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 Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Raúl Cavazos, GRUMA's Chief Financial Officer. Please go ahead, sir.

Thanks, Laura. Good morning, and welcome to our second quarter 2021 conference call. As always, we are very appreciative of your time and for giving us the opportunity to share our result with you. The tortilla business, whose footprint expressed mainly in the United States and Europe, exhibit a return shift towards the food service channel as it has been recovering, mirroring the progress in the vaccination effort across the world, resulting in food and leisure establishments reopening their doors to the public. As for the retail channel, it is showing remarkable growth in Europe and resilience in the U.S., given the strong client base we had been building over the past few years. That said, it has slowed down slightly in this region relative to last year's remarkable performance. Also, it is still well beyond our historical metrics. In fact, according to IRI consumer panel, GRUMA has been identified in the operator of top brands in the U.S. to have significantly penetrated the market in 2020 and retained more than 50% of gain during 2021. We are excited about these news and are confident that our strong client base will help us further grow our [ franchises ] and the presence of our tortilla across the country while increasing profitability. Similar to what happened to volumes in the tortilla business in the U.S., the high activity in corn operation last year was challenging to replicate, given the additional demand at the dawn of the pandemic. This effect had been similar across all the regions in global corn flour operations. Revenues during the quarter were driven mostly by the strong Mexican peso versus the U.S. dollar and to a lesser extent, by the change in sales mix of both the tortilla as well as the corn flour operations. Nevertheless, in Europe, we have a solid performance while prices increased in Mexico during the first half of 2021. Please keep in mind, however, that excluding the appreciation of the peso compared with second quarter 2020, net sales will have grown 3.5%. The volatility seen in the price of the corn has hit all players in the industry. We have seen fluctuations in the consolidated COGS figures that in addition to the strength of Mexican peso and the high cost of labor relative to the strong demand in the U.S. have temporarily and slightly hindered our EBITDA margin growth. EBITDA stood at MXN 3,716 million, representing an 8% decline, while our EBITDA margin decreased 10 basis points to 16.6%. Again, in line with the sales, excluding the appreciation of the peso compared with second quarter 2020, EBITDA would have grown 3.5%. Even with the price of corn at the level it is today and the volume dynamics I just mentioned, I still want to highlight the notable trend that we are on relative to our historical performance. In the U.S., analyzing today's performance and demand, we will be growing at a CAGR close to 10% in sales net out of tier retail channel in the period since 2019 through the end of this year, again, on an annualized basis. This is compared to a historical 3% and 8% or 3% -- of 8% versus 3% in number of tortilla sales during the same period of time. Following this same line of thoughts, our consolidated financial annualized indicators also point to a very stable growth trend of 15% in EBITDA and in net sales since 2019. This sets as a great indicator for us that is the strategy we put forward a few years ago with regards to innovation and application to cultural and lifestyle trends has been successful. In view of our long history in this industry, we remain confident given the temporary nature of the price of the corn, in addition to our plans to further increase sales prices well and when it is warrant, coupled with the normalization of the cost of labor in the next few months, we will generate revenues in a normalized level of EBITDA margin that will help us sustain this trend of operational success I just mentioned. Now let's talk a little bit about our subsidiaries. In the U.S. sales volume remained flat, showcasing [ an effect ] between volumes sold out of tortilla business, which decreased 1.8%, and that sold out of corn flour business, which increased 2%. The higher comparison again last year, given the pandemic effect on demand, in addition to a change in the sales mix of tortilla products toward the food service channel, generated a marginal 1% decrease in net sales relative to a year ago, which was the strongest one we have had in the company's history. We remain confident about our future performance in the region, given the market dynamics that we have seen related to our tortilla operations. We have been successful in retaining the majority of the client base we generated in 2020, as I mentioned earlier. In addition to that, our focus on continuous innovation on products that match consumer lifestyle change such as our Better For You product line with full growth across the U.S. as people keep discovering the benefit and versatility of their tortilla. Higher material cost [indiscernible] as well as higher labor expenses as a result of the pandemic increased COGS. And as a consequence, EBITDA decreased 6%, and EBITDA margin declined 100 basis points to 18.3% from 19.3%. At GIMSA, sales volume decreased 2%, as with other regions, the comparison base of last year, where we had a surplus in demand from the pandemic effect on consumer behavior that a [ sidebar ] to be overcome this year. Net sales increased 2% as the price increases. This has -- which we have been communicating since the start of the year, have been taking effect with our operations. Some of these increases were put through in the quarter, so have yet to see the full effect reflected on pricing. Similar to other companies in the segment, the high price of corn has indeed impacted our operations. EBITDA was 5% lower, and EBITDA margin declined 130 basis points to 15% from 16.3%. As of June, we have seen that our profitability has been restored, and we have finished implementing the price increases which we communicated during the first half of the year. In Europe, sales volume declined 1% in spite of a solid performance of the tortilla business, both from our retail effort in the region, which has been accelerated from the beginning, and a trajectory at the food service channel, which have been hit by the pandemic effect last year. Our corn milling operations were [ shielded ] by price of corn as some regions are highly price sensitive, decreasing volumes sold by 15%. Nevertheless, our strong effort in terms of market penetration in the retail segment in relation to our food service segment recovery and a high-margin sales mix in the [ major corn market ] enabled us to grow sales by 33%, which was also reflected in EBITDA growth. EBITDA was fully supported by $6 million in gain in the sales of a piece of real estate. Lastly, in Central America, volumes saw mirror those of other corn flour-focused business in other regions, decreased 7% compared to last year as volumes were driven by government welfare food programs coupled with the pandemic holding effect. There is a high basis of comparison. This created a 19% net sales decrease in peso terms driven also by the effect of the stronger Mexican peso. EBITDA decreased 49% to MXN 88 million. And EBITDA margin fell 420 basis points to 7.3% from 11.5%. At our other subsidiaries, operating income increased MXN 154 million to MXN 232 million due to a very strong performance at GRUMA in Asia and Oceania during the quarter in addition to higher corporate [indiscernible]. In terms of our CapEx during the quarter, we invested approximately $53 million in capacity expansion at our new plants in Indiana, Omaha, Spain and Mexico as well as in wastewater treatment systems at the corn flour plants in Evansville, Indiana and Edinburg, Texas. In closing, I want to assure our shareholders that, as always, we are working hard to deliver results through a strategic focus on profitability. And through the continuous implementation of that strategy, we expect great results ahead for our company. With that, I would like to open the call for questions for our listeners today. Laura, could you open up the call for questions, please?

