Gruma, S.A.B. de C.V. (GRUMAB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Gruma's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Raúl Cavazos, Gruma's Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today. We are pleased to discuss our 2020 performance review. First of all, we hope all of you and your families continue to be safe and no -- and with no major effects from the COVID-19 pandemic. We are glad to report that despite the disruption amid the pandemic, Gruma's third quarter results have continued to improve, with performance benefited mainly by increased tortilla consumption at home, especially in the U.S. We continue to see consumers getting more and more familiar with the use of our products over the time in favoring healthier alternatives, which includes our tortilla given the great innovation and diversity of our products that the company offers. We believe these factors will make the tortilla industry to continue to expand at a healthy pace. Those factors were reflected in the numbers are -- we are reporting. At our tortilla business in the U.S., where sales volume grew 5%. In corn flour, during the quarter, we faced the effect of stockpiling by some customers that took place during the second quarter and which offset the expansion of the tortilla business in the third quarter. In terms of revenues, better sales mix in the U.S. tortilla division provided a higher average selling price, which, coupled with price increases in Mexico at the end of last year and the depreciation of the peso, resulted in 17% -- in a 17% surge in net sales. Our EBITDA climbed 20%, and EBITDA margin rose 30 basis points, reaching the highest level in the history of the company. Sales from non-Mexican operations represented 77% of consolidated business and EBITDA, 82%. Net comprehensive financing cost was MXN 114 million less than last year primarily in connection with lower interest expenses due to lower market rates and a lower proportion of peso-denominated debt. Income taxes were 43% higher driven by higher pretax income and a higher FX [ pretax ] rate primarily due to higher inflation that caused increases in inflationary gains. Majority net income rose 26% due to a better operational performance, the benefit of peso weakness and the interest expense reduction. In terms of CapEx, we have continued to -- with our program, allocating $50 million during the quarter mostly for capacity expansions in the tortilla plant in Dallas and the tortilla plant in Spain. We have also continued to generate free cash flow, which we have applied to our quarterly dividend payment and our ongoing share buyback program. We also reduced our net debt by $45 million during the quarter, therefore improving our net debt-to-EBITDA ratio to 1.7x. Now talking about our main subsidiaries in Gruma Corp., Gruma USA. Tortilla sales volume rose 5% driven largely by the strong trend on food at home resulting in a 10% increase in the retail channel. Corn flour was impacted by stockpiling of some customers during the previous quarter. Net sales increased 10%, coming mostly from higher average selling price linked to a better sales mix, the retail tortilla business and the change between channels favoring retail over foodservice. EBITDA rose 10%, and EBITDA margin improved to 18.9%. At GIMSA, sales volume was flat. Higher export sales to Gruma USA and higher sales to government channels were offset by lower sales to snack producers and stockpiling of some customers during the previous quarter. Net sales increased 4% in line with price increases at the end of last year. EBITDA rose in line with net sales, with EBITDA margin was flat at 16.3%. At Gruma Europe, sales volume declined 2% driven by the foodservice channel, but a sequential improvement were notable, with more than 100% rise in volume in the third quarter versus second quarter. Net sales decreased 2% in line with sales volume reduction. EBITDA rose 79% due to extraordinary income from insurance claims. At Gruma Centroamérica, sales volume rose 14% mostly due to consumer demand and sales to government channels and the United Nations World Food Programme amid the coronavirus outbreak. Net sales increased 20% driven by sales volume growth and peso weakness. EBITDA increased 44%, and EBITDA margin reached 15.4%. On the other subsidiaries and elimination line, EBITDA declined MXN 116 million due to higher SG&A mostly related to severance payments, insurance expenses and donations. Now at this point, we are ready to take your questions. Naileen, could you please help us? Thank you.

[Operator Instructions] Our first question is from Isabella Simonato with Bank of America Merrill Lynch.

