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 Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to our host, Mr. Raúl Cavazos, Gruma's Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to our fourth quarter 2020 conference call. We are excited to have the opportunity to share our results with you for what we believe was another year of highlights, the strength of our main market and hub in the U.S., the historical stability that has always characterized our operations in Mexico and the recovery over the course of the year in the European division and other regions. Combined, these factors yield our historic EBITDA margin. The main characteristics of the year that support our results was twofold in nature. On one hand, the continued penetration of the tortilla as an established and familiar core ingredient, even in non-Hispanic households. On the other, another healthier lifestyle trend that are spurring people to prefer tortilla as a core ingredient as part of an overall health conscious diet. We are committed to providing our products to this end as we believe these trends are a new foundation for -- of growth for our company as we adapt to the market's changing dynamics. Volume growth for the year stood at 3%, with the U.S. and Mexico as the primary contributors for the growth over 2020. In all, thanks to the core of our business model, we were able to benefit from higher margins due to retail consumption in the U.S., our more profitable business line and [ 18% ] higher overall revenues, thanks to strong consistent demand for products creating more profitable product mix. The aforementioned dynamics enabled us to generate 23% EBITDA growth, while EBITDA margin expanded [ 70 ] basis points to [ 16.9% ]. We are very pleased with the group's performance and feel confident and excited about the opportunities for growth we see in the future. As of this moment, we continue to see a healthy increase in demand for our products around the globe. More importantly, however, this growth has been especially apparent in the U.S., our main market. In response to this demand, we have continued to increase our production capacity. EBITDA has been and will be to be a very comfortable basis that are more than sufficient to cover the CapEx investment as well as ongoing net working capital needs, while keeping a strong financial structure and leverage free cash flow as safety nets. During the year, we also provided a sound dividend for all of investors, on a quarterly basis, representing a dividend yield of 2.2%. This dividend yield was enhanced by the repurchase of $150 million worth of stock over the course of the year. The amount of stocks that are repurchased will be [ canceled ] during the next shareholders meeting. And it is worth mentioning that combining the dividend yield of 2.2% with the effect of the total purchase will result in an equivalent overall dividend yield of approximately 5.7%. With these market dynamics and our focus on the basic consumer goods sector, we are looking forward for -- to another great yield and, more importantly, another year of further creating value for all of our shareholders. Now I'd like to break down the financial performance of the fourth quarter 2020 in more detail. Gruma continued to grow in volumes at all subsidiaries, with the exception of our European division where we saw a temporary decline. This led to a 2% consolidated sales volume growth. Along with this volume growth, a better sales mix in the U.S. improved our average portfolio, while the higher prices in Mexico and Centroamérica further supported revenue growth. Additionally, the depreciation of the Mexican peso relative to the U.S. dollar on our foreign subsidiaries figures created and added benefits. As a result, consolidated net sales rose 13%. EBITDA rose 23%, and EBITDA margin improved 140 basis points to 16.7%, 17 -- excuse me, 17.8%, driven by better performance at all subsidiary, reaching the highest margin in our history. Our net comprehensive financing line benefited from lower interest expenses, reflecting lower average net debt and also lower market rates. However, net comprehensive financing cost increased 16% to MXN 384 million due to higher losses -- due to losses in FX hedging operations related to corn procurement in Mexico. Income taxes were 1% more than fourth quarter 2019 due to higher pretax income. The effective tax rate was 37%, down 300 basis points relative to last year. Majority net income rose 14% to MXN 1,413 million as a result of the better operating performance I mentioned a few minutes ago and the weakness of the Mexican peso. In terms of CapEx, we invested $50 million during the fourth quarter 2020 and distribute this capital among different projects with the 3 most notable being: one, expansion of the tortilla plant in Spain; two, capacity expansions of the tortilla plant in Dallas; and three, advances in the consortium of the new plant in India. On a sequential basis, Gruma's debt marginally increased 2% or $26 million relative to third quarter 2020, yielding a net debt-to-EBITDA ratio of 1.5x. In terms of our performance at a subsidiary level, we have reviewed the results in more detail. At Gruma USA, sales volume rose 4% versus last year, being tortilla the driver of growth with a 4% volume increase. Net sales increased 9% to MXN 11,965 million on the back of the better sales mix from the tortilla retail channel. EBITDA rose 12%, and EBITDA margin improved 50 basis points to 19.4%. At GIMSA, sales volume increased 4% during fourth quarter 2019, showcasing higher exports to Gruma USA and sales to channels such as tortilla makers in the government. Net sales grew 7%, reflecting volume growth and price increases implemented at the start of 2020. EBITDA decreased 13% in connection with FX hedging losses related to corn procurement. At Gruma Europe, overall sales saw a 12% contraction, resulting from 11% sales volume drop in the tortilla business as higher retail sales were not enough to offset the decline in the foodservice channel amid the ongoing pandemic. Additionally, sales volume declined 13% in our corn milling business from lower revenues from the trading of corn and from lower volumes of animal feed byproducts. Net sales decreased 9%, more in connection with sales volume reductions, while EBITDA rose 70% and EBITDA margin expanded 900 basis points at -- to 19.4%. This happened as we experienced extraordinary other income from insurance claim recoveries. At Gruma Centroamérica, sales volume grows 20%, mainly from sales to the Guatemalan government and the United Nations program arising from COVID-19 needs as well as higher consumer demand in supermarkets and grocery stores in Guatemala and in U.S., all of them trigger by the ongoing pandemic. Net sales increased 22% driven by sales volume and the peso weakness. EBITDA increased 1%, and EBITDA margin fell 230 basis points to 11.5%. On the other subsidiaries and eliminations line. Operating income increased MXN 66 million to MXN 67 million due to higher utilization of the technology division in relation with our CapEx problem as well as better operating performance at Gruma Asia and Oceania. Finally, I would also like to take a moment to mention the new addition to our IR team. We are pleased to welcome [indiscernible] to our Gruma family. He joins us after 8 years in an Investor Relations and Corporate Development Officer role in the banking sector and working as an investment banker for Royal Bank of Canada in San Francisco and New York. He has over 24 years experience in the financial sector. And he also -- and also is an alumnus from the Anderson School at UCLA and the Wharton School at the University of Pennsylvania. He joins our team to further grow our Investor Relations effort in the benefit of all our -- all of our shareholders. I would also like to announce that the departure of Lilia Gómez from our company as she decided to focus on her family during these troubled times. We thank her for her great work and outstanding commitment to Gruma for all these years and wish her well. Now Diego, will you open up the call for questions, please?

