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

Thank you. Good morning, and welcome to our third quarter 2023 conference call. We're pleased to have you on the line 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. To start, we'll take a few minutes to discuss the highlights and results for the quarter, and then we'll open it up to any questions you may have. We're very pleased with Gruma's performance in 3Q '23. Market fundamentals for a business have remained strong in the U.S. and Mexico, while the rest of our subsidiaries are seeing varying growth dynamics. Demand for our products is too quite positive especially for a better-for-you product line. And at the same time, there is a rapid adoption of our products in our other markets of focus. Our key objective has always been to safeguard profitability and the interest of all shareholders and we're pleased to have reached this objective in the quarter. In terms of market fundamentals, the third quarter of this year continued with positive trends in the tortilla category in the U.S. Although economic conditions still showed mixed signals as to the possibility of a recession in the country. Outside of the U.S., present activity has been more evident with consumers less sheltered against the effect of inflation. As I just mentioned, tortilla business, the U.S. continues to show resiliency, strong demand, which allow us to grow 2% in volume terms. As for tortilla business in Europe, the economic conditions have put the consumer under pressure, and Asia and Oceania, the Chinese economy has been impacting volumes despite positive results, which we have been able to leverage to protect profitability in the subsidiary. Total consolidated tortilla volume growth for the quarter stood at 1.2%, highlighting once again its versatility and health benefits in every meal in which it is used. The core tower business, productivity continues in the U.S., while stable and strong demand in Mexico has been characteristic not only of the quarter but year-to-date date as well. In the rest of the world, prices activity also been mixed. The combination of attractive growth rates in Europe and consumer pushback in Central America. For this better contraction in volumes, we were still able to achieve comfortable profitability. The balance sheet remains healthy. Inventory levels decreased by 13% relative to a quarter ago, thus, and proportionately decreasing our net working capital. As we communicated in the past investor calls, this reflects our current strategy of bringing net working capital needs back to normalized levels and in doing so, rightsizing our indebtedness as well, which we had increased to fact our risk mitigation strategy against potentially harmful logistic challenges when the warranty can broke out. Our efforts in decreasing net working capital needs should continue going forward as we strive to release close to $100 million in capital by year-end and reach a net debt to EBITDA multiple below 2x. Excess capital released during this process will be used to help us reach this objective at a much faster pace. We have 4 mentioned fundamentals. Sales grew 18% and EBITDA expanded by 34%. This represents a 190 basis point expansion in consolidated EBITDA margin, achieving 16.4% and EBITDA per ton growth of 34%. In the U.S., the tortilla market presented positive fundamentals during the quarter expanded by 2% in volume. As our category in the U.S., tortilla grew approximately 12% over the last 13 weeks. Much of this growth has been captured by Gruma on the fact that its optimal response to market trends and by private label as a result of consumer sensitivity and more basic or feed. This juncture are yet to see trade downs or overall relevant price sensitivity in our product lines and the consumer remains robust in the face of ongoing inflation. The core flower business has experienced a much tougher comparative base and also price activity for a couple of quarters now. Nevertheless, as we have pointed out before, as prices in the market normalize among competitors, we believe the differentiation of our product in this business channel will direct volumes back up where they were prior to this effect and be higher than those of last year. The third quarter of the year had a tough comparison base in 3Q '22, but we are very pleased to see the response we have had as we execute our strategy going forward. Our U.S. division has been successful in improving profitability growing by 90 basis points, reaching 19.8% EBITDA margin and 19% growth in EBITDA per ton as a result of EBITDA growth of 19%. In Mexico, demand has remained stable for most of the year. During the first 6 months, we saw a stable recovery from corporate clients. In this third quarter, we saw strong demand from tortilla producers as we start to keep a balance between our industry and a traditional method, highlighting our quality of the products. This subsidiary managed a volume expansion of 1% during the quarter, while it experienced EBITDA contraction of 5%. On the European side of the business, as we saw since the beginning of the year, consumer trends have been quite different from those in the U.S. The consumer has a strong preference from private label being a fierce competitor in the continent under normal circumstances and more so now with the levels of inflation over the past 12 months. Nevertheless, we've been able to cope with these market dynamics in the tortilla business and have added distributors across our main markets in Europe. It has promoted more brand awareness for our product and specific, and we've been able to protect profitability quite effectively in our operation despite volume contraction, which reflects accentuated price sensitivity in the region. Corning products, however, have completely made a combat as breweries and animal feed manufacturers have returned to the market and increase their activities in Europe. This has led to attractive growth rates in this business line. Offsetting the volume contraction in the tortilla business in the subsidiary. Volumes and sales increased 7%, yielding EBITDA growth of 51% and reaching an attractive margin of 10.5%. In Central America, a challenging comparative base and additional presence activity as a result from significant pressure from economic conditions in the region, in addition to declining demand for rice through volumes to contract. Just as it is the case in Europe, we anticipate that with improving economic conditions and winning pressures in the consumer, we should get back to our normal levels of volumes sold on the back of the quality and preference for our products in Central America. Profitability-wise and again, echoing the performance of other subsidiaries, we reached an attractive EBITDA margin of 11.9%, EBITDA growth of 31% and EBITDA per ton growth of 43%. This was on the back of sales growth of 6% in 3Q '23. Our Asia Oceania division continues to work in an uphill effort in the face of a slower-than-expected and more variable Chinese economy. Still, through our global strategy and localized efforts, we hvae been able to take damage of increased economic activity in China in recent months and combined it with the solid performance in Australia and Malaysia. With these dynamics stretching through the third quarter of the year, we reached 11.9% EBITDA margin, albeit with a 1% contraction in volumes, which we expect to recover with time, in line with the Chinese economy recovered. In terms of EBITDA per ton or in total profitability metric, we reached a 26% growth nearing EBITDA performance. In the third quarter behind us, we're very pleased with our results thus far. The company has had a very positive performance in the second half of the year. Nevertheless, we do see room for growth but the way our products are being adopted worldwide and especially in the U.S. Therefore, we will be surpassing our guidance we provided at the beginning of the year. We still have to wait and see how and if El Niño recession takes place in the U.S., which at these levels of inflation are uncharted waters for everyone in the industry. But for the time being, we see a solid foundation for growth and further profitability protection of their products gained popularity around the world, as we keep producing products with different focus markets that have resiliency to our performance. With that, I'd like to open the call for questions from our listeners today.

