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 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 we'll open the call for a Q&A session, where Mr. Raul Cavazos, Gruma's Chief Financial Officer and team will be available to answer additional questions. I would now like to turn the conference over to Mr. Fritz. Please go ahead, sir.

Good morning, and welcome to our fourth quarter 2021 conference call. We're excited to be here and thankful for the opportunity to share results with you. With me today, as always, are Mr. Raul Cavazos Morales, Gruma's CFO; and Rogelio Sanchez Martinez, Gruma's Corporate Finance VP. Before we open the call for questions, I would like to share with you the fundamentals and results for the quarter. The fourth quarter of the year underscored the continuity of the positive trends we saw during the second and third quarters of 2021, across the majority of Gruma's business lines in addition to continuing with implementation of price hikes across our divisions. In a tortilla business, the recovery of our food service channel is still ongoing, but now very close to pre-pandemic levels in the U.S. and fully recovered in Europe. Additionally, the solid performance of our retail channel in the U.S., which has been stable relative to our all-time high performance in 2020 and a strong double-digit volume growth in Europe, coupled with Asia's ongoing positive performance drove our tortilla business to grow compared to the fourth quarter of 2020. In our corn milling business, we also grew relative to last year, supported by the U.S. and European divisions, in spite of experiencing contractions in Mexico and Central America, where in addition to the tough comparison, Gruma has been conducting a selectivity process of corporate accounts, which also contributed to this temporary decrease in volumes. In all, Gruma's volumes remained flat for the quarter relative to the fourth quarter of 2020. As we announced last quarter, we increased prices for our products across the board to reflect the impact of higher inflation on the back of worldwide labor shortages and higher raw material costs. These price increases, coupled with the depreciation of the peso versus the dollar, helped our net sales growth up 17% over last year and 32% since the fourth quarter of 2019. Cost-wise, we continued our tight vigilance of our margins and profitability. We're already operating with higher raw material, labor and logistic costs. With the hedges we closed last year in the U.S. in addition to price increases on our products across all regions were sufficient to cover cost pressures. We do remain cautious for further price increases needs should they be warranted during the year. EBITDA grew 5% for the quarter, while EBITDA margin yielded 16%, and EBITDA per ton increased by 5%, in line with EBITDA growth. As we have communicated in the past, please keep in mind that the pass-through of cost to prices creates an unfavorable arithmetic effect on margins, and thus, EBITDA per ton is a better profitability metric in the inflationary context we're living. Compared to the fourth quarter 2019, EBITDA has grown by 29% and EBITDA per ton by 26%, while earnings have grown 29% relative to 4Q '20, [indiscernible] compared to the fourth quarter of 2019. Our balance sheet remains robust with a very healthy capital structure with a net debt-to-EBITDA ratio of 1.7x, while our operation is generating strong all leveraged free cash flows as it has done traditionally. We continue to target our capital allocation to CapEx to dividends [indiscernible] share buyback program as we believe our valuation is still at a deep discount compared to the median of our peers. On the CapEx front, during 4Q '21, we invested $70 million and $286 million for the full year of 2021. It is important to note that our tortilla plant in Omaha is fully operational, while the start of operations at our plant in [indiscernible] is contemplated for the first quarter of next year, as we saw further efficiencies in continuing our logistic operations as they are today for the time being. Achieving this outcome is particularly satisfying for our group, as it is based on a record-setting year and underscores the healthy demand we're seeing for our products across the globe. Beyond that, our actions over the course of the past year have set the foundations for our positive performance in 2022. Looking at results on a regional division basis. In the U.S., we continued seeing the trends in volume growth we have been seeing over the last few quarters of 2021. Tortilla volumes were supported double-digit recovery growth in the food service channel, while demand for our retail products kept volume stable even after the consumption we saw in 2020. Volumes in our corn milling business in the U.S. were also driven by higher demand spurred with the reopening of the economy as well as by seasonal holidays. This led corn flour volumes to grow by 6% compared to last year. Overall, in the U.S., volumes grew 3%, and so far, we have not seen a meaningful price elasticity effect even after the price increases implemented in October. I should point out that the pricing implemented at the end of the third quarter 2021, coupled with volume growth, resulted in sales growth of 15%. On the cost front, there was continued pressure due to higher wages and an overall rise in labor and raw material costs, raising COGS by 15%. However, as we have stated in the past, those costs should largely be mitigated by the price increases. Actually, in February, we recently increased prices again in our food service channel and are prepared to increase prices over the course of 2022, should current pricing be insufficient to offset the incremental costs. However, this is a measure that we would only utilize if the price hike is fully warranted relative to the context we're living today. That said, EBITDA in the fourth quarter grew by 15%, while EBITDA margin increased by 40 basis points to 19.8%. I would like to point out to our investors, EBITDA per ton, a more reliant profitability metric in our operations grew as well by 14%. The potential of the U.S. division in terms of growth and profitability represents a fantastic opportunity for us, and we started the year with firm determination to increase our sales mix composition