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 First Quarter 2023 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 -- 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, IRO. Please go ahead, sir.

Thank you. Good morning, and welcome to our first quarter 2023 conference call. We're pleased to have you all on the line and thankful for the opportunity to share results with you. With me today, as always, are Mr. Raul Cavazos Morales, our CFO; Rogelio Sanchez Martinez, Gruma's Corporate Finance VP. To start, we'll 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. We're pleased to report that market fundamentals and consumer demand have been more positive than expected across all our divisions during the first quarter of the year. In addition to these dynamics, the innovation efforts we've instilled in operation had an important role for performance during the quarter with 87% of consolidated EBITDA stemming from operations outside of Mexico. In our tortilla operation in the U.S., our Better for You product line in addition to a faster pace in the food service channel spurt growth in this division, while in Europe, stronger distribution in addition to a stellar performance in the retail channel spurt volume growth during the quarter. In Asia and Oceania, China keeps recovering, albeit slower than expected, but Australia presented in a more normalized level of operations after recent pricing strategies were implemented pointing towards a solid evolution in quarters to come. In our corn flour business, retail demand for corn flour in the U.S., coupled with accelerated buying in Mexico, supported volumes in our 2 main subsidiaries. In Central America, the introduction of new products has been very beneficial to our business since the third quarter of 2022. This quarter was no exception, although volumes were temporarily impacted by a slowdown in rice demand. With these fundamentals, total volumes expanded by 5%, while sales grew by 25%. EBITDA expanded by 28% relative to last year, while EBITDA per ton, our internal profitability metric, grew by 22%. Our balance sheet remains robust and with the same structure we had last quarter. Inventories, although rising at a slower pace due to the effect of inflation, have stabilized and net debt-to-EBITDA multiple stands at 2x, which is our internal threshold for leverage. Going into the performance at a subsidiary level. In the U.S., market dynamics in terms of growth are very similar to what we saw during the first quarter of 2022. The demand for Better for You line has been gradually accelerating in line with the ongoing innovation efforts that have characterized Gruma in this product line. This has taken place amidst inflation and with no trade downs towards other products thus far. Demand for corn-based tortillas and derivative products is still growing steadily on the back of higher inflation sensitivity from a portion of the consumer base that has been foregoing the purchase of other products to increase their consumption of tortilla. And demand for flour tortilla has accelerated significantly when compared to previous quarters. In corn flour, we witnessed a boost of growth in the retail channel relative to last year as more consumers [Audio Gap] at home instead of dining in more expensive alternatives on the back of inflation. This, however, was offset by the slower recovery from industrial clients after experiencing higher price sensitivity during the fourth quarter of 2022. Volumes in the U.S. grew by 2%, sales expanded by 22% during the quarter, while costs are still growing in line with inflation. We've been, however, able to protect profitability as reflected by a 41% EBITDA expansion. That being said, we're still cautious as conditions in the U.S. economy keeps changing. We have definitely started the year on a positive note. In Mexico, during the last few months of 2021, there was elevated demand, which caused a contraction in volumes in 1Q '22 on a sequential basis. This also created a lower base of comparison with the volumes GIMSA was able to generate during the first quarter of this year, led to volumes to grow 8% relative to 1Q '22. We also started to see the impact on EBITDA levels from the change in accounting treatment of royalties we communicated during our last earnings call in addition to a higher cost of corn impacted two thirds of the quarter, which led to a 47% EBITDA contraction despite the healthy market fundamentals. In European division, we reached a 10-year record high in terms of distribution coverage, where retail tortilla sales keep growing steadily in both the Northern and Southwest region of Europe. This positive performance, however, was overshadowed by 2 fronts. The ongoing logistic challenges brought on by the war in Ukraine in our corn milling operations in addition to a difference in comparison basis because of those months prior to the war, when these challenges did not exist. As revenue-generating drivers remain robust in the markets to subsidiary services been proactive in the management of inflation, which in some countries has reached a 50-year all-time high. Despite of these challenges and a 4% volume contraction, our operation is running very smoothly, and it is our expectation that this positive trend should continue going forward. The [indiscernible] of these dynamics caused net sales to grow by 21%, while EBITDA expanded 22% when compared to 1Q '22. In the Central America division, we've been very successful by expanding the distribution of our latest and most innovative products. This has led to profitability performance from the subsidiary to be an all-time high and with solid prospects for the rest of the year. Our volumes in the quarter experienced a 2% contraction when compared to those of last year. However, this contraction was caused by a slowdown in our rice operation in Central America, which lies outside of our core business. Profitability wise, however, this subsidiary was able to expand net sales by 27% while managing costs in line with inflation, resulting in EBITDA growth of 88%. The Asia and Oceania division went through a March slow than last year as a result of the lockdown China, severe weather conditions in Australia and all of this causing a variety of logistics and distribution challenges, which weighted on our cost structure in this division. Although we cannot yet say that the situation has been totally resolved, we're pleased to see an underlying improvement in the economic activity in the region. And with that, a much better performance at our division. Volumes decreased by 3% as a result of a higher comparative base a year ago, while net sales grew by 7%. Inflation on cost has been managed relative to the second half of 2022, yielding an EBITDA growth of 11% relative to 1Q '22. On a side note, as we've done in the past, this April, we will be holding our Annual Shareholders Meeting, where we'll be asking for approval for the cancellation of 5.6 million repurchased shares, which represent 1.5% of shares outstanding and through the distribution of dividends to shareholders, representing approximately a dividend of 2%. Turning back to our operation. In all, we're pleased to see a much better start of the year than it was previously expected. With worsened economic conditions are still looming on the back of a potentially much higher unemployment rate and an ongoing inflation. We are as prepared as we can be to face these challenges when and if they come, but until then, we will focus on expanding our business and protecting profitability just as we've done thus far. With that, operator, can you open the line for questions, please.

