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 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Adolfo Fritz, GRUMA's Investor Relations Officer, who will present earnings results; and then to Mr. Raúl Cavazos, GRUMA's Chief Financial Officer, who will be available in the Q&A session after the opening remarks. I would now like to turn the conference over to Mr. Fritz, IRO. Please go ahead, sir.

Thank you. Good morning, and welcome to our third quarter 2021 conference call. As always, we are very appreciative of your time and for giving us the opportunity to share our results with you. I'm joined here today by Raúl Cavazos Morales, GRUMA's CFO; as well as Rogelio Sánchez Martinez, GRUMA's Corporate Finance VP. Before we open the call for questions, I would like to share with you our results and fundamentals for the quarter. Our company keeps capitalizing on opportunities in all the regions where our footprint has been expanded in both the tortilla and the corn milling businesses. In the tortilla business, the retail channel has been greatly benefited by the acceptance of our Better For You line in the U.S. in addition to a solid performance of our food service channel as the economy keeps reopening in both the U.S. and Europe. Coupled with this, our efforts in the division of Asia and Oceania have been paid off with a great performance and acceptance of our products in this market, which just adds to the success we've had in educating the world with regards to the use and versatility of tortilla in every meal and diverse culture. In the corn milling business, we increased prices further in July in Mexico and mid-August in the U.S., adding to the price increases we implemented in Mexico during the first half of the year. We feel comfortable that these additional increases will help us to completely offset the inflation effect that took place during the first half of the year and keep attractive margins going forward in our operations in these divisions. This price increase, however, did result in a temporary 2% decrease in volume in the Mexican division, while in the U.S. division we reached 10% volume growth. We expect the volume decrease in the Mexican division to be recovered over time as our clients deplete their current inventories and start products with the new set prices. Given the product mix of the portfolio, while volumes remained flat, net sales increased by 2% even with the negative effect of the strengthening of the peso, without which it would have grown by 9%. More importantly, however, compared to 2019, net sales have grown 17%, setting up a solid base for the future. On the cost side, higher cost of corn in the Mexican division and labor in the U.S. division in addition to an overall growth in inflation impacted our COGS. We're confident that this effect will be compensated with the price increases done in corn flour as well as on the tortilla side that we regret to inform that we just increased prices in our tortilla division in the U.S., whose benefit you should see reflect starting in the fourth quarter and therefore, it should start reflecting higher levels of EBITDA margins. EBITDA was 7% lower given the inclusion of extraordinary gains during 3Q '20. Excluding these extraordinary items, EBITDA would have decreased by 2%. And without the negative currency exchange effect, it would have grown by 5%. Let's focus now on each one of the divisions so you can have a more detailed picture of the fundamentals I just mentioned. In the U.S. division, the retail channel has proven to be very resilient after the pandemic effect, which gave us great results in 2020. The client base we have been able to build for our Better For You line has enabled us to create some stable levels of growth for these products, which is part of our strategy to increase their composition in the portfolio from single digits to 25% currently. Our plan is to keep on pushing forward to further expand the composition with these products, making our portfolio even more profitable over time. This retail base of clients was coupled with the solid support from our food service operations, which have been growing in line with economic recovery in this region and the solid performance of our corn flour operations. Volumes sold during the quarter grew by 4%, supported by our corn flour clients' own business seasonalities driving a 10% volume growth within flat tortilla volumes. Net sales grew by 6% in the U.S. division supported by changes to our portfolio mix progressively shifting to a more profitable composition. It is our purpose to continue this trend as we keep supplying the strong demand that we're seeing for our products in various regions of the country, but particularly in the Northeast. Furthermore, at our corn milling business, we increased the price of our products during the quarter. Please note that compared to 2019, our total net sales in the U.S. have also grown by 17%, giving us a great momentum in that business. Labor continue to be a weighing factor in our COGS as we keep on hiring new personnel to smooth out the cost of overtime. We don't see additional labor costs increasing and are certain that the incremental amount of COGS we