[Operator Instructions] Our first question comes from Miguel Tortolero with GBM.

My first question is regarding CapEx. I mean we saw a big pickup in CapEx this quarter. And as you have mentioned before, CapEx should come stronger throughout the year, mainly towards capacity expansion. So I got 2 questions here. The first one, could you give some color on the capacity utilization level in your main regions? And looking at 2021, where should we expect the higher disbursement to come from? And then I'll wait for my follow-up question.

Yes. Well, Miguel, talking about the CapEx, as you said, we've been working at the higher utilization rates, particularly in the U.S., Europe and Mexico. Everywhere, we are growing everywhere in all the markets we are participating. And basically, what we can tell you is that in the U.S., we've been working about 100% towards capacity utilization in our tortilla business as well as in the corn flour. In some particular period of times, some lines are stopping because kind of show up of people. But generally speaking, what we see is that we are now working with 100% production capacity while we are leveraging additional production capacity for the future growth of the demand in the U.S. as well as in Europe. Also, even the procurement has been a little bit delayed. We are now growing on the retail sector, on the retail channel. We are performing better in terms of better prices, et cetera. And also, we are now working also at a 100% production capacity in our European operations. Everywhere, we are working in full. We have so many small space in Malaysia, some small space in China. But we are now experiencing growth everywhere in full year operation, Mexico and other sections.

Great. The second question is considering the increase in grain prices in the last week, could you give some color of your pricing strategy, talking specifically about Mexico for the year?

We are doing everything in Mexico, as soon as we figure -- actually last February 15, we implement a price increase of MXN 650. That means about [ 620 grams ], something about that, for the corn flour product in the country. We will ask for the authority to delay a little bit the price increase in order to have a smooth transition of the year. We are collaborating with them. And now, the -- price or [ law ] was implemented with very success -- a smooth process. And also, we are expecting to have a regional price increase in the next April. That deal we already have with the -- everyone in [ government. ]

[Operator Instructions] Our next question comes from Ulises Argote with JPMorgan.

A couple on my side. First, usually on this fourth quarter call, you provide guidance across regions. Was just wondering if you can kind of give us some color on your expectations for volumes, revenues and profitability across regions and kind of on a consolidated basis. And following on Miguel's question around CapEx and et cetera, maybe also if you can point us to a guidance there on the overall CapEx expectations you have for 2021.

