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 2024 Earnings Conference Call. [Operator Instructions] I would like to turn the conference over to Mr. Adolfo Fritz, for -- 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, IRO. Please go ahead, sir.

Thank you. Good morning, and welcome to our first quarter 2024 conference call. We're pleased to have you online 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, we'll take a few minutes to discuss the fundamentals and results from the quarter, and then we'll open it up to any questions you may have. We're pleased to report that GRUMA started the year on a solid footing. The first quarter was marked by continuous vigilance over changing market dynamics, coupled with effective execution on existing and new trends. We find ourselves in a position where we're still gaining market share at a faster pace than our competitors. In fact, growing ahead of the total market for the category as a whole in the U.S., despite strong growth momentum shown by private label, which has been fueled by a more selective consumer. On tortilla side of the business, U.S. retail, tortilla is still operating smoothly, which was offset by volume contraction in the food service channel. We also experienced positive growth in our divisions in Europe and Asia and Oceania, which helped us achieve a solid base for upcoming quarters and will continue to evolve in conjunction to the U.S. tortilla division during the year. On the corn flour side, volumes in our Mexican division remained essentially stable from a much higher comparative base, while in the U.S., we're in a positive path of recovery of our corporate accounts. Momentum in the corn flour retail business remains very strong, reflecting overall consumer weakness that has spurred more at home cooking and protection of savings. As a result, our consolidated volumes for the quarter contracted by 1%, while sales grew by 4% and EBITDA improved by 26%, leading to an EBITDA margin of 16% and EBITDA per ton growth of 27% as a measure of our profitability. On our balance sheet, we further decreased our net working capital needs by 9% as part of our ongoing strategy. Therefore, our indebtedness levels decreased to 1.3x from 2x a year ago. Turning now to the quarterly performance of our subsidiaries. In our U.S. division, as I pointed out at the beginning of the call, we have been witnessed to the strong momentum stemming from private label. This just highlights the fact that the consumer profile has changed from what we saw last year, and we have adapted our strategy to increase our private label production to take part of this evolution. In the quarter, in the U.S. specifically, we're very pleased with the results achieved as the demand for Better For You products continued with no signs of trade down to date. While growth in other product categories has also continued with the ongoing shift towards healthier and attrition in the form of wraps. The food service channel, however, overshadowed volume growth in the retail channel as that sector as a whole is being impacted by consumer weakness since the beginning of the year, coupled with a client optimization strategy to protect profitability. Volumes, therefore, remained flat for the quarter, while sales increased 2% and profitability remained at attractive levels with an EBITDA expansion of 15%, which yielded an EBITDA margin of 20%. In Mexico, GIMSA continued to see strong demand from tortilla makers and corporate clients as well with a very visible level of recovery when compared to the past years. As it is evident from the last results, GIMSA is coming up of a great year with strong volume growth, especially in the year ago quarter when volumes experienced an 8% expansion on a comparative basis. Volumes, therefore, experienced a 2% contraction when compared to last year, while EBITDA saw some recovery from a year ago, reaching EBITDA margin of 9.9%. In our European division, our efforts to expand distribution have given this operation a positive spin and outlook for the rest of the year. Tortilla business is growing at a steady pace, both in food service channel and more importantly, in the retail channel, while support from the corn milling operation has been contributing to its performance for a few quarters now, recovering after the effects of the war in Ukraine. With these dynamics, volumes increased 8%, although sales decreased 3% due to the higher contribution from the core milling operation. Nevertheless, the European division continues to deliver solid EBITDA growth of 63% and EBITDA margin of 9%. We expect performance to continue growing if market fundamentals and retail efforts reflect the same overall dynamics that we've operated on for the last few quarters. We're also very pleased with our Centroamérica division. The corn flour operation is still thriving and its strategy to expand distribution of a better mix of products in spite of volumes being flat due to lower demand of rice products also sold by the subsidiary in the region. We have a solid footing across the region, distributing products that were absent in some markets. As a result, we've benefited from strong demand. And while there is more price sensitivity here than in other divisions in the world, consumers are learning to appreciate both the quality and innovative nature of the brand. The division achieved sales growth of 7%, while EBITDA grew by 29% and EBITDA margin reached 16.1%. In Asia and Oceania, we have finally seen more activity stemming from China, which in conjunction with Malaysia, also the bad weather effects depreciation in Australia during the quarter. Volumes increased by 5%, while sales increased by 2%. EBITDA benefited from both revenue growth and cost efficiencies growing by 42% and bringing EBITDA margins to 14.9%. We're hopeful that China's activity continue increasing as we go further into the year, which will support the already strong performance of operations in Australia and Malaysia. In all, we're very pleased with GRUMA's results for the quarter and optimistic about the rest of the year. Operations in all our divisions remain smooth, although with price sensitivities present in varying degrees, in different regions of the world and demand staying strong and without much deviation from past trends. We look forward to seeing how consumer preference changes over the next quarter as a result of inflation and other recent economic indicators in the U.S. But so far, everything is where it should be. Additionally, I would also like to share that it is our intent to publish our third sustainability report, delivering on our commitment to make our ESG efforts public and transparent for stakeholders, including international financial markets. We're fully committed to continuing to develop ESG frameworks within the company and our overall supply chain and be part of its current evolution. On the side note, as we've done in the past, this April, we'll be holding our Annual Shareholders Meeting where proposals include the continuation of the dividend paid to shareholders and share buyback program that we've traditionally been carrying out every year. With that, I'd like to open the call for questions from our listeners today, operator. Can you help us with that, please?

