Industrias Bachoco S.A.B. de C.V. (NYSE:IBA) Q2 2016 Earnings Conference Call July 26, 2016 10:00 AM ET
Maria Jaquez – Investor Relations
Rodolfo Ramos – Chief Executive Officer
Daniel Salazar – Chief Financial Officer
Pedro Leduc – JPMorgan
Fernando Olvera – BBVA
Welcome to the Second Quarter 2016 Industrias Bachoco Earnings Conference Call. My name is Sylvia, 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.
I will now turn the call over to Maria Jaquez. Maria, you may begin.
Thank you, Sylvia. Good morning and welcome to Bachoco’s second quarter 2016 conference call. We released our financials yesterday after the market closed. If you need a copy of the release, please visit our website or request it from our Investor Relations department.
Before we continue, I will read the cautionary statements regarding forward-looking statements. This morning’s call contains certain information that could be considered forward-looking statements regarding anticipated future events and performance. These statements reflect management’s current belief based on information currently available, and are not guarantees of the future performance and are based on our estimates and assumptions that 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 obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.
Lastly, unless otherwise indicated, the amounts mentioned in this conference will be figures of 2016 with comparative figures of the same period from 2015 in Mexican pesos. As a reference, the exchange rate as of June 30, 2016, was 18.26 pesos per US dollar.
Here with me are our CEO, Mr. Rodolfo Ramos and our CFO, Daniel Salazar,
Now, I will give the call to Mr. Ramos.
Thank you, Maria. This second quarter we have in accordance to [indiscernible] of the poultry industry and is a lot stronger than the first quarter of 2016. In Mexico, we continue under volatile macroeconomic conditions. The Mexican peso continued moving in a wide range during the quarter with respect to the US dollar. When compared with the equivalent period of 2015, the Mexico peso depreciated nearly 18%. On the other hand, the inflation rate in Mexico continued at a low level and the economy continued growing. Conditions of soybean Mexican poultry industry for the quarter were first, we saw a strong demand for poultry products without the commercial - in the chicken feed from light chicken to further processed products. There was a normalized growth in supply both with our production [indiscernible] by our markets. We didn’t see - other supply conditions normal high even in the industry in general.
According to the USDA, imports of chicken from the U.S. into Mexico are not increasing this year. These are the sales and increase of chicken products coming from Brazil into Mexico. For the first half of 2016 the total import into Mexico has remained around 12% of the total consumption. Regarding our [indiscernible] business, we have served over supply conditions which is typical for this time of the year. According to the information reported by USDA, chicken legs in the United States poultry industry grew at less than 1% during the quarter. Regarding prices according to Georgia leg quarters and whole chicken prices remain at similar level in comparison with the first quarter. However, an improvement in the price of the breast meat was observed.
With regards to our company, we increased total sales by two-digits in Mexican peso term and our total volume grew around 5% year-over-year. This result is due to the higher volume saw in chicken leg and balance feed. In our balance feed business, we achieved two-digit volume growth during the quarter especially in our pet food products. Our pet food lines continue beyond our initial projection. This line represents more than 8% of our total balance sheet sales in the region. About raw materials, the industry faced high volatility in the quarter, futures for corn was around $4 per bushel in the first two months to a level of around $3.6 at the end of the quarter.
In the case of soybean meal, the situation was different. At the beginning of the quarter, futures were up level of $270 for short term and finish the quarter about $400. Regarding cost in our Mexican operations, we have seen an increase in prices of our raw materials in Mexican peso terms, this is impart of the depreciation of Mexican pesos to US dollar which boosts our production costs. We also want to mention that the performance of our U.S. operations, we increased our total sales in US dollar terms and continued the leading solid positive results that we are reducing our exposure to commodities market.
The condition mentioned before and keeping our SG&A at the same levels of the second quarter of ‘15 as a percentage of the total sales has allowed to reach an EBITDA of $2,329.6 million in the quarter due to the - increase of 11.9% as EBITDA reported as the same period of 2015; the largest amount for a quarter in our history. Our EBITDA margin was 17.4% which is very close to the 17.6% we reached in the second quarter of ‘15. We continue working toward our plan for growth by investing in projects to validate our broader mix in some of our production processes. As a result, our CapEx reached $1,188 million pesos in the first half of the year. Our financial result has strengthened our balance sheet. Year-to-date [ph] our net cash level of $11,283 million at the end of the quarter. This condition will enable us to support our future growth plans.
At this point, I’ll turn the call over to Daniel for a discussion of the financial results.