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

I have 2. The first 1 is related to pricing. How are you thinking about your pricing strategy, the remaining of the year in the U.S. and Mexico where volumes were strong? Do you see a need to implement additional price increases? And my second question is related to Mexico. Can you give us more color of how much of the EBITDA margin contraction comes from current costs and how much from royalties?

Thanks for your question. So with regard to the first one, what we're seeing right now is that the price increases that we've done in the different regions where we have a presence have cut off with costs. Costs have been stabilizing right now. So as of now, we see the operation being very healthy and in a good state and we're not looking into any price adjustments thus far. If inflation permitting, we're in good shape. And unless we need further adjustments, we'll be thinking about that in time in the future. But right now, I think we're -- revenues have finally cut up with the growth in costs. In terms of your question in Mexico, I would tell you that of around 300 basis points was the impact of royalties and the rest would be from the cost of corn.

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

[indiscernible]. How is elasticity in terms of the [indiscernible] that you already worked in? Has it been basically just as expected or maybe a little bit higher than you have expected because of difference of region?

Elasticity so far, I would tell you that it's been very -- as expected. We -- based on the economic data and how the consumer has been behaving, obviously, we had question marks in our head in terms of when the consumer will start to be pulling back from price increases or from other products -- or just to trade down to other products. But so far, things have remained as they were last year. The consumer is still pretty strong in terms of their purchasing power. We've been able to grow despite the inflation levels in the U.S. and the rest of the world for that matter. Our operations, specifically in the tortilla space has been gaining market share. We've been doing very, very well in the U.S. And that has echoed to other regions, just like in Europe. In Europe, the retail channel in tortilla there has been growing dramatically relative to the past. And it's something that it's bound to continue as we add more distribution in Europe as we've done for the last 3 quarters -- for the last 3 quarters, and it's something that we will be focusing on. Also, new product launches have attributed to, maybe the acceptance of the consumer of our products where we pride ourselves for the innovation that we're putting into these new launches, and they've been really performing extremely well.

Okay. Thanks for that color. And just [ I think ] you mentioned around 200 basis points the impact of royalties in Mexico.

300 basis points from royalty.

300, okay. Perfect. Okay.

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

A couple of questions on my side. The first one on the phasing of pricing. You've already talked about not doing -- or at least not having plans right now for pricing throughout the rest of the year. But just wondering if there was any price actions in the first quarter? And at what point during the quarter you did them? And with this, I'm just trying to figure out if this quarter saw the full impact of pricing or if second quarter will really be the first quarter where we see the full impact? And then my second question has to do with Central America. And in that region, you had a lot of trouble in past years, and it really seems like the last year and change, you've been performing really incredibly and the margins you posted are the highest that I can remember. And I'm just wondering how much of an impact came from innovation versus what happened in rice, because I imagine rice has a low margin. So the fact that, that side of the equation then performed that well must have helped you in margins. But maybe even despite this, you're expecting to maintain very high margins in Central America after the innovation. So just wondering if you could give us more color on what recurring margins will look like there?

