Conference Call Transcript 3Q10 Results Grupo Bimbo (BIMBO) October 22 nd, 2010

Transcription

1 Operator: Good morning everyone, and welcome to Grupo Bimbo s 3Q10 results conference call. If you need a copy of the press release issued yesterday, it is available on the Company s website, at Before we begin I would like to remind you that this call is being recorded, and that the information discussed today may include forward-looking statements regarding the Company s financial and operating performance. All projections are subject to risks, uncertainties, and actual results may differ materially. Please refer to the detailed note in the Company s press release regarding forward-looking statements. I will know turn the call over to Mr. Daniel Servitje, Chief Executive Officer of Grupo Bimbo. Please, go ahead sir. Thank you very much, Maria, and good morning everyone. Thank you for joining us. As usual I will begin with an overview of our performance in this period, after which we will begin to take any questions you may have. Let me start by noting that results this quarter followed the same trend we have seen all year, namely an ongoing but gradual recovery in volumes across our market, both sequentially and year-over-year, as well as pressure on prices in the United States, and some negative impacts from low FX rates from USD to Peso conversion. Nonetheless, you can see that our efforts to deliver value to the consumer, combined with tight control of our working expenses, allows us to deliver stable and in some cases stronger results in the period. Let us take a look now at our performance per region, starting with Mexico. Net sales were up 4.5% from the year ago period. The economic environment keeps putting pressure on consumption, but the initial signs of recovery that we saw in the first six months of the year extended into the current period. The strongest categories were snacks and [unintelligible] baked goods; the modern channels are performing in the period as has been the trend for some time. I should note that our volume performance this quarter was perhaps more impressive given the severe impact of Hurricane Karl in mid September. 2,000 of our clients were impacted by the floods, two of our distribution centers were compromised for five days, and the Bimbo plant in Vera Cruz was flooded for more than three weeks. Moreover, heavy rains this season have been affecting our sales in Mexico, Central America, and Colombia. From a profitability perspective, a more favorable exchange rate and lower commodity cost in the Mexican operation helped the gross margin expand by 30 b.p. Along with higher volumes and strong control of our admin expenses, [unintelligible], and boost in consumption and expanding penetration. As a result we achieved double-digit growth in operating income and generated a 1.3 p.p. improvement in the margin. Moving onto the United States operation, results in the 3Q were in line with our expectations. The residual pressures on the economy, weak consumer confidence, and a tough competitive environment, crises at the retail level continued to be effective. 1

2 The intake of pricing more than offset the benefit of higher volumes both sequentially and year-over-year and sales declined about 1.5% in USD terms, or 4.4% in Pesos. That said, there were a few bright spots, such as sandwich stands and the Bimbo bread brand launch. In terms of operating performance, even though expenses as a percentage of sales actually declined despite the strategic [unintelligible] and distribution, lower prices and the special effect resulted in an almost 20% decline of operating income, or 1.6 p.p. from the margin. Lastly, as you saw, Latin America was the fastest growing region this quarter in terms of sales. Our focus for some time has been larger penetration. We added about 12,000 new costumers this period, for a total of more than 45,000 on a community basis, and together with better economic indicators in number of countries, our expanded regional [unintelligible] led to double-digit volume growth in places like Chile and Brazil. Sequential performance also improved, as evidenced in our operating performance. Before I comment on our outlook for the year, I want to take a minute to discuss our financial position. As you recall, after raising US$2.3 billion in debt to fund the [unintelligible] acquisition last year, we made a commitment to achieve a long-term amortization profile that is aligned with the expected cash flow, and to deleverage our balance sheet to a more comfortable level in the period of three years. We have worked rather aggressively to meet those goals through a strict cash discipline, using most of our free cash flow to pay down, and in some cases to prepay our obligations. For example, in July we fully amortized US$200 million coming due in December, and repaid US$800 million of 2012 obligations, using proceeds from the senior notes offering that we completed at the end of June. There was a one-time financing charge related to commissions that would have otherwise be amortized on that loan, but clearly we preferred a healthier tenor of our debt. For 2010 we are maintaining our outlook of [unintelligible] sales growth, and slight yearover-year gains in operating profits, and EBITDA performance remains on track, driven by volume growth and efficiencies being extracted across the Company. The commodity environment, at least for some key raw materials such as wheat, is likely to come under pressure in 2011, and we will already see some impact in the 4Q, because the economic recovery [unintelligible], our strategic focus is on delivering value to the consumer, and supporting brand growth renovations. That concludes my remarks this morning, so now I will hand the call back over to Maria for any questions you may have. Robert Ford, Bank of America: Hi, Daniel, and congratulations on the victories in Mexico. I just wanted to clarify: I would have thought that with the cooler temperatures, in spite of the rain and in spite of the destruction, that may have been somewhat of a benefit for Mexico, but based on your comments I get the impression that the opposite is it true; that your performance may have been much better in absent [unintelligible] the rains and the decline in temps? Is that correct? 2