[Operator Instructions] Our first question comes from the line of Isabella Simonato with Bank of America.

So I have 2 questions that are somewhat correlated, right? So first, how do you feel about the annual guidance after the first half is concluded? I mean what are the opportunities and where you see for each division in the second half of the year? And in line with that, specifically in the U.S., you mentioned labor costs are impacting margins, right, during the quarter. This pressure is expected to continue in the coming quarters. What are the alternatives here to offset this going forward?

Thanks, Isabella. Of course. Well, talking a little bit about the guidance, of course, is we have to sustain the guidance we gave you in the last conference calls because, of course, we've been challenging this first half of the year, and we're seeing kind of reversions in some of our figures. Then in order to update this guidance, what I want to tell you is that in Gruma Corp. in the U.S., in terms of volumes, we are expecting to be flat -- from flat to minus 1% by the full year since we are expecting that it would be a little bit hard to recover the volumes lost during the first half. And of course, since we are also announcing price increases for the second half, then maybe one of the [ circumstantial question ] may be related for [indiscernible]. We are not sure what will be impact on the volumes. But talking about that, maybe flat to minus 1% is going to be a good number. In terms of sales, we are talking about 2% to 3% higher. Of course, generally because of the price increase that we are expecting to implement in the rest of the year. And in terms of EBITDA margin, we are expecting to be flat this [indiscernible]. We are expecting to recover very shortly in the first half, and we are expecting to recover this EBITDA margin by the end of the year. If we talk about GIMSA volumes, we were talking about 1% to 2%. However, because of lack of sales to some [ developmental ] programs during this first half of the year and as well as because of the revision and withdrawal of support from the government of some programs, we are expecting it to be flat by the end of the year in terms of volumes. However, since we also already implement a new price increase starting July 1, we are expecting to be in terms of net sales in the high single digits growth for the full year. However, in terms of EBITDA margins also, we are expecting to have a higher [indiscernible] in the second half. There is something above in between minus -- we were talking about minus 100 basis points compared to the year. We are expecting now [ in somewhere ] about minus 100 or in between minus 100, 150 basis points for the full year. In Europe, we were talking about 2% growth. However, given last year low volumes base, we expect a strong double-digit growth in the tortilla business and also contraction in the corn flour business. The EBITDA expecting to be higher than this 2%, maybe going to be in the high single-digit growth. Just to give you an idea in the tortilla business, we moved, in volumes, about 45% during the second quarter of the year. Compared with last year, we are expecting a double-digit growth for sales volume. In terms of sales, net sales, we are expecting also double-digit growth for the European division. In terms of EBITDA margin, we are expecting something about 7%. We want to keep this margin. Even we are expecting to maybe a bit lower, we want to be really conservative giving you the same guidance we gave you last quarter. Central America is a little bit different. In Central America, we expected mid-single-digit reductions in volumes. Last year, that was a problem. The food program were at least very active last year, and this year has been slowing down. And even we are replacing also with directly with the consumers. We are expecting to be lower in volumes compared with last year as well as in these -- the reductions on net sales. And in EBITDA, we are expecting something between 100 and 150 basis points lower than last year in terms of EBITDA margin. And now all in all, talking about the consolidated figures, what we are expecting in terms of volumes, we are expecting to be basically flat compared with 2020. That would be remarkable for us since last year has been, by far, the highest volume sold by the company on a full year basis and really a very good 2020 and be flat during the year. That implies that the effort the company to have these sales and volumes is quite remarkable. In terms of sales, we are expecting low single digits. And this is going to be given the price increases. Keep in mind the effect on the exchange rate in the Mexican peso, the strongest peso we have during this year. However, if you see -- if you compare those figures in dollar terms, you're going to see that we've been growing in all the indicators since '19 -- 2019 to -- or 2018 to now. We remain very consistently in terms of absolute dollars in the company. And also talking about the margins. The EBITDA margin for the year we are expecting to be something between flat and 50 basis points lower than last