Gruma, S.A.B. de C.V. (GRUMAB) Earnings Call Transcript & Summary

Ladies and gentlemen. Thank you for standing by. Welcome to Gruma's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Adolfo Fritz, Gruma's Investor Relations Officer, who will present earnings results and then we'll 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 your host, Mr. Fritz. Please go ahead, sir.

Thank you. Good morning, and welcome to our second quarter 2024 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, 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's results continue to trend positively. During the second quarter, momentum in the tortilla business remained positive at all of our subsidiaries around the world. In the U.S., volume growth was restrained by changes in the foodservice channel despite attractive growth rates in the retail channel. Moreover, private label growth in the U.S. presents an ongoing challenge to the industry as a whole. But nevertheless, we've managed to continue to increase market share and protect profitability, not only in the U.S. but in the rest of our subsidiaries across the world as well. In Europe, Asia and Oceania, the positive trends we've seen since the beginning of the year continued in response to strong demand in every region. In the corn flour business, the U.S. has seen strong demand from its retail channel, which has helped support volumes in the subsidiary, while Mexico continues to operate robustly with growing demand and strong brand recognition, although bad weather hindered its distribution capabilities mildly during the quarter. In Europe, some logistic challenges as a result of geopolitics have added certain volatility in our corn milling operation there, which has compromised volume growth in this business. However, we expect this to be a temporary situation. We should recover gradually. Total volumes, therefore, decreased by 1% in the second quarter of the year. However, profitability was increased as we continue with our focus on increasing the composition of value-add products and with these dynamics, Gruma achieved EBITDA growth of 17% and EBITDA per ton growth of 19%. During the quarter, although global corn fundamentals remain bearish, the risk of potentially drier weather in Mexico, coupled with seasonal procurements during the summer harvest led to higher inventories. No additional debt was incurred, however. And as a result, Gruma's net debt-to-EBITDA ratio reached 1.3x, which is still below our optimal range, which is around 1.5x. Going further into each 1 of our subsidiaries, starting off with the U.S. volumes and foodservice channel, we're still under pressure on a year-over-year basis, resulting from our client optimization efforts undertaken to protect profitability in the subsidiary. In the retail channel, however, volume growth followed the same positive trend we saw during the first quarter of the year, expanding by 2% with no trade downs to date outside of our most basic products, which has been pressured by growth in private label that has impacted the food sector as a whole. And the case of Tortilla specifically, private label has yet to reach its historic level of market share. So the growth that we are witnessing in the meantime has just been a correction from where it was prior to 2018 and targeted exclusively on basic products, while the rest of our portfolio continues to grow at a steady pace. However, it is our expectation that private label growth should recede gradually as the economy in the U.S. as well as consumer purchasing power go back to the normal level. Despite this temporary slowdown and volume growth reflected in a 1% contraction we achieved EBITDA growth of 9%, which is equivalent to EBITDA per ton growth of 10%. In Mexico, GIMSA continues to deliver with its steady operation, although bad weather conditions impacted product distribution. Additionally, as we communicated in the first quarter of the year, some corporate clients have decided to dilute to levels of supplier concentration, all of which impacted volumes. Furthermore, during the quarter, GIMSA align itself to the traditional method in order to be competitive in pricing levels. Given these market fundamentals, volumes were flat in 2Q '24, while sales decreased by 2% in the period. [ Gruma ] has shown remarkable results and further expands [ trickle ] commercial presence in the continent. We're very pleased with the results as both sales and volumes for the tortillas business expanded by high single digits, helping to create a solid footing for the second half of the year. Unfortunately, this effort was offset by the continuous challenges we have encountered in the distribution of our corn milling products as a result of geopolitical conflicts. We're doing our best to counter this situation operationally, and we will update the market accordingly should we find an immediate solution to alleviate the situation. Volumes therefore experienced a 10% contraction while sales grew [ 5% ] relative to the 2Q, '23. Moreover, our focus on profitability was underscored by the 43% growth in EBITDA relative to last year or 60% in terms of EBITDA per ton. In Asia and Oceania contrary to what we saw at the beginning of the year, China underperformed relative to our expectations in 2Q '24. But Australia and Malaysia more than made up for the slowdown by meeting strong demand for tortilla and flatbread products specific to each 1 of these markets. Volumes, therefore, grew by 4%, while sales grew by 8% during the second quarter of 2024 as a result of price adjustments in this division in prior quarters. EBITDA maintained a solid double-digit growth, standing at 29% and EBITDA margin reached 12.8% or a 210 basis point expansion from last year's results. The Central America division has had quite a great few quarters of solid performance as more innovative products are reaching clients and consumers through the expansion of the distribution capabilities. Demand has been very resilient for both the small operation of tortilla in the region and, of course, corn flour. We look forward to continuing to expand the area products available in each of these markets to subsidiary serves, and we expect to deliver solid results accordingly. Volumes grew by 7%, sales expanded by 11%, while EBITDA increased by 56%, reaching an EBITDA margin of 18.2%. In all, Gruma had another solid quarter of results to add to an already successful start of 2024. The sensitive nature of our products has allowed us to remain resilient through changes in different economies of the markets we serve. And although we're keeping a close eye on the evolution of private label in the U.S., we're very confident of our capacity to adapt and find additional opportunities that create value for our shareholders. Therefore, we would like at this point to upgrade our profitability guidance for the year. We now expect EBITDA margin to grow 120 basis points compared to the previous guidance of 70 basis points we provided to the market at the beginning of the year. With that, I'd like to open the call for questions from our listeners today. Can you help us with that please, operator?