3 Bob, good morning. Let me tell you that the quarter, in terms of temperature, was not a big hinder or also, neither a booster to our volumes. The effect of the rains was quite severe, and that is part of the effect that we have during the quarter. The other part was the Bicentennial celebration did affect the sales, specifically during September because of the long holidays, and that also affected our volumes when those things happened. But it is, I would say, not as big as an impact. Overall the volumes in Mexico are growing, although they are not recovering the full decline that we had last year. Robert Ford: OK. And just to clarify again: this Bicentennial would have been an adverse impact on your business in September. Is that correct? That is right. We had more holidays than usual, and longer holidays than usual. And that also affected our monthly sales. Roberto Ford: OK. And given your dynamics in the United States right now, I would expect that a big part of the decline in operating profitability was attributable to rising input costs, right? And the outlook is going to be tougher. And I was curious as to what your perception is in terms of competitive dynamics, the ability to push your price, and the response you might anticipate from consumers, as we get to more difficult input pricing pressures, please. We have certainly being experiencing already the new effect on the prices of wheat. As we mentioned, we will also continue to [unintelligible] into this quarter. In that regard we have implemented some price increases in our product line, and we are also reviewing our great expenditures as well. So, definitely the inputs are increasing and we are maneuvering to this stage with these tools. Robert Ford: And is it too early to determine whether or not how competitors are reacting, and how the channel is reacting? And out of curiosity, could you give us a sense of you typically hedge out about six months, is that what we should be kind of baking into our forecast in terms of what we are likely to see in terms of price pressures as you go into the 4Q for the United States and Mexico? We do not give specifics on our hedge coverage. We do tend to hedge, and the hedge timing will vary over time. So it might be very little or it might be more than six months, but at the end of the day our focus on buying futures is basically to reduce the volatility of our interest costs. And seeing into sort of the same policy; we are monitoring the 3

4 commodities market, obviously every day. And it is something that we take more care now than we did before given the circumstances that we have been experiencing in the past years. Robert Ford: And just the competitive response to your price increases so far are in the magnitude of your price increases? It varies region by region and also the competitive reaction changes differently in the different parts of the Country. But I would say that it is something that we are maneuvering in the respectable or in the right way, but I cannot give you more details. Robert Ford: Fair enough. Thank you very much. Alan Alanis, JPMorgan: Hi. Good morning, Daniel. My question has to do also with the United States; I am trying to understand what is different this time in terms of the raw material cost pressures that we are experiencing versus what we saw in 2008, before you acquired Western. Specifically when you had Bimbo USA back then, you took a hit in your gross margins that was several hundred b.p. as a contraction. But given the spectacularly good job at controlling SG&A and reducing SG&A, so the overall hit to your margins was pretty small in And I was wondering if you could do the same kind of thing in 2010 or in 2011 if the commodity prices were to spike again at those levels and what is different and what is similar from that situation? Good morning, Alan. Let me tell you that we cannot necessarily copy the same circumstances and actions that we had two years ago and then just paste them into the current environment. In that sense I would tell you that the price has not hit the ceilings that we had back then on the wheat side, but I would say different from now and before is that we do have a much more competitive pricing activity in the market on all products than what we had back then. That is something that is different from What we are trying and we have mentioned before is really to be focused on what are our opportunities and what is the best strategy, region by region and with the different categories that we participate in and at the end of the day we try to have or make decisions based on the opportunities locally and then just compile them trying to achieve the results on our national level. Alan Alanis: I hear you. On that same note, in terms of opportunity and strategy, how do you balance what you are thinking between market share and profitability, Daniel, in the United States specifically? 4