I have 2 questions. First, as Raúl, you mentioned, CapEx was $50 million this quarter and totaled $100 million in the first 9 months. How can we think about your guidance, right, which was between $200 million, $250 million for year and not only for 2020 but also for 2021? This will be my first question. And the second question is related to top line growth in the U.S., right? We continue to see very strong retail demand, corn flour decelerating a bit. But when we think about 2021, right, I understand there are several uncertainties regarding a second wave of COVID or anything like that. But how are you guys thinking the mix, right, between corn flours and tortillas in the next couple of quarters?

Thanks, Isabella. Well, talking about the CapEx, yes, we gave you our guidance at the beginning of the year for $250 million. However, because of this pandemic, we've been delayed a little bit on projects now, but we can talk maybe it's going to be something about $150 million, $160 million by the end of the year. And certainly, part of the CapEx program for the year will be carried by 2021. What we are expecting is -- if you remember, we were talking about a new production facility in Indianapolis. We were expecting to open this facility by the end of the year. However, because of this, we delayed this process a little bit. And now we are expecting to be operated by the end of the second part of the year or beginning third quarter of 2021. In spite of that -- or let's say, in order to supply the quarterly surge of demand that we are facing in the U.S., we are doing several things. One of them has been to support the process -- or the demand through our Tijuana and Monterrey facilities for tortilla, wheat flour tortilla to Mission Foods in order to support the West Coast and the Central South, let's say, areas of the United States in order to supply this excessive demand. On the other hand, if you remember, we used to have an operating facility in Omaha, Nebraska. This facility was shut down in -- 3 years ago approximately. Then with a very small CapEx, let's say, with a very small investment, we are talking about maybe something about $8 million, the idea is just to restart the operation of this facility in Nebraska in Omaha. We are expecting that this facility will start operations by the first quarter of 2021. We have some production lines. We are repairing some areas of the roof of the facility, and we are making some fine-tune of the production lines. Then with a very small amount, we will increase the production capacity through this facility beginning next year. How will be -- how much will be the amount of CapEx for 2021? We are not sure at this point in time. Of course, we are going back on those -- in those projects. But now we are working on the budget, and maybe the next conference call, we can talk a little bit about it. Now talking about the top line and growth in the mix in corn flour and tortilla, tortilla certainly will still be the high growth, growing faster than corn flour for next year. However, corn flour has been now stabilized the sales of the operations in the U.S. Now our sales in corn flour are doing well, and we are expecting a very good close of the year. And also, we are expecting to have better performance in terms of volumes as well as in terms of net sales for this company for 2021. We are acquiring new clients. We are growing with the [ 51s ]. Then we can expect better volumes in corn flour for next year. This is what we can talk about that. Of course, talking about more figures in terms of numbers, how much or how far we will grow in the States, if you don't mind, maybe the next conference call also, once we have the discussion in the budget -- of the budget for the year -- the full year, we can talk with a little more about that in the next conference call.

The next question is from Antonio Hernández with Barclays.

Congrats on the results. My question is regarding COVID-19-related expenses. Could you give more light on the fees that you're facing and the costs that you're facing for different geographies and if you have also an estimate of how much of that is expected to be recurring?

Yes. Well, we have not any amount at this point in time, Antonio. Thank you. At this point in time, of course, we've been investing or spending money in several changes and several things and several face masks and all the protocol of health that we need to implement everywhere. Certainly, we will have some kind of additional expenses. Hopefully, it will be a little bit lower than you've seen the second half of the year -- second quarter of the year, we reflected in our statements a huge amount of expenses. We reduced significantly in this third quarter, and I'm expecting to be also -- to have lower expenses during the fourth quarter. It's going to be maybe updated, but I'm sure they're going to be less and less for the fourth quarter. But giving you a [ so on ] amount at this point in time is going to be not true. Then we know that it will be better or it will be lower, but we have no idea about how much will be. Most of the expenses that we needed to implement, changes in our facilities just to have social distance in between the packaging area, the acrylics in between them, face masks, special wear for some people, we already invested. Of course, sanitization of -- sanitation of buildings and facilities will be there, and we're still doing that. We will maybe acquire some face masks, et cetera, but it will be lower amount than we are reflecting during this third quarter.