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

The first one is related to the U.S. Can you comment how our promotion dynamics behaving in the Tortilla business, given the weakness seen across the whole industry? And my second question is related to Mexico. Also, if you can share how are you seeing price dynamics in coming quarters.

Fernando, thank you for your questions. So in regards to the first question, the U.S., we haven't gotten to the point of of starting to making discounts or any other sort of promotional activities of that nature. So far, our products around those that are being traded down to private label, which are the basic ones are growing at a very steady pace, and there the demand is high for them. So we're really not at the point of starting to have discounts on our products yet. We believe if you see how the evolution is on a sequential basis of our results, you'll see that everything starting to pick up even more as we go further -- as we go from the first to the second quarter and the private label evolution, it seems that it's starting to change also to be less aggressive, at least in our sector. So right now, there is no need for that. In terms of Mexico, no pricing, as we've communicated in the past, will always be in line and in alignment with the traditional method. So far, the only thing that's changed from previous quarters has been our mix and the products that we sell. But as long as the traditional method keeps the level of pricing as it is today, there wouldn't be -- we don't see any price adjustments in the near future. I hope that answers both of your questions.

Our next question comes from Ben Theurer with Barclays.

Congrats on the results as well. I also have 2. Just 1 quickly following up on Fernando's around the U.S. and promotions, but more looking into like the volume dynamics. And obviously, you said that the tortilla business still grew in the quarter by 2%. And -- but that you had obviously at the food service, a little bit of a contraction. So wanted to ask how we should think going forward around that? And if that contraction is really just because of the specific measures you've taken? Or if there is a little bit of a shift in consumer behavior going from food service into retail, which is where you still see decent results? Or is it really just because of the actions you've been taking by looking through some of your key customers within foodservice? That would be the first question. Then the second one, I just wanted to understand Europe a little bit better as it relates to the issues that you have within the corn milling and the challenges on the commercial side here. Just help us understand what the trade flows are where things are coming from? And what alternatives could you focus on in order to get that kind of fixed in the foreseeable future.

Thanks for your question, Ben. Well, the first one, Yes. The drop in volumes in the foodservice channel was exclusively as a result of our own measures and the result of I would say, price sensitivity on the side of our clients as we adjusted prices in that channel in prior quarters. So how we see this folding out as we are trying to recomp our clients in that channel specifically. We're sure and we're -- at least we're confident that when they see the difference in quality in terms of our product compared to other products out there in the market, they will come back gradually. But until then, the effect that you see is exclusively because of those measures taken. In regards to consumers and food service, the economy right now in the U.S. is such that inflation is actually hitting a lot of pockets of the regular consumer. And there's some food chains that have actually been hit by this. Some of their customers who are turning back home to eat at home instead of going out and dining out there. So that doesn't mean that all of them are being hit. It just means that an industry as a whole, that is what's happening. We do believe this will just as in the case of what I just said in terms of private label being hopefully less aggressive, at least is what that what we're seeing on a sequential basis. But we're also seeing that in regards to food service, that whole situation will revert and we will recover the volumes and consumers will go back out and dine as they were doing prior to them being pressured by inflation so much. I think that with all the news that are out there about these expectations of future rates and cut rates in the future that will alleviate a lot -- the pockets of the average consumer and things will turn around towards that direction. In terms of Europe, really, just the issue is really the transportation through the Red Sea. All the product that is getting out of -- or rather that's being produced in our plant in Italy is being transported or has been transported through those -- through that area of the Red Sea and with everything that's happening -- it makes it very, very difficult to transport the product and to deliver it accordingly. So that is what the dynamic is. We're hopeful that in time, we're going to get a clearer picture as to where things are going and how much of that problem will be alleviated. But until then, we'll have to live with higher logistics and higher distribution prices and costs that I think that we've been managing very successfully so far. So that's a situation. And as soon as it changes, you guys will be obviously the first ones to know.

