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 2022 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 will open the 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.

Thank you. Good morning and welcome to our third quarter 2022 conference call. We're pleased to have you all on the line and thankful for the opportunity to share our 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. To start, I'd take a few minutes to discuss the fundamentals and results for the quarter, and then we'll open it up to any questions you may have. The big headline is consumer resilience even in the current inflationary environment. The robust consumption trends we have been seeing through the first quarter of the year, continuing into this current period. Gruma has also introduced and expanded new products into the respective markets, yielding very satisfying results. In the U.S., inflationary pressures have led to a general preference for staples, including both tortilla and corn flour or more expensive products in addition to healthy demand for new SKUs introduced recently to the market. In Europe, a greater distribution network, coupled with stronger brand awareness, has supported growth in every channel to record levels, while our subsidiaries in Asia and Oceania are recovering from the floods in the first quarter of the year and lockdowns in China. The combination of these factors drove up consolidated tortilla volumes. Performance in corn flour during the period parallel of that [indiscernible] tortilla in the U.S. Overall, we saw a 3% volume growth in corn flour on a consolidated basis. The preference for corn flour as a result of inflationary pressures supported volumes in the country, while in Mexico, volumes were supported by the higher tortilla yield with the use of corn flour amidst an inflationary environment. The Central American subsidiary benefited from greater distribution and higher availability of richer and more sophisticated SKUs and Europe was the only outlier due to logistic challenges on the back of the war in Ukraine, which obviously affected volumes. Thanks to the resilient nature of Gruma's products and its extensive product line, we have been in a good position to offer products that satisfy different needs and client profiles, increasing total volumes sold by 4%, while price increases implemented for net sales growth of 21%. It should come as no surprise that cost pressures continue to impact Gruma as they have the rest of the industry in the form of higher raw material costs, higher energy costs and higher freight costs as a result from scarcity of transportation across supply chain. One measure we have taken to counter this effect is to pass on the incremental cost of inflation via the price increases I just mentioned, yielding positive results for our operations. EBITDA increased 13% relative to a year ago, where profitability was protected in terms of EBITDA per ton, which rose 10%. In the U.S. we're still seeing a very strong and resilient market, and so far, we have not experienced any elasticity effects or trade downs within the product line as a result of inflation. Continuing with the trends we saw last quarter in our retail channel, we are pleased to report robust demand for tortilla products given their nutritional value and price point when compared to other more expensive items on the shelves. Also, thanks to our adaptability to new trends in the market, we have successfully and efficiently introduced new sophisticated SKUs into the Better For You product line, which have been welcomed by a buoyant demand. These 2 pillars of growth were underpinned by stronger distribution and marketing efforts, which yielded growth of 4% in our tortilla operation. Corn flour grew by 5% and had a similar driver to our tortilla corn products as higher prices of corn have spurred demand from industrial clients while home cooking has become more attractive than dining out to inflation-sensitive consumers. In all, strong demand for our products across the board in addition to stronger branding with retailers in the U.S. led volumes to increase by 4%, while additional costs in light of inflation that have been able to pass on to end customers in the form of price increases in both corn flour and foodservice tortilla helped net sales grow by 25%. Although costs remain at the forefront of the attention of the entire industry, we have managed these inflationary pressures successfully, and we were able to deliver EBITDA growth 33% higher than that of a year ago. We expect the current trend to continue and look forward to concluding a solid year for our company in the U.S. Our operation in Mexico keeps delivering results in line with our initial intended plan for the subsidiary. The efficiency and scalability that defines our corn flour product was particularly underscored during this quarter with firm preference for corn because of its higher yield in the production of tortilla. This inflationary effect was echoed in our wholesale operations where demand has risen, coupled with expected increase in corporate accounts back to our normal levels after finalizing our strategic selectivity process that we had initiated at the end of last year. These fundamentals drove a 5% expansion in volumes over last year, while sales grew by 18%. Costs were challenged during the quarter, not only from rising inflation on raw materials, but also from higher-than-usual freight and overall logistics costs caused by scarcity of storage and transport. Although we see that's a temporary situation in our market, it is an additional cost we will have to plan for as long as the situation persists in the quarters to come. With these cost and revenue dynamics, EBITDA decreased by 12% relative to a year ago. In Europe, the rising prices of energy in conjunction with today's overall inflationary environment have led to logistics problems and weakening consumer demand in some countries as preferences shift towards discounts and cheaper products. That said, we're pleased to report the results in our tortilla operation in Europe remain at record high levels in all commercial channels. The momentum we've had in the retail channel is not waning while foodservice continues to deliver steadily across the continent yielding total tortilla growth of 11%. Our core milling operations slowed down as logistic issues stemming from the war in Ukraine have impacted the volumes. As a result, overall volume growth for the quarter contracted by 1%, while sales grew 18%, given the price increases implemented in the region and a much better mix of products shifted towards tortilla's over corn flour. With these positive results, we remain optimistic about our operation in Europe, although cautious about further inflation pressures and continuing consequences of rising energy prices. At our subsidiary in Central America, the underlying economic recovery of the region, coupled with our continued distribution expansion efforts and the availability of our new SKUs in countries and regions where it was absent before, increased our volumes sold by 1%. Implemented price increases in conjunction with these drivers boosted our net sales by 24% in the third quarter when compared to a year ago. Those price increases are already catching up to cost growth, yielding an EBITDA expansion of 65%. In Asia and Oceania, the recovery in Australia and China led to a 3% volume growth, and these 2 countries were largely behind 12% sales growth when we did this call. There was some downward pressure in this division from Malaysia due to supply chain disruptions coupled with continuing COVID restrictions in Asia. Lockdowns in China have impacted our operations and maintaining inflation-driven cost and generating lower revenues. Has it been growing faster than revenues in light of inflation creating a defacing effect of the incremental price increases. This means that our profitability metric as the lack of availability of transportation, disrupting freight costs across the board, and EBITDA was 39% lower than that of a year ago. Despite of these obstacles, the subsidiary has been improving its operational metrics since the lockdowns happened in China. Therefore, we expect recovery and a better performance as we close the year. Because of its relevance to our capital structure, I'd also like to inform that we have successfully raised $4,500 million of capital in the local debt markets in Mexico. This new bond is part of an existing issuance program that will be used to pay the $150 million raised in 2018. It will mature in 2027. And by doing so, we have effectively increased the duration of our liabilities and support projected asset growth moving forward. We remain with a very healthy indebtedness profile and we'll continue our strict vigilance going forward. In all, although the world faces various challenges today, the defensive nature of our products in addition to the wide array of needs they cover are giving us solid results. We have a positive outlook for our company for the fourth quarter based on what we're seeing in each of our subsidiaries. There is a very solid base to plan for additional profitability and growth next year. With that, I'd like to open the call for questions from our listeners today. Can you help us with that operator, please?