And if I may follow up regarding competitive environment, any more light that you could share on that?

Can you repeat your question, Antonio, please?

Sure. A follow-up question would be on competitive environment, anything that you can share on that competitive environment throughout the different regions?

Okay. Sure. No, no. We have the same competitive environment everywhere. We are doing quite well on that. The recognition, service, quality, diversity of our products are doing quite well. And we do not see any kind of change in sales because of kind of competition at this point in time. We are doing quite well everywhere, in the States, in Mexico, Europe, Asia and Oceania, Central America. Then -- and sometimes of course, particularly Central America, we need to change a little bit our, let's say, flanker just to fight with our competition. But what we did in Central America, we launched a new corn flour with softer -- to prepare a softer tortilla and has been really very well accepted by the consumer. Then we have not any kind of concern about the competition everywhere. We are doing well on that.

The next question is from Alan Alanis with Santander.

I hope you and your family and everyone's staying safe. The price of corn has seen a pretty steep recovery in the last few months, and we're now at the levels of the last year. Could you remind us about your hedges, how much of next year and what impact would these hedges -- can have on your margins in the United States and what you're seeing in -- yes, let's just take that as the first question. Then I have a quick follow-up.

Sure, Alan. Thank you and thanks from us. Everything is well with me and my family. Thank you very much. Well, talking about the corn hedges that we already have, what I can tell you is as of today, we have about 70% of our corn that we will produce in 2021 in the U.S. already hedged at $3.40, And of course, what we are doing is maybe the rest of the corn, we will start to purchase on an average basis for the next 3 or 4 weeks, something about that. But certainly, we're going to be -- we will be lower than the market. In terms of our prices, because of we usually move the corn flour prices in the States aligned with moving average prices of corn throughout the year, we are expecting to be basically flat or a little benefit on that but not too much. Of course, this is going to be in the corn flour side. But because we have lower cost of corn flour for Mission, Mission will be benefited because of that.

That's great. Congratulations. I mean the price was announced at $3.99. So you have very -- really good hedges.

Yes.

And a quick follow-up regarding Mexico. You mentioned in your press release that the government -- that some government purchases and exports to the United States will keep -- help you keep your volumes in Mexico flat. And that's a great accomplishment, congrats, given that's offset the decline in restaurants and foodservice and so forth. How do you see those exports and those government programs purchasing as their restaurants start reopening? In other words, will there be incremental volumes for GIMSA in Mexico?

We already see incremental volumes in GIMSA during the month of October. And we are expecting to have an increase in volumes by the rest of the year. The volumes for Gruma Corp. will still be there. Gruma Corp., let's say, our second mill in the States needs the support from Mexico because they have not enough production capacity, then we are now supporting from our Mexicali, Nuevo León or Monterrey and Chalco facilities with traditional flour as well as some particular corn flour, the Antojitos corn flour used to make enchiladas, tacos and sopes and this kind of product -- Mexican products in the States. We have a very particular corn flour as well as for tamales. We are supporting from our Veracruz facility. And then these exports to the U.S. will be there. In terms of the government programs, we are expecting this is going to be there. But also, because of during the second quarter, the wholesalers and these distributors in Mexico, they stockpile inventories for corn flour because of the pandemic, they already consumed that, and we are taking now to start to grow. We are expecting a very good resourcing volume for the rest of the year. And we are expecting also for next year, giving out or, let's say, taking out the peak of the coronavirus sales, we are expecting to have a very good year for GIMSA also in Mexico.

The next question is from Felipe Ucros with Scotiabank.