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

The first question is -- I know this is the first quarter of the year. But how are you thinking about your guidance for the year, mainly at the EBITDA margin expansion that you are expecting? And my second question is related to the U.S. If you can comment what was your volume performance at the retail channel and how it compares versus the performance of the industry and private label?

Yes. Thank you, Fernando. No problem. Yes. Well, guidance -- we had a very good quarter guidance. We'd like to keep it still where it is until we have further data along the year. We feel right now comfortable with the operation. And really, we're just dependent on the U.S. economy and how the consumer changes its preferences over this upcoming 3 months or so, so that we may get a better understanding of how we are going to end the year overall. So I would say that at that point, maybe during our next conference call, we'll be in a much better position to say whether we change the guidance or not for the year. In terms of the performance in retail, volumes there expanded close to 2%. And the idea that we have is to start incorporating private label in our production just because there is right now a market for it and consumer -- there is a consumer preference for it today. So we don't want to waste the opportunity to hop on that opportunity and be able to distribute private label as well, just in conjunction with our existing production line.

Our next question comes from the line of Rahi Parikh with Barclays.

Can you guys all hear me?

We can hear you fine. How are you?

Perfect. Okay. Great. So I guess the follow-up for the U.S., how do you see the margin journey for the rest of the year with the efficiency plan, I believe, lapping in 3Q, but not as much pricing power? Would be the first question. I also have a follow-up as well.

Sure. Well, I think that margin expansion during the year will be consistent with what you probably saw during the first Q. Obviously, the comparisons there with last year might add a lot of volatility in that sense just because in the first Q, we were comparing ourselves maybe with a -- in the U.S. in specific with a base that was much more manageable than probably in the next 2 quarters. So that is why I was telling Fernando to his question, we'd like to see more data during this upcoming quarter and see how that moves along until we can see something specific for the rest of the year.

Yes. No, makes sense. And then also on lower grain prices, I see you have about 90 days inventory, and I assume some partial benefit in 1Q. But when in the year do you fully -- do you expect to fully benefit from lower grain prices? Maybe -- I think 2Q maybe fully in 3Q, but what's your take on that?