Right now -- well, just to follow up in order, regards to your first question phasing pricing, we've done price increases during the first quarter across our operations. If you remember, during the last quarter of last year, Asia, Oceania and Europe were hit pretty hard because of the distribution and logistics challenges that we encountered that inflated cost more than we expected. So with the pricing that we implemented in those regions, as you can see, we -- the operation itself turned around and we were able to deliver great results. We're expecting these to maintain themselves as they are. If there should be any more inflation hitting our cost structure, we'll delve into that when time of that happens. But so far, I think we're in great shape just to start focusing on volume. In terms of Central America, as you very well said, the introduction of these new products and more to the distribution to all the countries where we have a presence there has helped us a lot. Our expectations for margins should be around double digits. The prior expectation, if you -- the normalized margins in that, in Central America, if you remember, was around 8%. We're expecting something above, a little bit above 10%, hopefully, in Central America because of the introduction of these new products. And I emphasize again, innovation and new product launches have helped us a great deal. In the U.S., we launched our new products for the Better for You market last year in November, and it's been a total hit. It's really helped us in the U.S., and there haven't been any trade downs. The consumer is still in great shape, and they're still demanding more products from our brand [ including ] Better for You. So we will continue innovating as the consumer still in the position of purchasing the products and is still in the position of liking what we're producing.

Great. Understood. Just as a follow-up on the first pricing question. What kind of phasing do you expect? I mean, were the prices introduced in January? Or were they more towards March? Just trying to see how...

They were across the board. I can tell you that in terms of Asia and Europe, they probably were at the beginning of the quarter, and the rest of the other operations they were at more or less in the last month of the quarter.

Our next question comes from the line of Alvaro Garcia with BTG.

Two questions on my side. First, on guidance. Your comments in the fourth quarter call were that you were doing better than expected and it felt as though your guidance sort of baked in a pretty cautious scenario in the U.S. Given what you've seen in the first quarter, would it be fair to say there's upside risk to this 50 basis point margin contraction that in the U.S., which I believe is your formal guidance?

Yes, we're still -- I mean we're still cautious about how the economy may unfold in the U.S. We still believe that there may be a lot more pressure coming as far as maybe in June or July, we'll probably see a more pressure coming. Once we hit that point, we may be in a better position to maybe change guidance and increase our guidance numbers to have a more positive note in our guidance that we provided during the fourth quarter. But so far, we want to remain cautiously optimistic about -- of the results and how the things unfolded. And in our next call, we'll probably adjust guidance if things remain the way they've been in the last few months.

That makes sense. I mean the second half does have sort of tougher comps, so that makes sense. And then my second question is on taxes. That's not a very fun topic, but high 30s tax rate. I was wondering if you could sort of -- I mean, my sense is that there is a lot of cash that is being repatriated from the more profitable U.S. operation into Mexico, and that's why your tax rate is in the high 30s. I guess the question is why your tax rate is so high given that 70% of your business almost is in the U.S.? Would be sort of the basic question.

Yes. We're still -- thank you, Alvaro. We still have to pay taxes as a corporation here in Mexico. And as you know, there is a cash component and there is provisioning of taxes because of the difference in tax rates between the corporate tax rate in the U.S. and the corporate tax in Mexico. So that difference that exists between the 2 countries is a provision that we add to the corporate tax rate in Mexico that we do pay in cash. So that's why it's a little bit of a provisioning cushion, if you will, that we have in terms of taxes. And obviously, the inflation effect as well.

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

So if you look at the performance within the inventories account, if you look at the performance of raw materials, it's been growing quite faster than sales and you continue to build up inventories from that side. So can you go deeper a bit about this strategy and I mean, what can we expect in terms of that [ strategy ] in particular going forward, please?