year. This is the annual guidance that we want to share with you for this full year. And at the light of the -- of this first half figure, we already reviewed and maybe it will depend on us how we are not taking into consideration, let's say, a reactivation of lockdowns because of the [indiscernible] or this pandemic. But we are not expecting to have any kind of important [ erosions ] because of -- as of today, the activities have been recovering a lot. In terms of labor cost, well, what happens in corona, what happens is because of the pandemic, we have some people which have been effective or is not assisting to the company and some of the operations they have been doing is -- have -- so time, let's say, additional cost with [indiscernible] just to supply the whole demand. But the right of these issues, what we've been doing is we are launching a new strategy supported by we are constructing [indiscernible] launching new conditions for -- to attract new people. And we are expecting that during the second half, we will be basically -- stabilize the labor cost of the company. Over time, we will be paying. Maybe that we would pay [indiscernible] as usual, but not as much as we did during this period of time. Then we are expecting the second half of the year basically stabilize the cost of the labor, particularly in [indiscernible].

Our next question comes from the line of Ben Theurer with Barclays.

Just following up a little bit on the outlook. I remember last quarter you gave us an update on your hedges on the corn side. If I remember right, it was somewhere in like the 4 50 range. Can you give us an update where you stand right now and how far out you're currently hedged? And what your expectations are in terms of where commodity prices are heading just looking beyond 2021 and what your expectations are maybe for next year?

Sure. Sure. Well, let me tell you that we already hedged the full corn for 2021. And actually, we already hedged the full corn, half of [indiscernible] for 2022 as well as about 80% of the wheat for the first half of 2022 in also in [indiscernible]. Also, even we already hedged the price of the corn for the second half of the year in Mexico at the 100% requirements, and we already hedged 100% requirements of the corn for the second half of the year, 50% of 2022 [indiscernible] as well as 50% of the price of the corn for the second half of 2022 here in Mexico. Hedges are higher. [indiscernible] At this point in time, I don't want to disclose because we are working on the price increase implementation. We already announced price increases, and we are in the process to be approved by all of our clients. In Mexico, we increased pricing beginning July by MXN 1,550 per ton, which imply about 14%. It was already implemented. Of course, keep in mind that we always last about a month just to implement or implement this price increase. And what I can tell you is that reduced hedges of the [indiscernible] this first half of 2022 since we already hedged the price of a corn and we already changed about 40% [indiscernible]. We are expecting to have [ final ] opportunity to hedge the remaining amount in dollars. We are expecting to -- do not increase price in 2023. Or if we do that, we are going to be really asking like a price increase. However, in the States, we are very -- as I told you, we already hedged the rate of the 2021 and the whole 2022 corn as well as 80% of the first half of 2022 wheat. And what we already did is that we made the exercise of these cost increases pursued because of the company. And we are really taking into consideration not only because of these commodities, but the cost increase in some other materials and some other inputs we require in our processes. And we already launched or made the communications to price increases in both businesses, corn flour and tortilla, beginning in this quarter. For corn flour, we are announcing price increases beginning August 15. For the tortilla and the food service [ segments ], we are expecting to have this [indiscernible] by the September 1 and for retail by the end of September. Those price inclusions already include all these cost increases [indiscernible]. And as you can imagine, because of commercial topics and because the sensitive information for our competitors, I cannot open or tell you what are the percentages we are expecting to increase. But what I can tell you that most of the [ profile ] are quite comprehensive on that. And they know very well what will happen in the market in not only with the volume side but also in some other materials as well as in distribution and transportation. And they are quite [ conscious area ], and they're all gross cost increases. And all this price increase is taking into consideration all this cost inflation, then the company feel quite comfortable that this will be accepted because we are very [ well ] in Spain and supported this price increase. And we are expecting that a lot of our clients will accept this price increases. And then by the end of the year, we are expecting to recover this additional cost [indiscernible] those markets for the company.