experience will be diluted over time as we keep on hiring during the year. With this performance, our U.S. division yielded a flat EBITDA while EBITDA margins contracted 110 basis points compared to 3Q '20. However, margins should be restored as the new set prices in our tortilla products are implemented during the fourth quarter. On GIMSA, volumes decreased by 2% from the effect of price increases in the face of higher corn prices. We expect this effect on volumes to be temporary as our clients experience a turnover in inventories and replenish them with newly priced corn flour. As a result of such price increases, net sales grew by 13%. EBITDA was 8% higher than a year ago, and EBITDA margin stood at 15.6%. Please note that EBITDA margin is 70 basis points below that of 3Q '20 given the arithmetic effect from the increase in prices on revenues relative to expansion in costs. In terms of profitability, we have increased EBITDA per ton by 10%. In the Europe division, the positive trend we experienced during the last quarter continued in the third quarter. The tortilla volume we sold in Europe was 16% greater than that of last year, giving us not only very promising signals for the future performance of our tortilla business in this division, but also a new historical volume record. It is our intent to keep on focusing our strategy and strategic growth in Europe and maintaining it as our core product going forward. Volumes sold in corn milling were 20% lower as the fundamentals we saw last quarter mirrored those we saw in 3Q '21. Some markets have been very sensitive to price increases in corn milling products and byproducts and have been reluctant to buy at current levels. This, coupled with the solid year we had in 2020 as a result of the pandemic, led us to have the aforementioned contraction. Total sales increased 17% relative to a year ago. EBITDA declined by 43% while EBITDA margin stood at 8.4%. This drop in EBITDA is on the back of extraordinary gains related to insurance claims that took place last year. Without these onetime gains, EBITDA would have grown by 39%. Lastly, the Central American division keeps going through a period of normalization since the last quarter of 2020. During that time, on the back of the pandemic, several UN programs were in place in addition to direct sales to several countries that boosted our performance in this division when compared to our historical levels of operation. As the economies are trying to stabilize as they reopen, those programs are no longer in place. However, our operational metrics are marginally higher than those of last year as we keep pushing on our marketing efforts diligently across the region. As such, our volumes were 1% higher than last year, while our sales were 4% lower. The higher cost of corn and other raw materials has also put additional pressure on this division, contracting EBITDA margin by 620 basis points and EBITDA by 48% compared to a year ago. We're confident that price increases will restore margins as we grow volumes in this division. On a side note, I would like to add how satisfied we are with our operations in the Asia and Oceania division. We keep expanding our presence and our production capacity. As we had mentioned in the past, we briefly open the numbers of this division this quarter just as a teaser of how things stand today. Volume grew by 10%. Sales stood at $60 million, growing by 6% relative to 3Q '20. And EBITDA increased by 31%, reaching an EBITDA margin of 16.9%. As we've mentioned before, it is our intent to publicly disclose these figures as a separate division as we're eager to show to the market in more detail what our plans are in that part of the world and how that fits within our overall business strategy going forward. Our other subsidiaries operating income increased MXN 163 million to MXN 144 million due to the performance of the Asia and Oceania division, the technology division and better expense absorption at the corporate level during the quarter. In terms of CapEx, we invest approximately $65 million in capacity expansions at our plants in Indiana, Spain and Malaysia, maintenance work in Omaha as well as in wastewater treatment systems at our corn flour plant in Evansville. Additionally, we invested $45 million to purchase the property of our tortilla plant in California, which was previously being leased. With everything we've talked about, we want to reiterate that we are on track to reach our consolidated guidance for the year. For 2022, we have hedged all our needs of corn in our operations in the U.S. as well as 80% of wheat for the first half of the year and 100% of corn in Mexico. We feel very comfortable with these positions, especially in relation to the price increases we managed to pass on, providing us a promising perspective on higher margins in 2022. In sum, our team wants to give you an assurance that we keep working hard at expanding our operations abroad to keep up with the fast-growing demand we're seeing in the U.S., Europe and Asia while always safeguarding profitability. With that, I would like to open the call for questions from the listeners today. Operator, will you open up the call for questions, please?