Raúl, Rogelio, Lily, happy to hear you're all doing well. Congrats on the results, and thanks for the space for questions. So I wanted to ask you one on pushing the mix in the U.S. Obviously, the mix has been a very important tool for increasing the price/mix over the last couple of years. And pre-COVID, you were managing rates of around 2% despite the fact that you couldn't do rate increases. So I wanted to ask you, is it possible to accelerate this if you needed it? So let's say, in a world where corn prices stay high even beyond your hedges, which have very good prices, as you just told Alan, can you accelerate that rate of the mix?

Let me tell you, the mix, don't want to change too much. It's going to be -- of course, will be basically the same in terms of corn flour and tortilla. You are talking about this mix, isn't it, Felipe?

Yes, yes. And also within tortilla, you've been pushing innovation. So the average price has been increased.

Oh, okay, okay, okay. Well, in terms of tortilla and corn flour, it would be basically the same mix. And we are not expecting to have any kind of changes. In terms of mix in tortilla, the current volumes or, let's say, the current sales of better-for-you products, we are talking about 15% with the total tortilla and related products in Gruma Corp. We are expecting this is going to grow for next year. They are doing quite well. Last conference call, maybe we were talking about local tortilla was growing about -- at about 40%. As of today, local is growing at about 65%. We are also now already new products to launch to the market. We are expecting to launch [ no wheat ] tortilla and chips, almond flour tortilla, cauliflower flour tortilla, as well as we are now expanding the product line of local and gluten-free tortillas for different flavors, let's say, for tomato or in basil for spinach, jalapeño and cheese and some others. We are now expanding them. We have -- also, we already launched the sweet Hawaiian taco -- or tortilla, it's more tortilla, wheat flour tortilla with a very good success in the States. Then these better-for-you products, we are expecting to grow, of course, because of the size of this market do not represent too much, but maybe in terms of volumes, will take up at least maybe 2, 3 points from the total of all tortillas in the States.

That's really clear. And that's obviously super helpful for the mix. And then I wanted to ask you another question about traditional restaurants in Mexico. One of the comments that we've been hearing from many other food producers, not just in Mexico but across Latin America, is that many traditional restaurants, your taqueria in the corner or things like that, have been suffering tremendously because even the ones that reopened are still not seeing traffic. Are you seeing this sector changing? And how does that affect your flour volumes in Mexico?

Yes. Let me tell you the traditional taquerias in Mexico as well as in Latin America, they usually use the traditional process to make tortilla. They eventually use corn flour or some other restaurants, of course, they do the tortilla or make tortilla with corn flour, but we have not any -- seen any kind of change. This is a very small proportion of our corn flour sales for these kind of restaurants. It's really very, very, very small amount. No, we have not any kind of negative effect. On the other hand, we are growing in terms of higher sales to tortilla producers, higher sales to wholesalers and distributors there. Then we are expecting to have growth. Again, we took out the peak of the corn flour sales for next year because of the coronavirus outbreak. Then we will reflect kind of growth in GIMSA as well as in Central America for corn flour.

Great news, Raúl. If I can do a last one very shortly on Mexico prices. You're about to lap the year since you did the price increase in Mexico. Are you planning something on this front for next quarter?

Yes. We are now reviewing that. We are expecting or planning to make an additional price increase in Mexico. But we have not any kind of definition at this point in time how much it will be, but certainly, we will increase prices.

The next question is from Álvaro García with BTG.

Raúl, I have a couple of questions as well. My first question is on freight expenses in the U.S., so transportation expenses in the U.S. I know that you -- we don't really have guidance for next year. But I was wondering if you could tell us if that's increased a lot for Mission Foods in the U.S. or not.