Thank you, Rodolfo and good morning everyone. Our total sales increased 12.9% in the quarter as compared with 2015, mainly because of higher volume of products sold along with better prices for chicken and swine. For this increase around 12% is due to the translation of the results of our U.S. operations into Mexican pesos. It led us to an increasing sales of 8.4% for the first half of the year as compared with the same period of 2015.
In the quarter, sales of our U.S. operations represented 24.3% of total sales an increase from the 22.9% pre-quarter in the equivalent quarter of 2015. The cost of sales in the second quarter was $10,079.1 and $20,091.3 million for the first half of the year. This represents an increase of 13.1% for the quarter and 13.9% for the year. These figures are the results of increases in volumes sold and higher raw material cost in Mexican peso terms. The gross profit for the quarter was $3,283 million with a gross margin of 24.6%, an increase of 12.3% over the gross income reported in the second quarter of 2015. For the first half of the year, we reached a gross profit of $5,110.2 million with a margin of 20.3%. This amount is 8.9% lower than the gross profit reached in the same period of 2015.
Total SG&A for the second quarter of 2016 was $1,185 million and $2,306.8 million for the year, representing an increase of 13.4% and 12.4% when compared to the same period of previous year respectively. The variation for the quarter for the year is mainly due to the higher volumes sold. This operating income of the second quarter of 2016 totaled at $2,081.6 million and operating margin of 15.7% slightly lower than the 15.9% margin reached in the second quarter of 2015. The operating income for the first semester of 2016 was $2,787.9 million and operating margin of 11.1% lower than the operating margin of 15.3% reached in the same period of 2015. The EBITDA margin for the second quarter was 17.4% and 12.9% for the first half of 2016. The EBITDA amount reached in the quarter is the highest for our quarter as Rodolfo mentioned it before, and the EBITDA margin was very close to the second quarter 2015 which we consider [indiscernible]
In the second quarter of 2016, the net financial income was $197.3 million and $333.7 million in the first half of 2016, both higher than those for the same period 2015. Those increases are mainly due to a higher interest income. Our income taxes were $708.9 million for the quarter higher than the $621.1 million recognized in the same quarter of 2015. For the first half of 2016, our income taxes were $944.7 million which was lower than the income taxes for the same period of 2015.
All of the above led us to a net income to $1,577.2 million with a net margin of 11.8%. This income is 13.1% higher than the net income reached in the second quarter of 2015. For the first half of 2016, the net income totaled at $2,176.9 million for the net income margin of 8.6%. The net income per share was 2.63 pesos for the quarter and 2.62 pesos for the first half of 2016. Going into our balance sheet, we kept a healthy financial structure with an increasing total assets of $2,362.1 million when compared to the year end of 2015. This is mainly attributed to increases in the net property, plants and equipment and inventories. Our total liabilities increased by $741.9 million during the quarter as we accumulate the excess [indiscernible]. Our net cash was $11,283 at the end of the quarter.
So thank you and I would turn the call back over to Rodolfo for final comments.
Thank you, Daniel. We are satisfied with the results achieved in the quarter. Now we are entering into the third quarter of the year and the volatile competition for the Mexican pesos exchange rate and for raw material cost. We are looking closely at the evolution of the crossing the U.S. and Mexico under these conditions keeping the discipline in our hedging strategy will be key. We expect our poultry industry continue to be normalize rate in both the markets in which we participate. We expect a typical third quarter in terms of the market which historically is weak. We will keep focusing on productivity and controlling our SG&A and this is key for being competitive in our industry. We will continue to manage the aspects we cannot control as best as we can, dependent on the market conditions in our industries. We will continue with our CapEx -- supporting our growth plan and of course, we are confident in the effort, knowledge and dedication of our people.
With that, we will now take your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Pedro from JP Morgan.
Hi, good morning everybody. Thank you for the question and congrats on the results. First question would be and you just mentioned Rodolfo on the margin outlook for the second half of the year, you said expecting a normalized third quarter. Can we read that normalized is around 10% if yes and no? And then specifically on the COGS outlook this second quarter, is this what you believe will be one of the harshest year-for-year impacts so second half of the year COGS pressure at least nominal terms if it eases for you so you don’t have to take your - chicken prices don’t have to be strong to recover margins? This would be the first question. Thank you.
Thank you, Pedro. We expect to have more normalized second half and talking about the third quarter it is difficult to predict how - because as you remember and you know this is the third quarter is to be the weakest. So if we expect to have it normalized, that means that we will be in the range of one digit EBITDA margin. It is difficult to decide how much it would be.
Okay. And on the COGS trends, do you think the second quarter was the harshest hurdle meaning in year-over-year terms or is there still a tail that will pressure your cost in the second half of the year at least in - wise if the second quarter was the worst?