Our next question comes from the line of Felipe Ucros with Scotiabank.

Just a quick one on my end, and it relates to price volume elasticity in the U.S. So I just wanted to ask you about what the consumer elasticity [ is on ] tortilla, in particular, in the U.S. I'm calculating that in order to maintain the EBITDA margins in the U.S., the price increases would have to be around double digits to offset the pressure in early 2022. So the first question is, have you ever increased the prices that much in the U.S.? And the second one is, what do you expect is a reaction from the consumer? Because it's very clear that the consumer is highly inelastic in Mexico. But just wondering how the consumer usually reacts in the U.S. It's been a long time since you raised prices.

Sure, Felipe. We are talking about the price increase, we distribute in Mexico, of course. We are different than us. But again, I can tell you [indiscernible] maybe in the next conference call we can discuss about what the percentages of price increases we implemented, but not at this point in time. And please ask as well your understanding because we cannot give this information at this point in time because our competitors will take advantage of that. But no, no. We are -- we have value far from our estimations of price increases. And our price increases calculations again includes the recovery of the product increases and with that recovery, the margins for the company. In terms of supply will be the, let's say, the behavior of the consumer in the year because of these price increases, we cannot tell you at this point time. We are not expecting to have any major impact since the -- this is not only for tortilla but is on the industry, is on the commodities. We are not talking about on the corn but we're talking about everything in the [indiscernible] and a little is more expensive in all the producers as well as increasing prices and they're going to be the option. What I can tell you is since the company embarked in the product development, particularly on the Better For You, you have seen an important switch from regular progress to Better for You programs paying more. And that can give you an idea about what you can expect. The consumer is expecting to pay more, to [indiscernible]. You provide the high quality and add value products [indiscernible]. The market [ not expect ] -- we are not expecting to have any kind of reduction on the consumers. But, however, these are the moments we can suffer a bit more, talk about that in the next conference call just to advance the project implementation on operations side.

Our next question comes from the line of Luis Willard with GBM.

It's regarding free cash flow and especially working capital this quarter. Can you walk us through the dynamics that you saw regarding your working capital management this quarter and so far in 2021? And how do you see this evolving in the rest of the year? And in the same line, how do you feel about CapEx for the full year?

