Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA)
Q4 2015 Earnings Conference Call
February 5, 2016, 10:00 am ET
Maria Jaquez - IR
Rodolfo Ramos - CEO
Daniel Salazar - CFO
Mauricio Martinez - GBM
Pedro Leduc - JPMorgan
Welcome to the Q4 2015 Industrias Bachoco Earnings Conference Call. My name is Richard, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Maria G. Jaquez. You may begin.
Thank you. Good morning and welcome to Bachoco's fourth quarter 2015 and year-end conference call. We released our financials yesterday after market closed. If you need a copy of the release please visit our website or request it from our Investor Relation department.
Before we continue, I will read the cautionary statement regarding forward-looking statements. This morning's call contains certain information that could be considered forward-looking statements. These statements reflect management's current belief based on our information currently available, and are not guarantees of future performance. They are based on our estimates and assumptions and are subject to risks and uncertainties, including those described in our Annual Report or 20-F, which could make our current results differ materially from the forward-looking statements discussed in this call. Except as required by the applicable law, Industrias Bachoco undertakes no obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.
Lastly, unless otherwise indicated, this amounts mentioned in this conference call will be figures of 2015 with comparative figures for the same period of 2014 in Mexican pesos. As a reference, the exchange rate as of December 31, 2015, was 17.21 pesos per U.S. dollar.
Now, I will give the call to Rodolfo.
Thanks, Maria, and good morning everyone. In this quarter, we faced high volatility conditions in Mexico as occurred in nearly all the markets worldwide. This volatility had an effect on the Mexican pesos which depreciated nearly 20% quarter-over-quarter.
On the positive side, the inflation rate in Mexico reached an historical low level as the economy continue growing in fact. It is expected to our GDP in Mexico has grown around 2.5% in 2015.
Regarding the poultry industry in Mexico, this quarter was characterized by an important supply growth. Even though, we don't have the official information from the Mexican Poultry Association, we estimate the industry growth around 5% year-over-year above historical growth rate of 2% to 3%.
We also observed a good level on demand side. Even when we had some other supply conditions during the quarter, we have steady growth in all the commercial channels from light chicken to further processed products.
According to the USDA, U.S. chicken production could grow nearly 4% in 2015 also above historical rate.
Prices were lower for the quarter as compared to year-over-year, mainly in the case of leg quarter, as a result of the fine imposed to U.S. export by different countries. According to the same-stores exports of poultry products from the U.S. to Mexico has not been growing when compared to 2014.
The industry in general has benefited from lower main raw material cost in U.S. dollar terms. In particular, we saw lower future prices in soybean meal which is valued of $270 for short ton at the end of the quarter. Also the grain market showed a reduction in price closing at levels of U.S. $3.50 per bushel. In Mexico, we are not able to fully capitalize in reduction as the exchange rate compensated much of the U.S. price adjustment, pushing up our production cost.
Focusing on our company, our sales volume increased across most of our main product lines during the quarter. In particular, we saw the high volume for our quarter in chicken and balanced feed in Mexico. We also had an important growth in volume of chicken sold in our U.S. operation. This volume growth allow us to increase our total sales for the quarter by 6.9%. If we look at the whole year, the volumes sold in all of our main product lines increased, particularly in chicken and balanced feed, we sell to third-parties.
This growth in volume has been possibly impacted due to projects and efforts we put in place in order to be close to our customers. In our U.S. operations, the total volume sold in 2015 was the highest for years since 2011. We managed to gain some ground with different customers despite the pressure on the export markets which mainly affect leg quarters. Those conditions allow us to reach an EBITDA of $743.8 million with an EBITDA margin of 6.4% for the fourth quarter of 2015, and adjustments compared with the fourth quarter of '14 but it is slightly better when compared with '13.
However if we look at the whole year, our EBITDA margin was 12.8%, the second largest for the company in the last 10 years, with an increase in volume and total sales sold that we consider 2015 a good year in terms of financial results.