Yes. Well, let me tell you that yes, you're absolutely right. We are increasing the freight expenses because of higher support from GIMSA plants, tortilla in the States. We are also having some kind of freight increases because of higher tariffs and because of lack of equipment for transportation in some particular areas. Now that's why we are -- at this point in time, we are planning for reopening the Omaha facility as well as by the middle of the year, we will have the Indy facility. And that will allow us to reduce sort of the freight because we will -- instead of send tortilla from maybe Dallas or from maybe California to New York or to Boston or this -- the Northeast area or the States, they will be supplied from Indianapolis. And the freight will be substantially lower than we are currently paying for that. Then -- yes, we have, at this point in time. However, we are now in the process. Also, we are contracting or we are making some distribution centers in some strategic areas in order to be more efficient on the freight. Then we are expecting, if not to reduce too much, no, we are not expecting to grow these expenses for next year.

That's great. That's very helpful. My second question is on the other line, the other expenses, the other subsidiaries and eliminations line. I know it's typically pretty volatile, but I was wondering if you could maybe help -- this quarter, we saw negative EBITDA there. If you can help us see where that might trend into next year or why -- if that was extraordinary this quarter, if you could just help us understand that line a little bit more, that would be very helpful.

Yes. Well, let me tell you that this is basically -- I can tell you that this a little bit an extraordinary. We usually have some kind of benefits in the States to have some benefits for next year. We are doing quite well in the other subsidiaries. We are working a lot on the technology division. We are doing quite well on the Asia and Oceania operations. And then we are -- of course, we have some support from Gruma. And as we collect some kind of use of our brand, some kind of royalties, we support them for the marketing expenses. But for next year, the trend will be positive for this -- for the row, I think. And if we plan to make kind of change or different than I'm telling you, we will confirm you in the next conference call. But at this point, I can tell you it will be positive, sure.

The next question is from Lucas Ferreira with JPMorgan.

So Raúl, I wanted to ask you about Europe and the outlook you have, considering we're seeing a second wave hitting the continent. You mentioned about your CapEx. If there's any implications of the second wave to the CapEx plan in the region and also to the -- if you have any flavor of -- or any kind of first reading of also the impact on your sales. So that would be my first question. And then in the second question, I want to talk about your market share trends in the U.S. So if you can comment on how that has been evolving. Especially, also, if you can comment on the growth of the tortilla category relative to other similar categories, if it's outpacing the market, and also putting in that context, the private labels, if you still see them losing share over your products.

Sure, sure, Lucas. Well, talking about Europe, particularly in the case of Europe, let me tell you that we are expecting to have a good performance for this year sales. We will have now operating the new -- the expansion of the facility that we already have in Spain. Then we can tell you that beginning this year, we will start operations of this facility. And we are expecting to have a better performance in terms of that, really particularly on the retail sector in Europe for next year. We already have the clients. We already have the requests for tortilla. However, we are working at -- currently at 100% production capacity. We cannot supply at this point in time. But they are willing to wait for us in order to be part of the process to supply tortilla. Then even the second wave of coronavirus in Europe now, corona in Germany, in France and Spain, are doing quite bad, this second wave of coronavirus. Foodservice is doing not too good. And maybe it will last a little more in order to reopen once they have under control. But the sales on the retail are doing quite well. We are taking advantage of that. We are listing new products. We do supermarket chains. And we think that the sales will be really good and will be better than this year because of that. We do not see any kind of issue with that in Europe. And then since most of the sales will be oriented to the retail, we are expecting also a better profitability for Gruma Europe during 2021. And actually, they already have one production line that they are now in a process to install this production line. Maybe we would start operation by the beginning of next year. And now we are in a process to generate or to produce an additional production line that will be also installed in this expansion and maybe 1/3 by the middle of the year because of the growing demand for tortillas we are facing in Europe. Then European operations will -- we are expecting to do well during 2021. In terms of the market share, what I can tell you is that tortilla industry in the U.S. has been growing at about 21%, according to Nielsen. Of course, this, we are talking here in terms of dollars. And Gruma grew at about 22%, which means that we are doing better than our competitors in the States. If we see private label, private label in the market has been losing market share. We are stable or a little bit more, maybe getting 1 point or 2 points in market share. This is according to Nielsen, of course. You can see that information. And we are expecting to have or to be -- to still have a very good performance on that in the States in these things. In terms of full market share, maybe in the whole industry, we may have -- I don't know. Rogelio, you correct me if I'm wrong. But I think it will be something about 48% for the whole industry, our participation. But if we go through that, retail, we are talking about maybe 60%. This is in tortillas. And in corn flour, maybe we have about 85% in the States of corn flour market.