Yes. Yes, we'll have to see how the inventory layers are used. It's really a matter operationally speaking, to see what corn is being used at a particular point in time. Right now, our inventory days should be at the 90 days, as you very well mentioned, however, since we're coming from a surplus in inventory from the past because of a risk mitigation strategy that we carried out. It's not as clear cut as that, as what you're mentioning. So I would say that anything you see on a quarterly basis will be the reflection of using the layer of inventories that we'll be able to use relative to last year's. So it's not a clear cut answer to that.

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

So I mean, we continue to be impressed by the improvement of margins in the U.S. So my question, in particular, is how do you assess your current price structure in the market, especially in tortilla, especially bearing in mind 2 things: one, potentially softer consumption environment going forward; and two, comparatively better hedging positions on a year-over-year basis. Do you foresee any need to cycle back prices? Or are you happy with your current price structure?

Right now, we don't -- at this point, we don't foresee any price adjustments. We are comfortable with the levels of pricing we have today in the market relative to the overall behavior and trend of the inflation as we see it today. We really don't know what can happen in the future in terms of inflation. So whenever there is inflation, like happened in the past, last year, we'll be very -- very thoughtful of that, and we'll be very attentive to that to see how our cost structure is being pressured if at all. And depending on that, we'll determine, if there's any need for further adjustments or not. So -- but so far, things like I mentioned before, during the opening remarks, things are operating very smoothly, and we're very pleased with our results and the way the company is operating.

That's clear. And if I may, just a quick follow-up on the inventory side in the previous question. Is it fair to assume that there's nothing really structural -- structurally change, if you compare the level of rotation data that you had on the inventory side, pre-COVID, that was something around 70 days -- 70, 80 days. Now as you mentioned, you're closer to 90 and in a process of normalization. So is it fair to assume that going forward, there's nothing really structurally that could prevent you to go back to the 70 days on average of inventory rotation? Is that a fair assumption in your opinion?

As of today, at this time, there is nothing that we see that, that could increase inventory levels at this point. If something happened along the year, just like it happened back with -- when the war in Ukraine took place, and we start seeing some risks in terms of logistics or what not, that would warrant us to increase inventory levels then we obviously would start with the same strategy. So it's really -- it's very data-sensitive and it just depends on the overall dynamics. Today, we're not seeing that. And we're trying to reach that point that we have before being at 90 days, which is our sweet spot to operating. But we're normalizing towards that point right now. We still have to operating work with the layers of inventory that we have from the surplus strategy that we carried out.

Our next question comes from the line of Lucas Mussi with Morgan Stanley.

I have 2 quick ones on the U.S. The first one is related to the food service channel. If you could give us more color on how was the performance in terms of magnitude? And how you're seeing that throughout the year? What's your expectation in terms of recovering some of that volume, some of those clients, you guys saw some headwind this quarter? And the second one is, how are you thinking about profitability from the private label standpoint? You plan to incorporate more sales towards the private label sort of products. So just wanted to get a little bit of color on how you're thinking about profitability as you are shifting a little bit towards a mix, more indexed to the private label brands? That's it.

Well, thanks, Lucas. I -- we -- the food service channel have probably impact volume-wise of between 2% and 3% contraction. So far, we're just, I would say, readjusting or we want to normalize debt back to the former levels. One of the things that we've actually talked about with the market is that one of the things that actually distinguishes our product from the rest of the market is quality. So just as we have precedents to be confident enough to know that our quality is superior to those that exist in the rest of the market. We also have the confidence that because of that, clients and the corporate accounts will return as we operate during the year -- as they operate during the year, and as soon as some of the economic pressures are relieved off of them as the economy starts to deliver or it's clear in the U.S. As you very well know, the narrative in terms of the consumer is a little bit shady and some -- it changed from the first month of the year until the recent data that we received in March. So changes like those are the ones that can help us recover more quickly. But it's dependent on that really. We don't have a time frame or anything in our mind to tell us when a full recovery would take place. I can tell you from what we saw in Europe that it took us, I would say, around 3 quarters to recover from previous levels. But I mean, there are different economies and different consumer preferences. So just -- I would just take it as a precedent for your analysis in specific, but it's -- it doesn't mean that it will be that way in the U.S. In terms of private label, right now, we're not producing as much. We're producing close to 7% of our retail sales today. So the only -- what we want to do is we see this as an advantage, as an opportunity to be more -- participating more in private label and incorporate those products into production more so than substituting any existing items that we have for private label. Most of our SKUs have a level of satisfaction that are not very private label friendly. So what we want to do is just increase the production there. As of now, it is a test that we're doing, and we're -- we have the willingness to do so in production-wise, but it is something that we will see how it unfolds during the first half of the year and confirm if our hypothesis is -- has -- is warranted or not, profitability-wise. So I would say just give us some time to see how the operation unfolds with this new mindset and then we'll see how the profitability looks like at the end of next quarter.