Our annual financial result has strengthened our balance sheet, a condition that will enable us to support our growth plan. At the same time, the company remains a leader of the poultry industry in Mexico and an important player worldwide with a solid and attractive brand.
Now, Daniel, will join us to a discussion of the financial results.
Thank you, Rodolfo, and good morning everyone. The company's fourth quarter '15 net sales totaled $11,650.2 million, $750.9 million or 6.9% more than the $10,899.3 million reported in the fourth quarter of 2014. This increase is a result of more volumes sold in our main product lines during the quarter, partially compensated by the weaker poultry prices than the same quarter of 2014.
For this fourth quarter, sales in our U.S. operations represented 24.7% of net sales above of the 20.5% we reported in the equivalent quarter of 2014. For the year, our current sales were $46,229 million, an increase of 10.7% with respect to 2014. This increase was mainly the result of increased volumes sold, partially compensated by a reduction in prices.
The cost of sales was 9,989 million pesos for the quarter and $36,821 million for 2015. This represents an increase of 19.3% for the quarter and 15.3% for the year. This increase in cost for the quarter was mainly due to higher volumes sold, as well as an increase in unit cost primarily impacted by the increase in our main raw materials in Mexican pesos terms. For the year, the increase was mainly due to an increase in volumes sold.
Gross profit for the quarter was $1,661.2 million with a gross margin of 14.3%, a lower margin when compared with 23.1% reported in the same period of 2014. In 2015, we reached gross profit of $9,408.1 million and a gross margin of 20.4%. This profit is 1.3% higher than the gross income reported in 2014.
The total SG&A for the fourth quarter of 2015 was $1,137.9 million and $4,279.5 million for the whole year, represented an increase of 9.6% and 13.2% respectively when compared with the same period of previous year. The valuation is mainly due to higher volumes sold and additional expenses incurred in the implementation of procedures for further improve the services we provide in our markets.
Operating margins in the fourth quarter of '15 was 4.5% compared with 13.1% reached in the same period of 2014. This lower price in margin is mainly attributed to lower gross profit and higher SG&A than the fourth quarter of 2014. The operating margin for 2015 was 11%, a decrease when compared with 12.8% reached in 2014.
EBITDA margin reached was 6.4% for the fourth quarter, a decrease when compared with 15% from the same period of 2014. For the whole year, the EBITDA margin reached 12.8% lower than compared with 14.7% reached in the 2014, as I also already mentioned before the second largest in the last 10 years.
For the fourth quarter of 2015, the net financial income was $113.1 million and $118.5 million for the 2015 year, both higher than the same period of 2014. Those increases are mainly due to financial exchange gains and improvement and interest earnings in our investment portfolio breaking up by our levels of cash.
Our total taxes were $187.8 million for the quarter, lower than $426.4 million recognized in the same quarter of 2014.
All of the above led us a net income of $451.5 million for the quarter, resulting in a 3.9% net margin, a lower profit than the net income reached in 2014. For 2015 the net income totaled at $3,898 million, 8.4% net margin. This profit is very similar to a net income reached in 2014.
The net income per share was 0.75 pesos for the quarter and 6.29 pesos for 2015. This income per share is the second largest for the company in the last 10 years.
Going into our balance sheet. We kept a healthy finances charter with an increase in total assets of 16.5% when compared to a year-end 2014, an increase of 14.4% in our stockholders equity.
Our net cash at the end of 2015 was $11,161.9 million, an increase of more than 20% when compared with $9,511.2 million we had in the end of 2014.
Our CapEx in 2015 was $1,662.8 million, used mainly to support our organic growth and maintaining our facilities in high level of productivity.
Related to the volatility of the Mexican Pesos we are facing at the beginning of the year, the Company would give a hedging discipline.
With that said, and I will turn the call back to Rodolfo for final comments.