[Operator Instructions] Our first question comes from the line of Felipe Ucros with Scotiabank.

Price increases in the U.S., you mentioned price increases in tortilla at the end of the quarter. Can you delve a little bit deeper to tell us in which channels you drove the price increase and in which ones you have not? And also, I don't know if you can discuss this, but it would be great to know what the magnitude of those increases was and how the negotiations with Walmart ended up going if they're done.

Sure. Thank you for your question. Well, in regards to the price increases, we increased prices on all our products across all regions progressively, of course, but in the U.S., they were implemented at the end of the quarter, as you very well said. The prices we implemented on our products range depending on region and category. But in all, we went from single high digits to even mid-20s. So with those percentage increases across our product line related to the increases we experienced in our cost structure, we feel more than comfortable going forward and not only restoring margins, but be more profitable ahead.

That's great color. And were you able to, I'm not sure if you can discuss the channel makeup. Obviously, you talked about products and regions. But there's one channel, which is large retail that has historically been a bit more problematic. I'm not sure if you can give us some color on how that went.

Sure. The actual negotiations or the price increases that we closed at the end of the quarter were for the retail portion of the business. And again, it just depends on the product we're talking about, but they were approximately on high single digits more or less.

Our next question comes from the line of Isabella Simonato with Bank of America.

I have 2 questions. In the U.S., can you guys give us any view if you're facing any sort of disruption or shortage across the supply chain? I understand, of course, labor has been an issue for a while, but are you facing any sort of logistics issues, higher freight or anything in that sense? And moving to Mexico and similar to Felipe's question in the U.S., how are you thinking pricing especially in 2022? And if you will give us a sense of magnitude on potential hikes in Mexico for the upcoming quarters.

Sure. So first and foremost, as most of you know, labor, supply chain disruptions, it's a theme of the last few months and something that's been progressively getting worse over time. However, I can tell you that in terms of labor, our problem has been in terms of the overtime we have to pay to our employees because of the vast demand we saw in the country, in the U.S. I mean, given that, that was the case and given that we experienced that between, say, the second quarter and the third quarter, we started hiring progressively. So we have now completed almost the hiring process in this regard, and that should keep our labor cost down from the levels that we saw probably at the beginning of this quarter. So in terms of labor, we had an ongoing process in terms of new hires that should alleviate the additional load of cost in that regard. In terms of your other question in terms of supply chain disruptions, right now, we don't see any. As a company policy for many years, we've been, we've had a very secure line of inventory levels that allows us to account even in our operations for mishaps along the supply chain. So we contemplate those mishaps like any other business in the world. And right now, we're very comfortable with the levels that we have our inventories in and supply chain disruptions should not be seen in our operations in the medium term. In terms of the other question in Mexico, price, right now, we just concluded the price increase, as you know. In August, we placed our latest price hike of 13%. Overall in the year was a pretty aggressive hike along the lines with the basic basket of goods that exists here in Mexico on inflation. And moreover, obviously, the corn prices that we saw in the market that everybody was seeing globally. We have to wait until next year to see how the price of corn behaves until then and how the trend is relative to Chinese demand and the harvest at that point in time. However, my main message and our main message to everyone is that we will sit down again with our counterparts and start negotiating further price increases as need be, whether it's inflation or whether it's any other sort of cost disruption along the cost structure in our other business.

Our next question comes from the line of Antonio Hernández with Barclays.

Actually, now that the supply chain has been already discussed, I would like to check if you could confirm, please, the amount of hedges that you have for next year in the different regions.