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

My first question is on Europe, the Asia and Oceania. Those 2 regions have gone through their difficulties in the last couple of years. They've been recovering since then. And this quarter, they came back very near their original profitability levels. So just wondering what's next for those 2 businesses now that they've seemingly fully recovered? And then my other question was about operating efficiency. The SG&A to sales ratio came up a little bit. It was fairly generalized across regions and the release did give us some details on distribution marketing, but just wondering if you can dig a little deeper around what's going on in SG&A.

Yes, no problem. We're very pleased with the operation in Europe and Asia and Oceania and Europe. The idea there is just to continue increasing distributors across the continent, which is what we've been very diligently doing, so that our retail presence can increase and therefore, hopefully also profitability along the way. As you very well know, you've been following the company for a very long time. We started there purely with food service. And now there is a total different dynamic where retail is almost at the same composition level in terms of sales of food service. So I would say that our primary objective is to increase the distributors there for the time being. And to help with that, as we pointed out in the past, we're planning hopefully to invest some capital and some plans there to be able to sustain with the demand that we're seeing. And the same goes for Asia and Oceania, this quarter, Australia was a little bit with challenges just because of weather conditions. But to everyone's surprise, we pleasantly welcomed the China coming back "online" in terms of its economic activity, and that gave us a great surprise, and that's just reflected in the results. So -- if we can -- if China keeps delivering as it did during the first quarter as soon as Australia is back online, I think that will be even better news coming out of Asia and Oceania. And also for those reasons, we plan to invest in China to cope with demand there, from the food service sector in specific. In relation to the other question, the SG&A, yes, it has been somewhat of a drag of the distribution and logistics costs that we had to incur. Believe it or not, all these intricacies, all these geopolitical situations have had consequences in the logistics channels across the world. And we've been having to pay more for freight. There is less supply of them. There are less routes, and we have to pay higher freight for -- to take a different route in order to reach the destinations that we want to send the product to. So it's been like that across all our divisions. So that's why you see that on the SG&A the way it was presented.

Our next question comes from the line of Renata Cabral with Citi.

I have 2 here. The first one is another follow-up regarding the U.S. So you mentioned in the call that the [indiscernible] of increasing the private label portfolio this year. And my question is related actually to the Better For You portfolio. If you can comment something about the performance so far. Our impression is that it's pretty much resilient portfolio and if you have the intention to increase on the percentage of this portfolio as well in 2024? My second question is regarding the buyback program. You've been very active in the first quarter of the year. So just to understand what we can expect in the second quarter in the rest of the year?

