and Peru. Adjusted EBITDA margin was affected by the devaluation in Argentina and social disruptions in Panama and Guatemala, as well as a challenging competitive environment in countries like Chile and Colombia. The latter was impacted by a consumption tax implemented recently. We are working on maximizing consumer value and meeting their needs by continuing to strengthen our brands through innovation and differentiation, as well as focusing on operational execution and cost discipline. I would now like 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. 2023 was an excellent year. At the beginning, our performance benefited from the carryover effect of the pricing strategy implemented in 2022. In addition to this, results were impacted by non-recurring factors, such as the extra sales week in North America, the translation impact of a stronger Mexican peso, and the non-cash net benefit that we recorded also in 2022. Despite all these challenges, we reached record-level sales and adjusted EBITDA and expanded our margin by 30 basis points, showcasing the strength of our diversification, reinvestment efforts, and long-term perspectives. It is important to note that excluding the FX effect, which we never anticipated that peso was going to be so strong, we were able to reach our guidance. Our net sales increased low single digit and our EBITDA margin expanded as it was expected. There were two important components to achieve our results on the profitability front. we were able to maintain our gross margin as we experienced an ease in commodity prices in the second half of the year, most notably in the fourth quarter. And second, Mexico had an extraordinary performance with an important margin expansion as we continued to capitalize on our commercial strategy and cost-cutting initiatives. Our operating income was impacted by the $963 million net non-cash benefit that we booked in 2022, and to some extent, other restructuring expenses we had in 2023. As a result, our net majority income declined 67%, but excluding the MEPs, and Ricolino FA, it had a slight decline of less than 1%. Remember that going forward, there will be no significant movements related to the next concept. We had another year with record levels of capex with $2 billion, which is in line with our initial guidance for the year. We completed six acquisitions throughout the year. One in Romania, one in Canada, two in the U.S., and one in Switzerland, and one in Spain. As we continue to proactively look for these opportunities to complement our global profile. As a result, we closed the year with a level of net debt to adjusted EBITDA ratio of 2.1 times, and our total debt closed at 110 billion pesos. The increase in our debt position when compared to 2022 was also due to the accounting impact of the refinancing of the perpetual bonds completed in the first half of the year. Our record capex investments and other strategic investments, including Bolton acquisitions. It is worth noting that at the beginning of the year, we were operated by the three rating agencies, reflecting our commitment to investment grade, our solid business position, strong financial profile, and our long-term view. During 2023 and the beginning of 2024, We have been very active in the financial markets with issuance of more than $3 billion through different instruments. We deeply thank our investors and financial institutions for the trust placing us in these transactions. With these issuance, we improved our debt profiles. We now have an average life of 12 years. and closed the year with a solid capital structure at 2.1 times net debt to EBITDA. Working capital, including inventories, clients, tax receivables, and suppliers, increased by $7 billion. This was mainly due to recoverable taxes in Mexico, incremental accounts receivables, as well as inventories. Now, I would like to provide some visibility on what we are expecting for 2024. For the top line, we expect an increase between low to mid-single digit. As we continue to invest behind our strong brands, deliver accretive innovation to our consumers, and leverage the power of our frontline executions. For the adjusted EBITDA, we expect to have a growth of low to mid-single digits. We will see some tailwinds this year coming from commodity prices, coupled with productivity benefits from past restructuring and capital investments. We will continue to optimize our portfolio, improve the efficiency of our supply chain, and digitalize our business, which will enable us to expand our margin in the long term. So as you can see, we are expecting a flat to slight margin expansion for 2024. For this guidance, we're estimating a similar effect from FX conversion to the one in 23, which means that we are considering an average exchange rate of 17 pesos and 75 cents. On a more detailed note, the first half of 24 will be more complicated. In fact, several metrics were at record levels, including sales growth and even the margin expansion, which was 40 basis points in the first half of last year. So, for the first half, we expect a slight margin contraction. And for the second half of the year, we expect to see a higher top-line growth and a recovery on our margins. We expect CAPEX investments slightly below from what we invested in 2023, in the range of $1.8 to $2 billion. This level of investment is part of our strategic plan, and it also considers a carryover effect of projects that we already started in 2023. as well as the required investment to capture the opportunities that we see in some markets. This level of spending is in line with our long-term strategy to increase capacity where needed, strengthening our core capabilities while enabling productivity and digitalization projects across our different operations. We are confident in our abilities to achieve this growth and margin in 2024. As you know, we continuously and productively look for opportunities to improve our value chain and enable sustained profitable growth. As such, this year, we will begin to implement a transformational program designed to improve our North American business and ultimately reach our full potential. We strongly believe these investments will better align and focus resources to drive growth and protect profitability while continuing to create long-term value for our shareholders, as has been the case with past restructuring initiatives. We can now proceed with the Q&A session, please.