[Operator Instructions] The next question is from Miguel Tortolero with GBM.

Raúl, Rogelio and Lily, congrats on the results. I got disconnected for a moment, so I hope my questions haven't been answered yet. So the first one would be on the U.S. regarding your volumes in the U.S. corn milling business. You mentioned that this quarter, volume drop has to do with clients overstocking during the second quarter. And I know you just mentioned that you expect strong volumes for next year. But heading into 4Q, would you say that we're still in for, let's say, unhealthy inventory levels? Or should we expect normalization already? And then I'll follow up with a question on CapEx.

Yes. Well, let me -- we already talked about that. But talking about volumes, now we are seeing growth in the corn flour sales, which means that maybe all the inventories that got built during the second quarter are already consumed. And now we are facing a very good growth for corn flour business in the States. We have -- we are not expecting -- and for next year, we are also expecting to grow compared with the year if we took out the peak of sales in corn flour with the coronavirus unless the second wave will be there and still be panic purchases from the consumers. But they are doing quite well, and we are expecting to have a very good growth on the corn flour business in the States for the rest of the year and for 2021.

Okay. Great. The second one is on capacity utilization. I mean you just mentioned that your CapEx has been mainly towards capacity expansion. And you just mentioned as well that 100% capacity utilization in Europe. But could you share more color on the capacity utilization levels which you are operating in the U.S.?

Well, in the U.S., we are basically working also at 100% capacity utilization. Sometimes because of [ showoffs ] of people, we need to shut down some kind of line, production line in the facility. But usually, we are working at the full capacity. That's why we are supporting Gruma Corp. from Mexico, from our Tijuana and Monterrey facilities with additional tortilla, wheat flour tortilla. And also, we are expecting to start up again our Omaha facility. I was discussing with the audience that we used to have -- operating a facility in Omaha, Nebraska. We shut down this facility, I'd say, about 3 to 4 -- 3 years ago. And then we are expecting to reopen this facility by the first quarter of 2021. We have very small CapEx with a very, very small investment. We are talking about with an investment of about $8 million, we will have additional production capacity there just to support the Midwest markets as well as the -- some of the -- I mean, the Colorado and some other states there in terms of additional market consumption. We will still have the supporting from Mexico. But also, by the end of second quarter or beginning of third in the States, we will start up the new Indianapolis facility. We are expecting this facility will start with 2 or 3 production lines that will support also the Midwest but also the Northeast region of the States. And by the end of the year, we are also expecting to be operating about 8 to 10 lines out of 16. In other words, by the end of the year, this Indianapolis facility will be operating at about something between 50% to 65% production capacity utilization because of the growth we are expecting to have in the States in terms of tortilla consumption. Then we are [ cut ] on that. We are hit on that. And if we need to do something else, we will still support from Mexico for this additional demand we may face because of the coronavirus or because of whatever. Just to correct, I was saying something between 60% and 65% market share on retail. What I can tell you is something about 56%, 56% in market share from our brands in the States.

This concludes the question-and-answer session. I'll now turn the call back over to Mr. Cavazos for closing remarks.

Thanks, Naileen. And thanks, thank you all. Please be safe. Take care of you and your families. And if you have some additional question, please feel free to call us. And of course, once again, thank you very much for joining us for today. Have a great week and weekend. Thank you.

Ladies and gentlemen, this concludes Gruma's Third Quarter 2020 Earnings Conference Call. Thank you for participating. You may now disconnect.