No, thank you for your questions. So regarding Better For You, the momentum is still there. Growth rates are around historical levels, I would say, around 14% year-on-year. So I really haven't seen anything slowing down in that regard. We're very pleased with that. We haven't seen any particular consumer pressure that would hint a drastic slowdown in that market specific. We have seen more competitors in the market, but despite of that, as I mentioned during the opening remarks, we've been able to cope with that and still increase our market share. So everything on that front is working pretty smoothly for us. In terms of -- our intention, obviously, is to increase the composition as much as we can related to sales. We don't -- I mean we're -- as we've talked in the past before, we're very reactive in nature, and our company is reactive to the demand that we see and the new trends that we see. We're very -- we have a very fast response capabilities to those trends and to that demand we see. So it's really depending on demand. It was -- if we had a say in it, we could -- I mean, we would be increasing everything that we've got in terms of Better For You. But unfortunately, that's not the way it works. So we'll have to wait to see how the consumer preference has changed and all the products that we have in line to get launched during the year, to see what effect they have and so on. So we have great plans, no doubt about that. But we're still demand dependent on that -- in that market. Your other question was regarding the buyback program. Yes, we've been more aggressive this year than last year. Last year, we had a very solid momentum for the stock. We believe that it was not asked necessary to support that momentum at that particular point in time. However, we still believe that the stock is very heavily undervalued. Given the results and the growth, the EBITDA and earnings growth that we've been able to deliver relative to the levels of the price today. So because of that, we feel it's extremely cheap, and we are very aggressive with the program, and we'll still be as long as it's that valuation. And as long as the valuation continues to be that way.

[Operator Instructions] Our next question comes from the line of Álvaro García with BTG Pactual.

Two questions on my end. One, also on sort of distributions and buybacks. I guess the question would be how you're thinking of target leverage. Leverage has come down significantly because of working capital and strong EBITDA growth. So what would be a fair target leverage you think of? And would it be fair to sort of maintain that in the context of the dividend announcement in April and buybacks or maybe more buybacks going forward? That's my first question.

Yes. Our target leverages should be around 1.5%, at least, that's what we're trying to get it to. Historically, we've been operating at 1.8%. However, our target is 1.5%. Hopefully, we can have that on a sustainable basis, that's the intent. And buybacks, we increased the program based on 2 things: first, the leverage that we have, the debt leverage that we managed to achieve, is number one; two, the cash flows that we were able to generate; and three, the devaluation of the stock. So I would say you can expect a lot more aggressiveness in terms of buybacks, just looks you've been witnessing in your monitor almost on a daily basis. But other than that, I think that's more or less the balance between the two.

Okay. Great. And the announcement for dividends is -- is that for April? You mentioned, I think, in the prepared remarks.

Yes. Yes. It's next week.

Next week. Okay. Perfect. And then my other question is also a follow-up on private label. Maybe just zooming out of it. In terms of quality, I know that you mentioned this in the context of food service, you take a lot of pride in the quality of your product. How would you grade or rate the quality of private label? And maybe if you can give us more color in the retail channel specifically, I know you mentioned the 7% of your entire sort of retail business. But if you can give us maybe some context as to the specific products that you're focusing on private label? Is it [indiscernible] tortillas? Is there a Better For You element for some retailers that you're starting to develop? That discussion would be very helpful.

Sure. No, it's as plain as you can get it really. The quality there is according to the, I would say, the market standards for private label, nothing special about them. We just want to increase our production there because as probably a few of you could see in the Nielsen data, they've been growing market share a lot lately. We just want to get a benefit from that growth, but it's still the same quality. So the idea here, as it's happened in the past is that when all these inflationary pressures start easing down or at least the consumer starts changing its preference back to branded products, they might leave those private label products behind and get back to branded products. But in the meantime, we just want to get the benefit of that growth. The tortilla itself, it's really, as I mentioned, private label quality. Not a lot [indiscernible] and it's not comparable to one of our branded products at all.

Okay. Super clear. And would you happen to have, by any chance, the percentage of your corn flour business that sold into private label producers? Or is that not something that you have off the shelf?

Not off the shelf. I would tell you that, more or less, would be around, I would say, 7,000 tons of product. Overall, between corn and wheat, it's around 13,000 tons. So I'm assuming just a little -- half a bit -- a little bit more, it's wheat, to the same proportion as our production for corn and wheat tortilla really. So we're using that as a proxy.

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 very much to all of you for joining us today on the call, and we hope to see you soon in the future market events. Take care, guys. 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.