Sure. Well, this second quarter, it was a little bit different because we have an important recovery from working capital sales last year. The food service companies in the U.S. asked Gruma Corp. to -- for additional period of time, for additional term for the payment because of the situation they were having. Of course, we convened with them, and we agreed to extend that period of payment. In the second quarter, we have an important recovery in working capital because of the [ diversion ], particularly of the account receivables. We have a very good income on that. But for the rest of the year, we already bought the corn from Mexico. We will manage in a very good way as we've been doing that. In Gruma Corp., talking about the corn and talking about the wheat also, we are doing well. We are not expecting important amounts of requirements of working capital to the company to extend the [indiscernible]. Keep in mind that in the U.S., we basically pursue the whole corn in one corn harvest, let's say, from September to October, November. Basically, we are very finished in some small parts of the corn during March. However, the price of the corn is -- keep -- or is maintained, in some cases, in the silos of our suppliers, and we are -- they are providing us -- in [indiscernible], we are requiring that. Then we have not [indiscernible] as well as in Mexico. We are very hedged the full corn that we would require for the second quarter to have -- to be, let's say, to have enough corn to finalize the yield. Of course, we have some input into the corn and that they will have the [ discipline ]. [indiscernible] we have a very small amount, and we are not expecting any kind of issue on working capital. And second, the second question or talking about the second topic you were asking for, talking about the CapEx. As of today, we have something a little more than maybe $120 million or $125 million in CapEx. This CapEx has been really invested mainly in the U.S. and secondly in our European operations. But if you remember, I was sharing with you that we were planning to build a new facility in Indianapolis. And some of the constructors -- the contractors we are [ contracting industries ] to build this new facility in Indianapolis. They have been facing kind of issues with people, let's say, with personnel. And they are spending a little more in the construction of this [indiscernible] facility. Then we were expecting to start operations during the second quarter of 2022. Then now we are expecting to start operations by the fourth quarter 2022 this facility then we will be getting a little bit more of a CapEx program for the year. The other facility [indiscernible] to start operations in the Omaha facility [indiscernible] down last 2015. In this facility, we will start operations. We're expecting next August, next month, that will allow us to increase the production capacity as well as to save some money in terms of distribution since we will produce by the [indiscernible] Midwest instead of importing from, let's say, Dallas or California. And the product, we will provide from Omaha, Nebraska, and we want to be a short distance for that. Then for the full year, if you remember, we were guiding -- that we were expecting to invest something about $150 million or something about that. For now, maybe for the rest of the year, we are expected to spend something about $150 million is the rough [indiscernible].

[Operator Instructions] Our next question comes from the line of Álvaro García with BTG.

I have a couple of follow-ups. Just one very quickly. Just the CapEx figure you just mentioned was 2 25 to 2 50 for this year.

Right. That's correct.

Perfect. Just wanted to clarify that. And then you mentioned in the release less legal expenses in the U.S. I was wondering if that was a onetime sort of gain or is it maybe recurring going forward.

Onetime, onetime. So we settle down some [ recent processes ] with workers' compensation issues in the States where pay down those events, and that's a onetime charge.

Onetime. Okay. And then just one on Europe, and then one on Mexico. The one in Europe is, you mentioned -- I mean, profitability seems nice and high, even adjusting for the onetime real estate gain. And you mentioned the core Mediterranean region was doing well. Can we assume that sort of your margin there in the Mediterranean region is higher than 2019 levels at the retail level? Is that retail that's really driving that margin this quarter there?

Absolutely. We've had a couple of benefits in [indiscernible], let's say, in European operations. One of them is that the pandemic, we took advantage of that in wheat [indiscernible] process on the retail chunk in a lot of, let's say, supermarket chains. Now we have the presence as well as we are providing them some of our -- the [indiscernible] Mission brand. [indiscernible] and now you can find out in a lot of countries and a lot of chains our Mission brand in Europe. And of course, that allow us to have a better place. But just for you to [ review ] last year, the lockdown and the shutdown of the food service vessels, maybe the mix of our retail and food service was about 70% or 60% on retail and 40% food service. Now even during this year, we are recovering our sales on food service. We have increased prices. And we've been engaging the accounts, and the mix is going down a little bit. It's more or less 45% retail, 55% food service. But both of them are giving us more money, and we are recovering our profitability instead of maybe 2018, we have about 80% on food service and QSR and 30% only maybe on [indiscernible]. Now they are doing very well in their respective [indiscernible]. So [indiscernible] we're in the right trend [ of profitability ]. And so for your benefit with that, we are increasing production capacity in our Spain facility with our regional production line. We are having full production to produce tortilla. We already have solved those production basically because we are going in a very good way in the European operations and with a much better profitability for us.

That's wonderful. Just to clarify that number. You mentioned 2018, roughly 80% food service. And then obviously, peak of the pandemic, maybe that came down to 30% food service, 70% retail. And then now you're at 45% retail, 55% food service.

Something about that. Right.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Cavazos for closing remarks.

Okay. Thank you, Laura. And once again, I want to thank all of you guys to be with us today. We really appreciate your time. And please feel free to call us if you have some additional question, where [indiscernible] will be able to address any kind of questions you may have. Please stay safe, you and your families. The pandemic is going up again and really we need to be quite careful in order to avoid any kind of [indiscernible]. God bless you all, and thank you very much.

Ladies and gentlemen, this concludes GRUMA's second quarter 2021 earnings conference call. Thank you for your participation. You may now disconnect your lines.