5 We have already mentioned also many times that our focus is not necessarily on the next quarter results but on building a strong business and a sustainable business in the long term. So, our decisions are guided by that criteria and sometimes, yes, for the sake of profitability we do have to have higher prices or lower trade expenses and lose some market share. But our goal, our focus is taking the right decisions for the business in the long run. And that is what we are focusing on doing every day. Alan Alanis: That is useful. And one last question, what is the desired capital structure in terms of net debt/ebitda? And once you reach it, should we assume that the excess of that cash that you might have then, you will have then, will go back to the shareholders, one way or the other? Well, that is a great question, Alan. Let me tell you that we are sort of in the process of getting to the point where we wanted to be and that is sort of one year earlier than we have mentioned to the public when we acquired the Western business, less than two years ago. We are very happy with that and we are also very comfortable with the timing of our debt. So, our position is, I would say, comfortable but not in excess. We are just in these months reaching the level that we wanted to have and we are reviewing the plans for next year, and we have also an acquisition to pay which was the Vero company that we announced, I do not know, months ago I forgot when we announced it and we expect that to close in the coming months and we will then pay the acquisition. And we are reviewing also our CAPEX plans for next year, which I see strengthening, looking at the different opportunities in the different markets, especially I would say in Latin America, where we see opportunities to continue our organic growth more aggressively than we had in the past. Alan Alanis: I hear you. And, I am sorry, one last last question regarding pricing in Mexico: do you see space there? I mean, what is your read of the domestic consumer in Mexico in order to continue with your pace of growth via some price increases there, Daniel? We have seen a recovery in volumes, but as I mentioned in the conference it is still below what we had before the 2009 decline. So, we are still in the process of trying to grow our volume back again and we have been careful in trying not to increase our prices. Given the recent price increases in wheat and the outlook for the coming months, we will increase our prices in the next quarter alongside the lines of the inflation rates for the Country next year. So, our average price increase will be somehow aligned to the inflation rates of the Country. We expect that that will not hinder the volumes and will allow us to maintain a reasonable margin on our business in Mexico. 5

6 Alan Alanis: OK. Thank you so much, Daniel. Jose Yordan, Deutsche Bank: Good morning, Daniel. My question is about the decline in operating expenses as a percentage of sales in Mexico. I mean, it makes it all the more remarkable given what sounds like a big increase in distribution given all the disruptions of floods etc. And I am just curious, you know, whether there is a particular layer of cost that was cut permanently or whether this is, you know, as we have seen in the past few quarters it kind of goes up and down versus the year before in terms of operating expenses ratio or etc. So, how should we think about this in the 4Q of the year and into next year? Is it something that sustainably is going to come down or was it a one-time event that expenses that were cut you are not able to cut them permanently? Good morning. No, let me tell you, Jose, that we have been working on trying to reduce our expenses Companywide, and as that happened last year and we have also tried to maintain our cost in line this year as well. So, what you are seeing is not necessarily a one-time event or a big project, but it is basically a continuation of the initiatives that we had been putting in place. And also, as we increased our volumes a little bit and our sales came back again, we had a little bit better absorption on our fixed costs. There is nothing of a one-of-a-kind event nor, you know, big in terms of [unintelligible] change. It is basically things that we have been putting in place in the past and that are giving back some reductions in cost. Jose Yordan, Deutsche Bank: OK. Thank you. Dorothy Craig, Neuberger Berman: Hi. Thanks, guys. Most of my questions have been answered, but a kind of a follow up on to what you were talking about before in terms of cash flow priorities and the M&A landscape. Can you just talk a little bit to your current desire for M&A as well as opportunities you are seeing in the market? Yes, good morning, Dorothy. Let me tell you that we are basically on the same path that we have been in the past. We continuously review the opportunities in every market in which we operate. And when there is an opportunity and our finances can allow it, we the discuss it with the Board and go in that direction. That is why we made this decision this year to acquire the concessionary business in Mexico, which has been our largest-ever acquisition in the year, in the concessionary business. So, that is basically what I would tell you, and we are still committed to maintain our leverage position and to be careful in managing through this period as well. 6