Thanks, Daniel. We enter into a challenging 2016 year due in part of the macroeconomic volatility we are expecting worldwide at the beginning of the year. However, we are confident that we will continue to the deliver positive results. We still have many opportunities to improve in our productivity level, as well as in our SG&A, and we will continue working hard to capitalize these opportunities.
Looking forward, we expect the Mexican economy to continue its road in a range of 2 to 3 GDP in 2016. We also expect to gain certainty about the exchange rates of the Mexican Pesos versus the U.S. dollar during the first quarter of the year. We expect the main raw materials to be in the range of $3.50 to $4 per bushel, as well for corn around $250 million to $300 million per short ton in the case of soybean meal for the first part of the year.
The evolution of this market will depend on generating demand and the information related to crops in 2016.
We expect our poultry industry with a more normalized growth in both Mexico and in the U.S. even when we may face some other supply condition in the first part of the year. In Mexico, we continue to focus in our organic growth while alleviating some bottlenecks at different stages of our process and implementing targets in order to be close to our customers. In the U.S., we will focus on optimizing our sales mix and move out of the commodity markets.
The agreement we announced at the end of 2015 to acquire full equipped facility located in Oklahoma City will help us achieve our goals once we close the deal. Therefore, we expect to continue with our CapEx above maintenance level. We will continue focusing on those things. We can add control on managing the other ones as the best as we can, depending on the market condition in our industry.
With that, we would now take your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions].
Our first question comes from Mauricio Martinez from GBM. Please go ahead.
Good morning, Rodolfo and Daniel. Thank you for taking my question. I was wondering if you can share with us your expectations in terms of margins for 2016. And given the current levels the dollar how much you think it will impact to your cost structure? And also, if you give us any insight about your expectations for chicken supply in Mexico for a next year it will be very helpful? Thank you.
Well firstly the chicken supply for the first half of the year is going to be a little bit above the normal conditions because we closed the 2015 with an increase in supply above the normal levels. So that condition is to remain the first half of the year.
The second half of the year we're expecting a more normalized supply, so more or less we're expecting an increase than above in the year about 3.5% to 4% of increase which is a little bit above the normal level.
And turning to the cost, normally we have a GAAP to transfer the increasing cost due to the exchange rates. The last year here in Mexico we had the local crop was a little bit slower than normal and we're expecting this year a normal situation in Mexico with a normal supply for -- of grains in Mexico. So we're going to have a little bit more acquisition of the domestic -- well in the domestic market in order to avoid increases in the exchange rate. But I believe the first quarter of the year is going to be affected by the cost and at the end of that period; we expect to start recovering our prices according to the cost, to the percent in the cost.
So complementing the answer, now looking for the whole year, we expect obviously a very pressure year. So the level of the margins that we expect would be around something around 9% to 11%. So it's more in the normalized range and even that we, as Rodolfo mentioned, it expect a weather, probably a weather crop the effect of exchange rate will affect us in around 7% of our total cost due to deprecation, Mexican peso depreciation.
Thank you. [Operator Instructions].
Our next question online comes from Mr. Pedro Leduc from JPMorgan. Please go ahead.
Thank you, hello everyone. Thank you for taking my questions and I would like to hear your thoughts on the pricing outlook for the next year. Of course, you already touched on margins basically now. And as I mentioned in the release of course Mexico face another supply situation that you are yourself expect to remain throughout the first half, I mean but on the other side costs are rising in not only for industry wide i.e. I believe smaller players are even fully more pressured than yourself. So would it be reasonable to assume that this is cost pressure together with an easier supply will be supported for pricing in 2016. So when would we expect a pick up there and your outlook for the full-year as an average in terms of pricing, I mean $0.05 a day just increased U.S. chicken margin outlook for 2016, so perhaps when is that turning into U.S. as well and if you could touch on this division's profitability that will be great? Thank you.