Sure, Ulises. Thank you. Well, talking about the guidance for 2021, 2020 for the company, we are expecting -- even with the pandemic we experienced that year in the volume growth we've seen throughout the last year. We are expecting growth in basically all the subsidiaries, with the exception of Centroamérica. In the U.S., we are expecting volume growth by about 1% to 2%. In terms of sales, we are expecting also growth something about 2% to 3%, and an improvement on EBITDA margin by about 0 to 50 basis points, let's say. Something about in the middle, something about 25, 30 basis points improvement, and this is going to be because, as we've been discussing before, we will start up some facilities. And of course, we will have the related expenses we need to forecast. In GIMSA, we are expecting to grow something between 2% to 3% in volumes. In terms of sales, we are expecting order to increase about 6% to 7%. And in terms of margins, we are expecting to be flat. Talking about the European operations, we are expecting growth in volumes by about 5% and sales about 5%. However, in terms of margins, we are expecting to be basically flat, excluding the extraordinary income we reflected last quarter of last year. Centroamérica, we are expecting a kind of volume reduction of about 3%. The same in net sales, and basically flat in terms of EBITDA margin for the full year. It's going to be basically the same EBITDA margin that we had in 2020. All in all, well, we have good performance on our Asian-Oceania operations. And all in all, what we are expecting on a consolidated basis is we are expecting to grow something about 2% to 3% in terms of volumes, 3% to 4% in terms of sales, net sales, as well as we are expecting kind of improvement on EBITDA margin by about 20 to 30 basis points. This is what we are expecting. That's going to be a very challenged year, but we are working quite well. We are doing things in a very good shape. We have been increasing production capacity, category volume, marketing volume, and we are trying to take advantage of that just to supply this additional demand for tortillas, particularly in the U.S. as well as in Europe. In terms of CapEx for the year, what I can tell you is that since we are already started last year some of our projects, we have some recovery on CapEx carried from 2020 as well as no CapEx for the year and as well as also maintenance CapEx for our subsidiaries such as GIMSA. Then we are expecting to spend something about [ $300 million to $320 million ] throughout the year. And that's what we are expecting for CapEx for the full year.

Okay. Perfect. Just to clarify, on Centroamérica, you said volume and sales, 3% up, right?

3%. 3% volume and net sales. Right.

Our next question comes from Felipe Ucros with Scotia Bank.

Lilia, best of luck to you if she's on the call. Maybe, Raúl, if I can start with Asia. We often don't get a lot of color about how Asia has performed, and there's some expectation that eventually, you've got to break that out as a separate division, right? I understand it's had good growth over the last 5 years. I don't know if you can give us some more color about how you performed in this year and what you expect going forward for that division. And then I'll ask the second one.

Yes, Felipe. You are talking about Asia and Oceania, excuse me, because I can't hear you well.

Correct, Asia and Oceania. Yes.

Yes. Yes. We've been doing very well, while the result of this division are doing quite well everywhere in all the countries that we are participating. We are growing in terms of volumes. They are growing in terms of production capacity utilization. We are growing in results, and margins are quite comparable with the States. Even China, there was a [ country ] increase. Last year, we had kind of [ negative sales ] because of this pandemic during the first half of the year. Now we are operating basically at about 95%, 98% of our budget. We are growing compared with last year. And yes, speaking, the markets in Asia and Australia are doing quite well. We have very good results again, and the margins are quite comparable. Actually, we've been discussing about the possibility to maybe try to open the A&O operations during this year -- maybe by the end of the year. We are preparing all of that. We're just trying to see we can append the result just to clarify this business for you guys. But again -- and this is the same performance we've been having during the last 5 years. We have strong results in terms of sales. We are about $200 million, $220 million. It's a quite comparable size of the operations with the European operations, a little bit lower. But again, in terms of results, very, very good. We are doing quite well in all the countries.

Very, very useful. And then the other one that I wanted to ask you was around other categories. You've been performing incredibly well in each category. And obviously, there's more penetration of them and doing quite well outside of the U.S. But at which point do you start thinking about exploring other categories that are maybe adjacent and fit well within the portfolio? Do you guys think about that for the -- I don't know if immediately, but maybe for 5 or 10 years down the line, do you think about adding other categories to the portfolio?