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

I have 2 questions. The first one is related to the U.S. Can you comment how much is growing the Better For You category? And how much are the new launches contributing to growth? And what do you have in the pipeline in coming quarters? . And my second question is related to Mexico. Regarding the anti-inflationary plan implemented by the government, what are the risks that the plan could extend beyond February 2023 and that more strict measures could be implemented?

Sure. Thank you for your questions. So in terms of your first question, we've had a growth around 11% -- almost 11% in Better For You line relative to last year. And of that, around 30% of that growth was attributed to the introduction of this new SKU in the U.S. Now your second question, I could not -- you kind of broke out on the call. Could you repeat it, please?

Sure, Adolfo. It's related to Mexico. Regarding the anti-inflationary plan implemented by the government, I would like to hear your thoughts about what are the risks that the plan could extend beyond February 2023 and that more strict measures could be implemented?

Well, the plan just highlights the strategy that we've been having historically of not raising prices during the second half of the year for corn flour. If you look back at our historical performance, you'll see that all price movements have been -- have taken place at the beginning of the year and not in the second half of the year. So it's just highlighting the same strategy we've had. The last price increase we normally do or we've done in this current inflationary environment have been around August. The same happened this year. And just as we've done in the past, we were raising prices, which was communicated on the government over to press. Now we -- in an article would say that we would move those prices until February, which is exactly what we've done also last year, and that's probably what we'll do in the following years as well. We will -- in the following years, we will just raise our prices during the first half of the year and not increase them during the second half of the year just on that particular product line, just corn flour.

Our next question comes from the line of Sergio Matsumoto with Citigroup.

In the United States, can you comment on the pricing environment more broadly? The -- you see in both -- are you able to increase your prices both in the rate of your products and the mix? Or just is it more skewed to one of those? And if you could comment also a bit on the color with the discussions with the retailers, please.

Sure. Retailers have been, as we've said in other calls, very open to the price movements and price adjustments that we've had to make given the inflationary environment that we're living in. So far, we've been successful at transferring the cost of inflation that's been pressuring our cost structure. And we've been able to maintain profitability through those increases. So we've been able to increase prices across our product lines without any problems and retailers, again, have been very open to those increases because of the reason that we're doing them. So going forward, you can expect further price increases or price movements depending on whether we see it necessary or not as we see our cost structure being pressured by inflationary pressures or not. So if we feel that the profitability is being jeopardized, we will, of course, increase prices as long as it is justified.

Understood. And second question, if I may. Do you have an update on the guidance for this year?

No. I mean we're in line with guidance. We're actually a little bit over guidance at this point. Checking it out until the end of the year. So we're not making any adjustments or any changes to the guidance we provided.