towards Better For You line, keeping up the strong demand we're seeing there, which has driven EBITDA per ton growth of 15% relative to 4Q '20 and 23% compared to 4Q '19. In GIMSA, volumes declined from a year ago with a 4% contraction, which reflects the high base of comparison from 4Q '20, coupled with the effect of a corporate client selectivity process with the aim to reach a more profitable product mix into 2022. Sales, however, reflected the increase in pricing we implemented throughout the year, driving sales growth of 14%. On this, we would like to note that given the current inflationary environment, we increased pricing this year in February by mid-single digits to further support our operations in the face of increasing costs. EBITDA grew by 19% and EBITDA margin increased by 60 basis points. EBITDA per ton in GIMSA increased by 24% compared to [indiscernible], and we will keep our vigilance on this metric as we continue our strategy during 2022, increasing prices only when it is warranted. In our European division, we had an outstanding year as the retail tortilla channel presented double-digit growth in volume, while giving us additional driver of growth in combination with the recovery of the food service channel, which is already at pre-pandemic levels. Our corn flour operation finished the year strong, as the trend we saw during the first 3 quarters of 2021 in some of our products was reversed and experienced a higher demand from the southern part of Europe and for animal feed products. Overall, in Gruma Europe, volume grew by 17%, while sales rose 32%, driven by volume growth, implementation of higher prices and the depreciation of the peso. As we're seeing elsewhere, costs in this division also increased and remain a factor to be vigilant on. However, just as it has been the case in other divisions, the price increases implemented during the quarter, will lead us in protecting profitability going forward. EBITDA declined by 48%, given extraordinary gains from insurance claims in 4Q '20. Excluding those extraordinary gains, however, EBITDA would have grown 76% and EBITDA margin reached 7.6%. The successful marketing campaigns during 2021 and the recovery towards pre-pandemic levels in the tortilla food service channel have boosted our European division's tortilla growth by double digits. We will continue to focus on retail tortilla to keep its outstanding momentum in 2022 and beyond. In the Central America division, volumes were 3% lower in the fourth quarter relative to a year ago. Given the progress we had in place in 2020, that provided additional product to governments in the region as part of a UN program. For the sake of normalizing the numbers comparing volumes to those in the fourth quarter of 2019, we did in fact grow 16%. Sales were 10% higher compared to the fourth quarter of 2020, given the price increase we implemented in a better product mix. Costs have been a particularly important factor here, increasing by 16% as inflation has been creeping up on our cost structure for the last several quarters. We will remain vigilant as always on costs and are confident that now that prices have been increased in this division, we will see a positive performance going forward. We're confident that with the price increases taking place in this division, we will thrive in 2022, optimizing profitability. As we did last quarter, we provided a summary of our Asia and Oceania division's operation, which finished the year with remarkable results, with strong demand in Australia and Malaysia, giving us a solid grounding to proactively expand our footprint in 2022. Having provided a perspective on the fourth quarter, let's look ahead and provide you with a guidance for 2022. Again, please keep in mind that although margins will have an unfavorable effect from the implemented price increases across our divisions, EBITDA per ton is expected to improve. In the U.S., we expect to grow volumes by low single digits and sales by low teens, while EBITDA per ton should be flat- to low-single digits for the entire year. The EBITDA margin is expected to be 200 basis points lower. In GIMSA, volumes are expected to be flat, but we expect sales to be higher by low teens, and EBITDA per ton should grow by double digits with a flat EBITDA margin. In the European division, we're seeing volumes increasing by high single digits and sales by double digits, while EBITDA per ton should remain flat and EBITDA margin should decrease by 100 basis points. In our division in Central America, we're expecting volumes to be flat, while sales should grow by high single digits. EBITDA per ton should increase by double digits and EBITDA margin 200 basis points. Lastly, on a consolidated basis, we should see volumes grow by low single digits for the year and sales grow by double digits. EBITDA per ton should grow by mid-single digits and EBITDA margin should be flat or present a 100 basis point contraction. In terms of CapEx, we should be investing approximately from $300 million to $350 million in 2022 and be paying $100 million in dividends while we deploy the remainder in our stock buyback program. We also would like to inform that starting on January 1, 2022, Gruma has decided to report its financial statements to the [indiscernible] U.S. dollar. This decision was approved by Gruma's Board of Directors and was also reviewed by Gruma's Audit Committee. It will include all financial information related to quarterly reports starting in the first quarter of 2022 and thereafter. This change in reporting was based on Gruma's current composition of revenues and earnings stemming from operations outside of Mexico, especially the U.S. It will allow for an easier analysis of results for various users, including comparability among other global entities in the food and beverage industry. As we close the year, we're very optimistic about opportunities of growth and profitability for 2022, particularly, given the success we've had in our tortilla business, whose brand recognition has been increasing divisions other than the U.S. However, we do remain cautious about cost to act swiftly when needed to help protect profitability going forward. With that, I would like to open the call for questions from our listeners today. Can you open up the call for questions, please?