Sure. So inventories have been growing at a dramatic -- well, probably shouldn't use the word dramatic, but in a significant way. Given that we were preparing or trying to be a little bit more of managing the potential risk of having a logistic or distribution problems that would not allow us to distribute our products to our end client directly. In other words, we made a strategy during last year to have a surplus in inventories to avoid the risk of not having enough product given the logistic challenges that we saw coming as a result of all the Ukraine and the lockdowns in China, et cetera. So we wanted to have more inventory that was actually needed. And that's why you had 2 effects on inventories. One was a surplus in inventories. And in addition to that was the inflation on the cost of those raw materials. So that is why it increased by that much. And that is why also our debt levels increased proportionally to the needs of the net working capital in that sense. Going forward, we see -- I mean, obviously, the scenario we're preparing for thankfully did not come to pass. So going forward, we see inventory levels stabilizing, even decreasing over time, as we as we sell the surplus that we had in inventories because of the situation I just described. And as such, you would see that decrease as well in line with net working capital. So it's not something that -- it was part of a strategy, part of risk management strategy that we had here internally. And that's not something that at least the market should be concerned about.

All right. So provided -- I mean, assuming raw materials prices, corn prices or whatever, don't come back sharply, it would naturally wind down as you continue to grow. That's correct assumption, correct?

Yes, that's a correct assumption.

Next question comes from the line of Eugenia Cavalheiro with JP Morgan.

I wanted to know if you already have any plans regarding on the refinancing of the 2024 USD bonds or what are your plans related to that?

Yes. Thank you for your question. So yes, we -- as we communicated in the past, we're still balancing between using our own resources in the form of revolvers that we have in place of committed revolvers or going to the markets issuing a bond. That will depend on interest rates at the point in time when we meet them. And if our own resources are more than enough to finance -- the refinancing of the bond, then we'll use our own resources. It just depends on the rates at this point, which right now, they're too high for us.

[Operator Instructions] Our next question comes from the line of Alan Alanis with Santander.

Congratulations for the results, pretty impressive. My question has to do with market share in the United States. I mean, anecdotally, just going into different supermarkets in the U.S., I've seen more presence of regional brands, I don't know, Guerrero, Ole and the likes, and I wanted to ask you, what are you seeing in terms of market share? What are you seeing in terms of these regional brands apparently growing and becoming faster? And on that same question, I mean, one of the most important things for retailers in the U.S. and in Mexico and all around the world is private label. I mean that's a big, big game. And there are some supermarkets that are very big on private label tortillas on the [indiscernible] CV and so forth. What are you seeing in terms of the market share trends, the regional players and the private labels in the United States?

Thank you for your question. Yes, as you very well point out, private label did have an increase at the beginning of the quarter, a significant increase, but it's been winding down. It's not something that has been a direct threat to us more so than probably other competitors that have more plain vanilla products in their array of offered products and with retailers. Right now, our market share has been growing. The entire segment has been growing very healthy. And our market share still remains. Our market share right now is around 57% without private label and with private label is close to 60%. So we feel comfortable with that. And we see our competitors growing as well, but not in the same way we are growing. Right now, we've had a huge benefit because of our products and the quality of the products, the innovation that I was talking about has dealt with great results and great growth rates and a lot of market share in that respect. So we're very happy with the way things are right now. And as I said, if things continue like this, we could be looking into changing or adjusting our guidance accordingly.

Got it. And the market share figures that you mentioned, I mean, ballpark, where were they 5 years ago relative to what you're seeing right now?

We're probably -- we were probably maybe 4 points below where we are today, maybe 53% with private label is, more or less around those numbers.

Got it. So you're still not seeing -- I mean the question that I'm trying to ask is the pricing actions that you're taking is not having a consequence of an erosion in market share at this moment, and you don't see that happening in the remaining...

I probably shouldn't use the word surprisingly, but given the economic conditions and the way the economy has been unfolding, we've actually gained market share because of the value add that our products are giving our customers. So we're -- again, we're extremely happy with the results.

Congratulations. Congratulations. That's very impressive. And I mean, if we would make an exercise, a blindfold exercise of any investor, and we tell them that this company increased prices, whatever, I mean, 20%, volume, 5% expanded margins tell me which industry it was. I'm not sure anyone would get it, that is the leading tortilla manufacturer. So congratulations.

There are no further questions in the queue. I'd like to hand the call back to Mr. Fritz for closing remarks.

Well, thank you all so much for your time today, and we hope to see you soon in any of the events or any other market events that we participate in for the rest of the quarter. And thank you so much for your time again. Take care, bye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.