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

I think I'm going to follow up on the same topic that we're talking right now. First of all, congratulations on the results. I don't recall in my career, having seen in the United States, an increase of any product 21% and then still seeing sales volume grow up 4%. That's pretty impressive. And I think what we're trying to do is try to understand how that was achieved. I think you answered part of the question regarding the new products. But if you could give us more color regarding channels. I mean is this incremental volume from off-premise, from restaurants or more supermarkets regions. Are you gaining market share? Is the industry growing in that level? Because I think that -- I think the big question is how sustainable is this combination of pricing with positive volumes? That will be my first question.

Sure. Well, all of the volume changes that we've experienced after the price increase has come from all channels really -- different proportions, obviously, but it's come from all channels. As you know, depending on the product we're talking about there in 2 specific markets, these markets are not or have not presented any price elasticity whatsoever. So the real question is -- as you very well said, and I think that question goes for the entire industry, how much of a price increase is the market willing to sustain until we see more elasticity? However, I would suggest that our product might not feel that elasticity at all just because it's a product that it's still on the low price range of comparables. And it's -- and it caters to markets that are non-price-sensitive. For example, the subsidiary line, as we've talked about before, is catered to a market that's normally not price-sensitive any of the other products they buy. So I would suggest that that's the reason why we have not seen impacted volumes. And if you go to the other spectrum of products to the corn-related products, those products are aimed for Hispanics that consider tortilla and corn flour as a basic need product and as part of their meals every day. And they would forgo probably other types of food before they start foregoing buying corn flour or tortilla for their everyday meals. So I would say that we are fortunate enough to cater to market that allow us to be naturally hedged in these conditions, if you want to use that term, to yield the volumes we've been able to have during these times.

That makes sense. So basically, people are not eating as much steak and they're eating more tacos. Okay. So you're benefiting from the downtime -- that's very useful. Okay. And the second question also kind of starts before but I want to expand on it, and I want to make sure I have an understanding, what's your strategy regarding pricing in Mexico for the next few months, for the next few quarters?

As I said, right, we're just going to follow the same strategy we've been following historically. Before inflationary times, we made price adjustments according to the harvest, as you know. In Mexico, there's two harvests. So we have to have price movements done by the first half of the year, and that's what we've done historically. So going forward, that's exactly the same situation. We will do the same thing, we will start -- if it's justified, obviously, start making price movements during the first half of the year and not do anything during the second half. Again, that's just for corn flour.

Got it. No, that's very clear. Congratulations on the results.

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

A couple of questions. The first one on pricing as well in the U.S. and we saw pricing accelerate 8% quarter-over-quarter, which was a surprise to us. We had sort of left off with the pricing you had mentioned at the beginning of the year is sort of high single digit in tortilla, low double in foodservice and so on. So I was just wanting to confirm if this was an additional rate increase or if this was just a product of a big shift in mix that we saw this quarter? That's my first question.

Yes, sure. I would attribute that to the, I would say, the shift in mix across the product line more so than anything else and also the implementation of the prices across the core of our products that are being done at different -- in different stages. So that's why you have a -- if you want to call that delaying effect in the prices. As we've talked on our calls, we're catching up to the cost growth. So we're performing those price increases as we go. So that's the result of it really.

That's super clear. A little bit of a delay there. That makes a lot of sense. And then one housekeeping item. We noticed that in other subsidiaries and eliminations, there was an EBIT loss of $9 million and EBITDA loss of $14 million. I was wondering if you could sort of expand on what drove that, if there is any sort of specific nonrecurring item that was involved there?

Yes. No, that's clearly a nonrecurring item, and it is just a result of the company eliminations really. If you look at the operating income of the subsidiaries -- the subsidiary that comprise that part, that group within the income statement, you'll see that there they have positive results. However, through elimination, company eliminations, that's what's used to get that expense that you're talking about or that fall that you're talking about. So I would attribute that to that. And also, we also had extraordinary [indiscernible].

Okay. And just one last one for me on -- I feel like we've seen a delay in your -- in the COGS, so your cost of goods sold increases year-over-year. You're sort of in the low 20s now. I think corn and wheat were way higher than that sort of a year ago, 9 months ago, 6 months ago, it's been difficult to sort of, for us to measure when we might see this cost per ton increase? Or if this is the peak increase we might see, any commentary on sort of direction or if you expect to see additional increases into the fourth quarter would be very helpful. That's my last question.

No. I mean, look, I think that, that level of growth is probably a "normalized" growth for the next quarter. The reason being is it's difficult to say, just because, as you know, we use different types of corn of different prices and different layers of prices as we start producing our products. So it's difficult to say how much of what price are we using relative to -- from quarter-to-quarter really. So that's a base guideline, I would say that you could count on that level of growth next quarter.