[Operator Instructions] Our first question is from Álvaro García with BTG.

I have 2 questions. My first one is sort of a longer-term question on profitability. I appreciate the guidance, but as we think longer term and as we think of protecting margin levels versus the absolute level of EBITDA -- and I appreciate the emphasis on EBITDA per ton, but is the focus sort of on a medium-term basis to recover that margin level in the U.S.? Or to simply recover the absolute level of EBITDA? That's my first question. My second question is just a simple one on Mexico. There is a 15% year-over-year decline in SG&A on the release of provision expenses. And I was wondering if you can provide more color as to what that was?

Sure, Álvaro. Thank you so much for your questions. So in terms of your first question on profitability, yes, I mean, the idea is for our margins to improve progressively. As you know, we're protecting profitability with price increases. And with the current inflation in place, you won't see a lot of change in the short to medium term, I would say, but in the long term, when these costs are getting diluted by lower inflation, in the long term, you will have to see eventually our margins going -- or margins going up by the proportional amount. So that would be our longer-term view of profitability just by current inflation and how we see that. And in terms of your question for the provision expenses. What happened in Mexico was that we just -- normally, we provision for not extraordinary expenses for some expense that we're foreseeing that could happen during the year. In this case specific, there were some insurance expenses that we provisioned for. We did not use any of that, and we just released them...

[Operator Instructions] Our next question comes from Antonio Hernández with Barclays.

Of course, you yourselves are going to be increasing much more than your volumes. But just to understand a little bit more, how much of that increase in sales is coming from either price increases or on sales mix? Just to understand how is your perspective on that and also to see how much of the input cost pressure you can pass through and [indiscernible] recent volatility.

No. Right now, it's obviously stemming from the price increases that we're doing. In terms of product mix, we continue our strategy, especially in the U.S., to keep improving our product mix there in terms of our Better For You line in terms of wellness and lifestyle [indiscernible]. So I would tell you that right now, at least, the growth has been mainly from the price increases and to a lesser extent, from volumes.

Perfect. Would you say that the U.S. could be a place where the sales mix is better positioned to improve going forward and maybe you are going to do basically 100% price increases?

I'm very sorry. I couldn't hear you when you were speaking. Could you repeat the question?

Sure. Would you just -- would you then say that sales mix has been better in the U.S. [indiscernible] sales performance in the other places, the improvement is going to come most -- basically, 100% from price increases, not that much from sales mix?

Well, I think in terms of product mix, where -- it depends on the region we're speaking, but in terms of product mix, the U.S. is in a very -- very well positioned with the Better For You line over there. Price increases are happening across the board in all our divisions. So it just depends on the product mix in each one of the divisions to see what the impact of that will be relative to the price increase. But I can tell you that everything -- having everything else constant in this case, the product mix, the majority of the increase will be coming from the price hikes that we're doing and to a lesser extent, from the volume business.

Our next question comes from Felipe Ucros with Scotiabank.