Sure. No problem. So we, as I just briefly mentioned, we covered all our hedging for corn in the U.S. We're at 100%. We have 80% of wheat covered for the first half of the year and 100% in corn in Mexico as well. So we're in pretty good shape. As you know, since last quarter, we're not disclosing the exact level of those hedges for commercial reasons, but we're in pretty good shape in terms of coverage.

Perfect. And seeing the overall, I mean, input cost pressure, but also being offset with these hedges and then supply chain disruption and that is also being overcome, labor issues as well. Out of these 3, 4 issues, what could be maybe your biggest concern?

Can you repeat the question, please? I had a little bit of problem understanding it.

Sure. I mean, considering that hedges are in place to offset some of these input pressure, the supply chain disruption is also being overcome and labor issues are also being overcome as well. So considering these 3, 4, is there anything in particular that might be of a concern going forward in next year?

No. Right now, I think our main focus has been on the price increases in our products. I think that was a concern. There was also a market concern overall for quite a bit of time. We feel that we successfully raised prices, as I said, across all our channels and across all our regions. We'll be implementing them progressively in other regions other than the U.S. and Mexico, which they're already in place there. But as of now, we don't see challenges that we're not currently handling and we're handling them pretty well. So we feel comfortable with our position right now.

Our next question comes from the line of Alan Alanis with Santander.

Good results, congrats. So let's take a step back. So you have 25% now of your products in the United States being Better For You so that you have premium pricing. I have 2 questions. How much? And you said that you want to increase that even more, congratulations. I mean, what's the premium pricing that those products have? But my most important question is, okay, you're covered with all of your hedges for next year, for 2022. You're very good. You're taking very aggressive, well, you're taking pricing because you're taking pricing. Right now, consensus is expecting around a little bit over 16% EBITDA margins. But it seems that you have everything already locked in, in terms of price increases and hedges for next year, is it fair to say that you can exceed your margins of 2020 in 2022? I guess that's the real, that's the most important question, consolidated, across all the countries.

Thank you for your question. So yes, our main strategy, as you just said and as I mentioned on the opening remarks, is to increase the composition of the Better For You line. These products are very sophisticated in nature in terms of the composition of ingredients that they have and the market that they service. So our main goal is to increase them. And of course, given their nature, across our product line, our array of products, they're in the upper end of our pricing. That's just because of the market that they're targeting and the nature of their products. Now what our target is for that composition, right now, we're just very glad about the growth we're seeing in that division as we further enter the market in the U.S., where it's been very, very satisfying to see the high demand we're having for those products. I can tell you that product-wise, those products have had a growth of double-digit growth consistently. So we're very proud of them, and we're very satisfied with the development over time. However, along that evolution, we're probably trying to get those to be above 30% of our composition in the short term and hopefully increasing margins. In regards to your other comment of us having everything locked in, as I mentioned, we're in pretty good shape after the price increases and after covering ourselves or having everything in place to be prepared for any further challenges that could happen and along the lines of supply chain disruptions or logistic disruptions. So right now, it is a question of servicing the everlasting demand we're experiencing. I cannot overstate this enough how the demand that we see right now, it's unprecedented. And right now we're focusing on expanding capacity. Right now, our capacity is along the lines of 90%, so we're focusing on providing more volume to the market to benefit from the margins that we're able to achieve.

Got it. So in other words, the focus continues to be on profitability, and it would not be out of the question to reach a record. You had record high margins in 2020. You should be able, it sounds like you can break that level of 16.5% and go above 17% or 17.5% in margin for next year. I think that would be a fair assessment, right?

Yes. That would be a fair assessment. As you know, our CEO has always been focused on profitability, and that's how it's going to be going forward.

Yes. Last question, last question for my part. Could you quantify the increase in pressures of labor in the United States? I mean, because you're not the only one who's complaining about not being able to find people, right? Just give us a ballpark figure of how much that those labor cost pressures are just across the board, across your industry and across what you're seeing in your industry.

Well, labor overall represents, depending on the region, obviously, but on a consolidated basis, it represents about 8% of COGS. So given their weighting, we have not seen an actual increase that I can think of right now. But more or less, it should be around 20% increase across the industry.