7 Dorothy Craig: OK, great. Thanks so much. Karla Miranda, GPM: Hi, Daniel. Good morning. Most of my questions have been answered already. What I want to know is if you can give us some color on what is happening in Latin America: Venezuela, Brazil, Chile, and Colombia delivered strong results during the quarter. What do you see going forward? As we mentioned, we have seen very nice growth in this quarter in Chile and Brazil, and also Colombia is performing quite positively. In Venezuela we are solving our issues at the hinder of our performance last quarter, and we are basically committed on delivering on our projects. I would say that the most important growth opportunities are right now in Brazil, and that is where we really are committing our investments. I forgot to mention that we inaugurated a plant in Belo Horizonte this quarter, and it is a part of filling the void spaces in our distribution opportunities in that market. And we are also improving and revamping some of our manufacturing facilities to allow for the volume increases that we are seeing in that Country. Karla Miranda: OK. Well, thank you. Akshay Jagdale, Key Banc: Good morning. Thank you for taking the question. My question was more related to your long-term strategy in the United States. If you could answer it in the form of market share or profitability, that would be great. What I am trying to understand is: you made a pretty large acquisition in the United States, and I think you made a good case for why you did it. But in today s environment, is it more of a market share growth opportunity longer term for your business in the United States to grow, or is it profitability related, because I know there were major differences in the two operations, which is why I asked that question. We are, and I would say all our business is trying to maintain or strike a balance between both goals. And we want to have a sustainable business everywhere, and obviously in the United States, and that requires having a profitable business, and one that keeps our growth of market share over time. We still focus on trying to improve our practices from the different regions, and leverage the ones that can adds us more value. And that is a process in which we embarked on and it has not finished. But structurally, yes, there were differences in the two businesses that some of them will remain in the 7

8 future. And we are quite happy with the results of the business, even though we have been experiencing a tough and challenging business environment this year, but it certainly is a much better one than the one that we had before the acquisition. And as I mentioned before, that is the idea for the next year. It is really to build a sustainable business, and one that can be profitable as well. But we want to be focused on extracting the last drop of profitability, because our goal is intended to build a business for many years. Akshay Jagdale: OK. And just on inflation, being a bread company, and again this is more specific to the United States, do you as a bread company prefer to be in an inflationary commodity cost environment or a deflationary commodity cost environment? Sorry. I did not get the question. Akshay Jagdale: We have seen wheat cost go up in 2008 and come back down significantly in 2009 and in And now we are seeing it cause wheat prices go back up again. My question is: as a bread company, do you prefer to operate in an inflationary environment for wheat, meaning when wheat prices are going up is it an easy environment to operate in than when wheat prices are coming down? I think we have to manage through the bumps and the crises and the valleys, and what I would tell is that definitely the volatility in the wheat market is there. I do not expect to get it back to the previous years when we had a very stable environment. So, we have to manage through these bumps, and even though we will try to reduce a little bit of the volatility with the futures hedges and [unintelligible], I would say that we and the market will have to live in this new world of ups and downs, and sometimes we will have deflationary impacts that will again get back to the consumer. And then we have shift afterwards in the crises. There was also a report on the agricultural commission in the UN that states that what we conceive after this trend, there is a continuous hike in the prices of food in the trends for many years. So, behind that short-term volatility, what we are seeing is, yes, an increase in the cost of food in the world. But we will have to get accustomed to these bumps. And it will have an effect sometimes in profits. So, that is the way at least I am seeing the market in the coming years in that regard. Akshay Jagdale: And one last one: do you think that the United States market specifically has an issue with capacity, meaning is there too much capacity in the business today? Not your business but in the industry, such that there is undue pressure on pricing? 8

9 No, I mean, we have heard this being mentioned for many years, and we have also seen closing of many baking plants in the last years. Having said that, we also have seen investments in new plants by some of the players, and this new capacity comes sometimes even with higher outputs than the ones that are being closed in [unintelligible]. Certainly there is capacity in the industry; the industry reacts. But it is not a static level, and I think that is also part of the story that will not get away for many years. Akshay Jagdale: OK. Thank you very much. I really appreciate it. Operator: This concludes our Q&A session for today. I will now turn the call back over to Mr. Daniel Servitje for any closing remarks. Thank you all for your time and interest today, and as always please do not hesitate to contact us with any further comments or questions you may have. And we look forward to speaking with you soon. Bye-bye. Operator: This concludes today s conference call. You may now disconnect, and have a great day. This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ. Please, refer to the company s investor relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript. 9