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

I have 2 -- the first one is related to the U.S. How should we think about U.S. volume and margins in the fourth quarter given the additional week that you had last year? And how much can this result in the margin expansion that you already registered in the first 9 months of the year? And my second question is very quickly if you can explain the gain registered at discontinued operations line? And how should we think about this line in coming quarters?

Well, in regards to your first question, we really have a very good momentum in terms of the performance of the company's products. We believe that at this point, as I just mentioned, we're surpassing the guidance for the year. And if you're looking for guidance for the fourth quarter, I really would just assume the same performance we had during the third and streamline that towards the end of the year. With that, you probably have a very good proxy as to what level we'll be closing the year at. In terms of the discontinued operations, that was an extraordinary gain arising from the sales of assets in our discontinued operations in Venezuela and therefore, it's just a one-time gain that won't repeat itself in the future. Please let me know if there's any additional questions.

Our next question comes from Benjamin Theurer with Barclays.

I have just 2 quick ones. So one, in the U.S., obviously, and you've been very positive here and you just reiterated the positive momentum and the guidance for passing. But can you elaborate a little bit about the different channels in the U.S. retail versus food service, what you're seeing there in terms of demand trends? And if it is broad-based demand that's driving up your results? Or is there a difference between the 2 channels? That would be my first question. And then I have a quick follow-up.

Ben. Well, the reality, the 2 channels have had a great performance. In retail, the main driver there has been really the quality of the product and also the focus that there is today in our better-for-you product line that itself has grown significantly and we're just pleased to see the performance and acceptance for the product itself. And that is a huge incentive for us to keep innovating what we've done so far. So that's on the retail side. We haven't seen also any trade downs as I was just mentioning a minute ago in terms of along our product lines on the retail space. And the food service space, it's up quite a bit from dynamic. As our clients have been recovering from the coated times, if you will, we've been gradually increasing their operations and results, which obviously have had a positive impact on us. So I believe that those were the 2 main drivers for those 2 channels so far unless the economy starts being pressured severely and last inflation keeps on being the way it was 6 months ago, in addition to a probable high unemployment rate, if there's any at some point. Those are -- those would be the challenges that lie ahead in terms of seeing how the channels respond to that. But so far, the sort of 2 drivers and where we leased with the performance in that.

Okay. Perfect. And then my second question, if you could just give us an update on where you stand as it relates to the hedges and the contracting for your needs into the next couple of quarters? What's like the current level you're at? And how is that favorable or unfavorable on a year-over-year basis from the levels you've been looking in?

Yes. Sure. Well, as everyone knows, we do have an internal more than a policy of practice of hedging 12 months prior to our needs in the U.S. that is and that is different because the harvest are 2 times in the year versus one time in the US. But so far, what pertains to corn, we do have our needs covered so far. In terms of our other raw materials, for example, wheat. We have partially covered ourselves there. Now the reason being is that the wheat price dropped dramatically, and we decided to leave that portion open, but it's still the remainder. So we're about -- it should be around 60% hedged on that front in the U.S. With that being said, it is obvious that the hedges that we're seeing attractive relative to the levels that we had prior to this year. So we're operating with right now. However, we're cautioning investors and market participants has not to take this as a direct benefit of margins, given that we have inflationary pressures on other items outside of raw materials that are still ongoing. So I would not take the full benefit of the differential or the positive differential in hedges at this point as a 100% benefit? Or I would just caution you to use maybe half of that as a benefit to margins, assuming that the other half is being pressured by other items by inflation outside of the raw materials.

Our next question comes from Luis Willard with GBM.