Yes. Got it. Yes, no, that's what the inflation we're seeing in the United States. Okay. That was very clear and very useful. Congrats.

Thank you for your question.

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

So you kind of talked about it in a previous couple of questions, but I mean if you think or look beyond the recent headwinds in the U.S. coming from labor and the commodities and the cost pressures overall. But thinking long term, can you share with us your thoughts on how do you see post-pandemic growth and margin potential for the U.S. business?

Well, right now, as I just mentioned, we were fortunate enough to have these talks after everything was "out" in terms of all the cost disruptions that we saw along our cost structure, so we were able to negotiate based on those. And based on the price increases that we put in place, we're pretty comfortable with that. Now what the future is going to hold post-pandemic is something that I wish I knew. I wish that I knew exactly how things are going to be post-pandemic. But we're more than prepared to if it's something in regards to cost pressures to sit back down again with whomever we have to sit back down again in terms of our counterparts and negotiate pricing again to safeguard profitability and shield our operations as we just did in the retail segment and in the food service segment and in our corn flour segment across the board.

Right. So maybe another way to ask this is, I mean, do you still see a premiumization of your portfolio in the U.S. as a growth avenue and also profitability avenue? You mentioned about the strong volumes that you're seeing and you're adding capacity to it. So perhaps this is a secular trend that did not move and perhaps even accelerated post-pandemic?

I'm very sorry. I think something, there's something wrong with the line. Could you repeat the question because it didn't come up very clear on our end.

Yes. So I said another way to ask this is there's, I mean, the secular trends for tortilla or flatbreads in the U.S. doesn't change post-pandemic, and in one case, even accelerates. And so you're seeing strategies as premiumization of your portfolio accelerating as well. I mean, nothing of this story that you've told us over the years in the U.S. has changed after the pandemic. Maybe that's another way to ask the question.

Yes, sure. I think that what the market in general was expecting was a contraction, especially in the retail side post-pandemic. I believe we've done a great job during the pandemic to market our products, and it was a great time for our clients to know our products, our entire array of products, which is pretty vast and more specifically the products that are good for your health, which is the product line that we're currently focusing on to expand. So now that the pandemic has sparked a lot of healthier lifestyle trends that helped us in that regard as well because of the same reason. So the pandemic gave us a pretty stable base of clients in the retail segment that has enabled us to reach the volumes and the sales we're presenting to you today, even after a great year, which was a pandemic as you, well, for the 2020, I should say, because the pandemic is still going on in some regard. But 2020 was a huge year for us. And in spite of that, we were able to deliver growth compared to that performance. So we feel very, very comfortable with the clients and the market that has been established, not only in the Better For You line but across the board. We're extremely satisfied with how the brand of our products has gotten to be known within our clientele and showing the demand we're seeing. So in terms of the post-pandemic, if you want to view it like this, I would say stable growth from the retail channel relative to how it is today, something that I think the market was not counting on. And I could tell you that also the same thing is happening in Europe, right? In Europe, you see the performance pre-pandemic, we were focused on food service. And we had a not rough time, but we were a little bit delayed in the reaction in terms of the retail channel. If you see our numbers right now, we're really doing fantastically well in retail in Europe. And we see that as a very strong base for future growth as well. So combining that performance with the U.S. post-pandemic now and the other regions that we're working on, including Asia and Oceania, which as you can see from our report, we have great margins over there and the acceptance of our products have been outstanding, I think it's just a question of pushing on volumes with keeping profitability, of course, but keeping on pushing volumes in all our regions, responding to the huge demand we're seeing, particularly in the U.S., as I mentioned, and focusing on that to keep going on and keep increasing the intrinsic value of the company.

Our next question comes from the line of Ulises Argote with JPMorgan.