Our next question comes from Lucas Mussi with Morgan Stanley.

I have 1 related to hedges. If you could provide any more color or granularity as it pertains to your raw material hedges for next year -- if you have already begun doing hedges for next year, it at favorable levels or favorable half levels? Any granularity here would help.

Lucas, thank you so much for your question. Yes, we're being very optimistic about the the fundamentals for corn. As you can see there, they've been pretty varied throughout the year and all the reports that we've gotten so far point out that it will be still bearish going forward. So being very opportunistic as to when to enter and when not to enter and hedge ourselves. We have begun doing that. So I will -- I would say that we'll be, depending on to the fundamentals, we will be more aggressive than we have been during the first half of the year where our hedges were profitably nonexistent. But we will definitely start hedging a lot more depending on where we feel comfortable with the prices and depending on the fundamentals during the second half and we will inform accordingly and communicate that to the market with when we do.

Our next question comes from Fernando Alfaro with Compass Group.

I was just wondering if you can provide any more color regarding the guidance in terms of profitability, as we have seen a really strong quarters, I mean, the conservative guidance. So yes, basically that.

I have to apologize. I couldn't hear you very well, but from what I heard, you wanted a more -- you wanted me to repeat the guidance that we provided with profitability. Is that correct?

Yes. Yes.

Sure. No, no problem. So at the beginning of the year, we provided a guidance of 70 basis points in terms of EBITDA margin. Right now, we're upgrading that guidance to 120 basis points. So 50 basis points more than we were expecting at the beginning of the year.

[Operator Instructions] Our next question comes from Ulises Argote with Santander.

I just had a couple there. One follow-up maybe to first question there on the guidance. Are you providing any more granularity on kind of on a per region basis. Obviously, the U.S. has been the one that's outperforming the most. But any upgrades on any of the outlook for the other regions? And then maybe the second one, just kind of tying to your previous comments also there on those kind of more challenging consumer dynamics in the U.S. Can you elaborate a little bit more on how those more premium products, those better for you, all of these categories are kind of performing more recently?

Ulises, thank you for your questions. So no, we're really, at this point, just providing the consolidated number for the increase in profitability. And in regards to your second question, everything around the most basic items is still growing at -- they put the same trend they were growing in the past or historically. One example is Better For You that we always talk about. Better For You is still growing at double digits, albeit it's experienced a small slowdown from the point it was right after we launched our most successful products recently. That is just part of the industry. I mean, as soon as you launch a product, and there is a big hype for it and then your growth rates start increasing exponentially and then they go down as the hype starts slowing down. So -- but they're still according to historic levels and double-digit growth. So we're not really seeing any trade downs from anything other than the most basic products as we like to call them, those items that may be some hobbyists like to purchase when they have an occasional Mexican grill weekend or a barbecue at their place. And those items are the ones that that are traded down to private label because that market is specific, it's not necessarily attached to branded products in the first place. So that's the dynamic that we've seen so far. Based on history and unprecedence, we can tell you that those same consumers in that same market, even though it's a hobbyist market. They tend back to back to -- towards branded products as soon as the economy gets better for them. So I would say that at least for now, that is the picture. And the good news, as I mentioned, is that on a sequential basis, if you look at the numbers, you will see a very -- I don't want to say significant but a very clear slowdown of private label relative to where it was on a year-to-year basis and an acceleration in our other items. So at this point, we're very pleased with the results, and that's what prompted us to increase that consolidated guidance in terms of profitability.

There are no further questions. At this time, I'd like to turn the call back over to Mr. Fritz for any closing comments.

Thank you all so much for being with us this morning. We look forward to hearing from you in any other market events or -- and obviously in our next conference call. Take care, guys. Bye.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.