Well, let me tell you that actually, we have, let's say, adding category but all of them basically flatbread. We are now expecting to start operations in the U.S. to produce some different product lines, naan, pita, no gluten, and some particular this kind of flatbread products. We are basically very soon to start operations. We want to have a new brand, a new division, for sure, mission brands for this kind of product. We have a very good market. We are very pleased with the market with these products. We've got very good results. And the northeast of the country in the U.S. is a very, very high consumer area for these kind of products. Also, we've been experienced a tremendous growth on pizza bases in Asia, in Australia. We are producing for -- not only for the retail, which is growing, but also in a very important way, we are providing pizza bases for most of the pizza, let's say, restaurant chain in that area. Now we are introducing this also these products in the U.S. We will start to also offer to the market the pizza bases as well as in the -- in Europe. That's what we are doing. Talking about different kind of products, we are very [indiscernible] in Russia. We are adding different kind of healthy products, such as beet root, almond -- anyway, different kind of [indiscernible] in the same tortilla [indiscernible] category. But talking about the different categories of products or different company, let's say, or different sector is the way that we align with distribution or business. At this point in time, we are not expecting to do nothing else. We are growing in a very good way. We are having a healthy growth. The category is growing. Maybe you see a growth for the category not as fast as you want to see. But when we talk about growth for 30%, we are talking about the tremendous amount of tons of tortilla wraps in naan, in pita, in pizza bases, et cetera. I mean we are not the -- somebody else to fill the market and it will be more difficult for us to recover this kind of market. That's why we are concentrate over in this one, but adding additional products for our portfolio in the same category of [indiscernible].

That is great color. That's exactly what I was looking for. Maybe if I can ask one last one, Raúl. I couldn't hear very well what you said on the prices in Mexico. I heard you have done a small increase in the early part of the year, and you were going to do another one, but I couldn't catch the rate.

Yes. We have raised -- I'll just repeat what I said. We increased prices, they are MXN 650 per ton last February 15, and we are expecting to have another increase, and we are evaluating how much will be during next April. That will be enough to recover the cost increases that we've been experiencing in Mexico. So that we'll have -- and if, for any reason, the price of corn will still be higher during the second half, these are the things we need to evaluate for the second half of the year. But next April, we'll be implementing a second price increase.

[Operator Instructions] Our next question comes Álvaro García with BTG.

I have a couple of questions as well. I was wondering, over the last couple of years, we've seen, in some instances, negative EBITDA from the other and eliminations category, which obviously includes Asia and Oceania and the markets that are doing great. But it also includes other stuff like the [ G plus ] stuff and other things. So I was wondering if you could give us a bigger picture understanding of why that EBITDA was so positive this quarter? Is there less cost maybe on G plus? Or did Asia and Oceania do like that much better? What's really going on there?

No. Let me tell you, the result of Asia and Oceania has been quite stable during the last 4 to 5 years. We are doing very, very well in there. And the profitability rate, as I already told you, got a very good in terms of commercial sales. We have a very good return, and that does not imply that this quarter, we have all this year, we have a, let's say, a tremendous result Oceania because it has been quite stable throughout the time. Currently, what I can tell you is maybe the EBITDA margin for the division is something about 12% or something about that. And it has been in the same rate, sometimes is higher, sometimes lower, but not quite different. China, particularly last year, it was a little bit lower because of the pandemic. But China is one of the most profitable in terms of EBITDA in the division. Also Australia is doing very well. All the countries are doing quite well, but happy particularly in other and elimination line. Is -- this particular line depends in a very strong manner or a very strong way to our technology and equipment division. In the past, we've been growing but at a very low rate. Let's say the pace of growth and the operations we've been doing was lower. We have that full -- let's say people working there, but we have not enough volumes to rectify all the people there. Now we started to go up in a very important way. We took advantage of all the people we have in this division, in every division. And we are doing quite well. We are producing a huge amount of production line. We operate some production lines to the U.K., to Spain, to the U.S. And for the next, let's say, a couple of years, we will produce something about -- maybe about [ 32 ] production lines additionally. And eventually, we will maybe bank capacity in our corn flour operations, particularly in Mexico, and maybe also in the States. Then because of that, because of the tremendous activity we saw during 2020 in the R&D division, that's why this row have an important improvement in the results. It's not a matter of if Asia and China have a very good result. It's not -- nothing to do with this division, but it's particularly the technology and equipment. Then for the year next, due to the activities of this company, you will see something about MXN 150 million to MXN 250 million benefit from this -- in this goal. And again, Alvaro, maybe what we want to do by the end of the year on the business, we are working to open the A&O division. We also benefit and to see what the performance is of the company and follow the company on acquiring new businesses.

Yes. That would be super helpful and I super appreciate it. Just one quick clarification. And that was super helpful. One, the clarification is on your CapEx guidance. Did you say $200 million to $220 million or $300 million to $320 million?

No, $300 million, $300 million to $320 million, right. $300 million.

Perfect. Yes. And I'm not sure if someone asked us. If they have, no need to answer it. But any color on the impairments would be very helpful as my last question.

Our next question comes from Fernando Olvera with Bank of America.