Just one follow-up on the U.S. price increases. So just to understand a bit better, is this like an extraordinary increase that you're doing right now in the final part of the third quarter and into the fourth quarter? And can we expect any more increases into next year or will this be the level that you will carry into next year? And then the other one, just to dig a little bit deeper there on capacity utilization. I think you mentioned that you're currently running at around 90%. So can you provide a little bit of detail there on each of the regions, maybe particularly thinking into the U.S.? And how kind of CapEx expectations should be around this for the final part of the year?

Sure. Thanks for the question. So in terms of price increases, we negotiated on the cost structure that we see currently and foresee for the medium term. So we're comfortable with that position. What's going to happen in the future, we obviously don't know. But as I mentioned, we're very open and flexible. And then if once you have different cost structure will sit back down with our counterparts and start negotiating on price increases again, just like we just did this year. So we feel very confident in that regard. And in terms of the capacity question that you mentioned, well, we're 90%, as I mentioned. Normally, you can count on us investing on CapEx around $100 million to $150 million. That's in addition to the maintenance work we do, which is around $100 million. So it's $250 million more or less approximately every year. This year, we gave our guidance of $320 million. We're not going to reach that guidance, but we should be around $260 million, including the property we just bought in California. And right now, in terms of demand, the strongest demand we're seeing is coming from the Northeast. Right now, we're trying to satisfy that demand with distribution and logistics, but we're more than sure that once things are up and running fully in our plant in Indiana, we'll be able to satisfy that demand pretty easily. Again, just having price increase in our perspective on costs, we are every day assessing future demand and based on that calculating our CapEx over the year. So please be rest assured that we're satisfying the demand as it is. We're just right now extremely satisfied with how demand has been post 2020 and the prospects that we have for the future with the market as it is today.

Our next question comes from the line of Álvaro García with BTG.

My first question is on the others. So we now, thanks for breaking out Asia and Oceania. That's fantastic. Very profitable segment, most profitable market of yours. But what I'm asking about is actually the other others. So the corporate expenses, the technology division, if I grab the others and I subtract Asia and Oceania, it's obviously a negative number. How should we think of that other others going forward, into next year and sort of longer term? Is that something that will always be a drag? And if so, sort of if you can quantify that, that would be very helpful for modeling purposes.

Well, talking about modeling forward, I think it's like MXN 100 million more or less pesos per year in terms of EBITDA, in terms of EBITDA, of course.

Yes. Of negative EBITDA just from intercompanies and...

Yes. Correct.

And corporate expenses. Okay. Wonderful. Wonderful. Great. And then my other question on the third quarter specifically, it seems most of the pressure in COGS in the U.S. came from non-grain items, right? So I just wanted to sort of confirm that the third quarter, you still had solid hedges in place from last year's prices of corn. Is that correct?

Yes. No, everything is fine in terms of hedges, feel more than comfortable with those hedges and everything. We're at 100%. So I wouldn't say that's an issue. And as I said, with the price increases we've set at the beginning or the last days of the quarter in terms of our tortilla operation in the U.S., you should also feel more than comfortable with further labor cost increasing or inflation or any other typical aspects of our cost structure being volatile.

But for the third quarter specifically, so this last quarter that you just reported, it's fair to assume that there really wasn't an increase in corn prices yet, right, that you still had a favorable hedge?

Correct. That's correct. Yes.

[Operator Instructions] Our next question comes from the line of Enrique Mendoza with Actinver.

A question regarding labor cost in the U.S.A. Specifically, if you could share with us how much of the cost per unit increase is explained by labor cost increases. I don't know if you have any kind of figure about that.

Enrique, thanks for your question. I actually don't have that number specifically. But I'll be more than glad to send you the information or through a call and give you the information in that regard.

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. Adolfo Fritz for closing remarks.

Well, thank you all for being here today and giving us a chance to share with you our results. We look forward to seeing you in the future conference or other calls we might organize between our company and yourself and have a great day. See you next time.

Ladies and gentlemen, this concludes GRUMA's Third Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.