Well in the Mexican market as you know we have a seasonality during the year in the second quarter we probably will have the best performance of the hind stream. So we expect to recover some part of the impact of the cost in prices due to the increase in the demand in the second quarter.
So talking about that, the increased prices for the year we expect probably something above 5% of impact in the prices for the whole year. So in the second quarter we probably expect a significant increase from probably in the first quarter of this year.
Okay, that's great. And if you could also touch a bit on how you seen things in the U.S. usually perhaps you see increased outlook together with what [indiscernible] mentioned to today?
Well in the U.S. the situation is quite different. We started the year with a significant pressure in prices in the -- in leg quarters mainly. But in the case of breast meat we expect a regular year. We expect other prices for the second quarter of the year and of course we will be benefit somehow from the lower cost for raw materials in the U.S. operations.
Thank you. We have a follow-up question again from Pedro. Please go ahead.
Thanks. Regarding the balance sheet, of course it's the current question on that you did generate a lot of cash even though your margins were down, so keep accumulating. Any sort of outlook for CapEx you just mentioned of course it's going to in maintenance if you could perhaps signal in which segments are you going to deploy this incremental CapEx in. So if it is Chicken Mexico or other proteins you are seeing that will be helpful. And then, second, if you believe this downward trend we're seeing in industry margins if they will open up more opportunities for M&A for leading careers and yourself and also the second part of the question. And then third could it be perhaps by this year-end you think about increasing your dividend payout and if so what's the timeframe that you would be looking forward to grow. Three questions there for capital deployment and balance sheet. Thank you.
Well in terms of our CapEx, our CapEx outlook, our entity in both the Mexican and the U.S. operation. In Mexican operation we are deploying our CapEx in both in farms expanding capacity as well as in processing plants in order to break some bottlenecks in food or processed products. And in U.S. we are also increasing our capacities in expanding our capabilities in the processing plant in order to be more flexible, to have more flexibility for positioning different kind of products for our full service customers.
And in the M&A right now we are also as you mentioned we probably see this year a more opportunity this year in terms of possible opportunities to concrete. As we have mentioned in the past we are very actively looking for opportunities not only in the U.S. market but also in Latin America market looking for opportunities, so it's difficult to predict that this year we can concrete the transaction, but definitely we are actively looking for opportunities, and we a whole strategy with other condition to concrete the transaction than in the previous year.
And in the case of the dividend of course this always will be a possibility but we are -- we prefer to consider the cash for the growing strategies before we consider a significant dividend payment. So we are looking very hard for concrete our growing strategies before to start the discussions to make a significant dividend.
Okay. Clear. Thank you. And if I may, just catch on something you mentioned processing capacity, I don't know if it's related. But if -- could you tell us a bit how your further processed food volumes in Mexico behaves, especially in the second half? We understand there was some market share petroleum is giving -- given the change of hands and one of leading players. So if you believe you have gained share both in chicken and in processed foods? And if your CapEx also entails some diversification into other tool things, doesn't it make it hard, for example? Thank you.
Well, in that regard what I can say is that we are growing in a double-digit rate in this particular kind of product. And yes, we think we can -- we have gained some share in this market. Even that is growing in a lower rate than in other countries for instance, but yes we are gaining some share in this particular product. And we are investing as I mentioned to increase our capacity in this particular kind of product in Mexico.
Well, in terms of product offerings we are not basically investing increase our capacity organically speaking, but we are looking for acquisitions in other processing to expand our presence that we already have. So we are also looking not only in the chicken business opportunities, but we're also in the other processing [indiscernible].
And we have a question online again from Mauricio Martinez from GBM. Please go ahead.
Hi, again. Kind of a follow-up question. If you can share with us any guidance for CapEx for 2016, really helpful?
Well, level of CapEx will be in the range of $120 million a year for 2016.
And it looks like we have no further questions in queue.
Okay. Thank you. And thank you all for joining us this morning. If you have any further questions, please contact us at our Investor Relations area and we will be glad to take your questions and help you with those.
Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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