Okay, in our Mexican operations the cost is been affected by the Mexican pesos depreciation, it means that the raw materials and the feed have so far increased with the previous quarter. Now probably year-over-year we will expect an increase in our raw materials, talking about our Mexican operations probably about, something between 8% to 10%, but in our U.S. operations it is the opposite because we have a benefit from the lower raw material and we are capitalizing our this positive FX in our U.S. operations. So in - terms we’ll have the same cost in our U.S. operations in dollar terms.
Okay, understood. Godo. Thank you. And then last question not least, CapEx was up almost a 100%, I know year-over-year and first half of the year and others probably had a small M&A component. But it seems like a big jump so if you could tell us a little bit on what you’re investing behind and what kinds of effects it will have on your business in the second half or if we should expect something more next year?
We expect to maintain our same amount in CapEx for the second quarter and mainly this CapEx are oriented to increase a little bit our capacities in all along the integration I mean not only in the processing plants but also in the farms, factories and also to replace our fleet. We invest an important part of our work annual CapEx budget in replacing our fleet in order to have it in very good shape. And also to increase our fleet because we’re growing in some distribution centers basically or mainly in the southern parts of our Mexican operations.
Okay, great. Thank you.
You’re welcome, Pedro.
And the next question comes from Gabriela from Newfoundland.
Hi, yes. Thank you. So my question is related to cash use. I know M&A is always a possibility I was wondering if you feel that sector anything has warmed up or if you could may be see higher cash dividends with the cash being generated by the company. Thank you.
Well the cash is primarily dedicated for our growth, it’s a strategy. As I mentioned before, we’re investing or increasing our investment in CapEx and we are also facing right now the weather season in which it demands a more level of working capital. But we’re also expecting to use this cash to complete our inorganic growth strategies. As we mentioned before in some other conference, we are looking for inorganic growth not only in Mexico with other projects but also outside Mexico in poultry business. So we are looking to complete these strategies before we think to distribute our dividend.
Perfect. That makes sense. And I was just wondering I know you mentioned that same thing at last call, but if you are getting closer to it, if you’re seeing may be like a possibility of that something happening sooner or if it’s still in initial conversations?
Well it’s difficult to predict how fast our transaction could be but we’re working very closely in pursuing particular opportunities not only in Mexico but outside Mexico but we’re expected to have something to tell you in the near term.
And we have Pedro from JP Morgan.
Yes, thank you for the follow up. On sales volume in your release, you mentioned other volumes growing 13% 13.5% year-over-year. Now on the prepared remarks you explained this is a little bit on unbalanced feed growth. Could you elaborate what is driving demand for balance sheet in this amount? And if there is any other product categories that are falling on the others that are also experienced this sort of fall in growth? Thank you.
Well the balance sheet grew around 16% probably this is the largest growth in a particular business line but we have significant growth in the other business line. For instance, the leg, the beef are in the single digit range or in the up single digit range of growth from this 16% that would probably grow around 20%.
And these products have similar margins to your poultry business more or less, any color would be appreciated. Thank you.
In the fast food particularly, it has higher margins in the poultry business. But this assumption – and the reason because we are fortunate to grow this particular business even that is still very small compared with the other business lines but growing very fast and we are taking – to focus to have a healthy growth in this business.
Okay. Thank you very much.
We have no further questions at this time. Pardon me, we have Fernando from Banco.
Hi. Good morning. Hello Rodolfo and Daniel. My questions regarding Mexico I wanted to hear your opinion or your outlook about prices and volume for the second half of this year and what have you seen so far in July?
In July what we have seen is let’s say a slowdown of the market but this is something that it is seasonal so it’s what we expected. We have been – with prices because industry it is on the slow run – this particular situation. But in terms of volume, what we expect in second semester second half is to be in the lower one digit growth rate. So year-over-year I’m talking something around 2% to 3%. This is in volume but in terms we expect to be in the two digit range in the middle two digit because we are somehow affected positively by the income of our used operations because we – revenue from the used operations to Mexican pesos we have benefit for the Mexican pesos depreciation.
Okay, perfect. And I have another question, after this good second quarter are you going to change your guidance for the EBITDA margin or are you still expected to be between 9% and 11%?
Yes, we will maintain the expectation because given that we have a very good second quarter and our expectation for the second semester is more let’s say conservative, because we are getting into the lower part of the cycle in the year. So we’ve seen a lot of pressure in the market. We think the second half will be probably similar into the second half of the last year. And remember that the difference seasonality in the third quarter.
Okay. Perfect. Thank you very much.
Okay, thank you, Fernando.
We have no further questions at this time.
Okay. Thank you everyone for joining us this morning. If you have any further questions, please contact us investor relations - who will be glad to assist you with your questions. Thank you very much.
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
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