Congrats on the results again. Quick question on results and then maybe a little bit of a more strategic one. The quick one on results has to do with Asia and pricing in that region. It seems that prices have not moved drastically in that region based on what we saw in the last 2 quarters. Am I correct when I'm looking at that? And then I guess a follow-up to that is, do you have a price increase slated in that region for the next few months or next couple of quarters to kind of fight off a little bit the raw materials pressure? And then the next one has to do with the change on reporting to U.S. dollars and something -- it obviously popped into my mind because of that, but do you guys ever discuss the possibility of listing the Gruma U.S. division in the U.S.? Obviously, it's a huge percentage of EBITDA nowadays. It's the overwhelming majority of the business and comparable businesses trade at much higher multiples in the U.S. So I just wonder if you ever guys kind of contemplate the possibility of listing that division in the U.S.?

Well, thank you for your question. In regards to the first question, thank you so much for asking because that's something very important. Raw materials has been a factor of continuous pressure in the region. As a result, we are increasing prices there these few months of the year, progressively over the year actually. But the first course of action right now is to increase pricing now and then to see how it holds out the rest of the year. So that should improve things there for the time being. In terms of your second question, it is something -- that's something that's been, I guess, discussed and talked about for a long time, but it's not something that we're contemplating right now in near or medium or even long term. I mean we're right now focusing on getting the operation done the best we can and getting the results done. And if there's something to talk about with regards to that in the future, we will tackle that when it comes our way, but right now, it's not something that's on the table.

Great. Thanks for that color. And maybe if I could do a follow-up on the question that was done with regards to the mix. Just wondering how the mix went in this quarter, in particular? Because I imagine that as you get food service to reactivate, that may affect the mix a little bit because food service is obviously a lot less intensive on the Better For You brands, I imagine. And on the flip side, you also have very tough comps from the retail where those brands are a little stronger. So just wondering how that went in the U.S.? How that shift from retail a little bit more towards food service as the economy reactivates? How that is affecting the mix, if at all?

That's -- I would tell you that your reasoning probably is the common sense reasoning that you could see from the outside. However, if you really take a look at the products we're selling over in the U.S., they're niche products for a very specific market. In this case, the wellness and lifestyle market. So those products actually in terms of composition have been increasing from last quarter. So we don't see anything slowing down that demand because it's very, very specific. And the recovery of the food service channel, yes, it's been -- right now, it's very close to the pre-pandemic levels, it's been recovering efficiently, and it's provided just an additional support for us. And now that we've increased the pricing I just mentioned, it's going to be very beneficial for us. So in terms of product mix, I would tell you that we have a richer product mix, given that the food service channel mix has reached pre-pandemic level. They're at the same level, and we've just increased a more beneficial part, which is the Better For You line in terms of composition in our rare product. So right now, things are going very well in that regard. We'll have to see how the year unfolds with all the inflationary pressures and everything, but we're -- now we're good.

There are no further questions at this time. I'd like to turn the floor back over to Adolfo Fritz for any final remarks.

Well, thank you very much for joining us today. It's always...

Excuse me. Sorry to interrupt. We just had an additional person queue up for a question. Would you like to take them?

Okay. Sure, of course.

Our next question is from Álvaro García with BTG.

Just a follow-up on the guidance. Just to clear up, you mentioned EBITDA margin down 200 basis points in the U.S., and then on a consolidated basis, you mentioned EBITDA margin flat to 100 basis points contraction. It would seem -- and given your sort of -- your guidance on Europe, which I believe is down as well, that flat really wouldn't make sense within that. So maybe you can give more color on the consolidated EBITDA margin guidance, that would be great.

Well, yes, you're right. The consolidated guidance does have a -- in terms of margin, it does have a flat to 100 basis point contraction. We're just dealing with ranges here because of this arithmetic effect that we're talking about with the price increases that we've done and we're doing, it's hard for us to lance a specific number. That's why we see -- we focused on the EBITDA per ton metric, that has more logic behind the numbers in terms of what you're saying [indiscernible]. If you go by region and as you see how the numbers are working, then you would land to -- the growth in EBITDA per ton that we're seeing in mid-single digits. But it's hard for us right now to provide a very specific guidance in terms of margins because of the price increases that we're doing and we're looking probably -- we're preparing to do if inflationary pressures keep being like they have been in the past.

There are no further questions at this time. I'd like to turn the call back over to Mr. Adolfo Fritz for any closing remarks.

Well, thank you so much again for joining us today. And as always, we're looking forward to seeing you in future events or calls that we may have. If you have any further questions, please don't hesitate to contact us and we'll be glad to talk to you about any concerns you might have in regards to our company. Take care, and have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.