Conference Call Transcript 4Q10 Results Grupo Bimbo (BIMBO) February 25 th, 2011

Transcription

1 Operator: Good morning, everyone and welcome to Grupo Bimbo's 4Q10 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 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 now turn the call over to Mr. Daniel Servitje, Chief Executive Officer of Grupo Bimbo. Please go ahead, sir. Thank you very much. Good morning, everyone, and thank you for joining us. As usual, I will begin with a review of developments and performance in the quarter and then Guillermo Quiroz, our CFO, will provide some additional information on the financial position. We will be happy to take any questions you may have at the end. Let me start by saying this was a tough quarter and with a very difficult comparison with the 4Q of last year. We essentially had four issues impacting us. Two of them were operational, specifically higher wheat prices, especially in our United States operation and a weaker USD, and the other two were the extraordinary charges, one in Brazil related to a more conservative policy and the second at a Holding Company level reflecting changes in Mexican GAAP. If you look at the total decline at the operating level, 2/3 of that figure comes from these causes. These factors did not allow us to achieve the targets we set out for the year, although I would still say that sales and profit for 2010 were reasonable, given the economic environment. I should note that volume performance in most markets this quarter continued to recover, which is a positive reflection of our investment in innovation, marketing and sales efforts. Let me now walk you through the performance of each region in a bit more detail. In Mexico, net sales were up 5.3% from a year-ago period. We slightly increased prices towards the end of the year, but do not expect to see the full effect until this quarter. So, growth came from particularly good performance by our salted snacks and confectionary categories as well in bread, sweet baked goods and cookies. As you read on our press release, we also launched a special portfolio for schools in the 4Q with products from both the baking and snack divisions, aligned with our core commitment to consumer health and nutrition. From a profitability perspective, the weaker USD was no longer sufficient to offset higher commodity costs, as had been the case in previous quarters. Thus, we saw a contraction in the gross margin. At the operating level, the main driver of performance was the extraordinary expense associated with the Sara Lee acquisition. Excluding that factor, operating expenses were stable as a percentage of sales. So the key factor affecting our underlying performance this quarter was really commodities. In the United States, results were in line with the trends we had been seeing the whole 1

2 year. The economy is continuing to recover, albeit slowly, and consumer confidence seems to be moving up. Prices this quarter were in level with last year, although we did make adjustments in the 4Q that are now fully filtering through. With stable volumes in the period, sales in USD terms were flat. There were some bright spots to highlight, specifically the Thomas brand and Bimbo Bread, which was launched nationwide earlier in the year. That line is now getting additional visibility with our Major League sponsorship of the Philadelphia Union Soccer Team. In terms of our operating performance, the Peso conversion effects and higher commodity prices comprised almost 80% of the decline in operating income this quarter. To give you a quick update on the Sara Lee acquisition, regulatory reviews are still underway but the process is on track and we anticipate a close in the 1H of the year. Moving on to Latin America, volume growth drove sales up more than 4% for the quarter with several countries in the region contributing a double-digit rise in sales. We are seeing a good turnaround in Central America and performance in places like Colombia, Chile and Brazil remaining solid. What impacted us this quarter aside from the raw materials environment was a change in how we provision certain legal contingencies in Brazil, resulting in a one-time non-cash charge of about Ps.350 million. Before I turn the call over to Guillermo for his comments on the Company's financial position, I want to share some preliminary outlook for the year. We expect the pace of the economic recovery to pick up in 2011, although raw material pressures are likely to remain throughout the year. That means that we will need to be very careful to balance pricing actions with our focus on supporting and also increasing our volumes. While these are mixed signals, I remain very confident about the future of our markets and the potential for long-term growth. As such, we see this as an opportune time to develop our markets with greater investments in our manufacturing and distribution capabilities. You can expect to see higher CAPEX allocations in One of our primary goals this year will be on volume growth and we will have a full range of initiatives in every market at every level, from national accounts and mom and pops to point of sale merchandising and consumer focused promotions, from portfolio of innovations to new product launches. Maintaining margins will be a focus, but as I said, pricing actions will be taking careful consideration in light of our commitment to give value to consumers and customers. Guillermo, let me hand it over to you at this time for some additional comments. Thank you, Daniel. I only want to cover two specific topics, some additional background on the extraordinary expenses and an update on our balance sheet. First, in Brazil, we decided to change our policy from recording actual payments reserve each year to a more conservative approach of creating a reserve amount, reflecting the expected value of open lawsuits. This means that in the future this reserve will be adjusted depending on the current status of current lawsuits. However, we do not expect this to be huge amounts and we will only adjust the reserve based on each year's circumstances. Although such lawsuits are a very common issue in Brazil, we will make strong efforts to take a more 2

3 proactive approach towards them. In terms of extraordinary charges for consulting and legal fees related to acquisitions, we would have ordinarily considered them as part of the acquisition cost, but there was a change in Mexican GAAP that require us to recognize a full charge as incurred at the Grupo Bimbo Holding Company level. In terms of our balance sheet, as you know we have been working aggressively to deleverage and achieve a long-term amortization profile that aligns with our expected cash flows. We are meeting those goals through a strict cash discipline to pay down and in some cases to prepay our obligations. In 2010, for example, we prepaid US$800 million of 2012 obligations using proceeds from the senior notes offering we competed at the end of June and used US$300 million from cash holdings to pay down additional debt. This has resulted not only in lower total debt position, but has also diversified our sources of funding and extended our average maturity to more than five years. I am pleased to note that our debt instruments are among the highest rated in Latin America. We also took a few additional measures with the aim of reducing our borrowing costs. In September, we took advantage of prevailing conditions in the credit market to reduce interest rates on our bank loans, generating annual savings of approximately US$18 million. We also converted a portion of our debt that was denominated in Pesos into USD in order to better aligning the movement in the cash flow. This has two important benefits. First, it is a perfect economic hedge and second, it generates savings of more than US$25 million per year. Some of you have asked about how we intend to finance the Sara Lee acquisition. So, let me say, we are intend to pay about US$200 million from our cash holdings and for the rest we are analyzing the best options available. We have plenty of flexibility in both Mexico and in the United States and in the bank loan market. So it will come down to the most cost effective option. That concludes my remarks. At this moment, I will hand the call to Maria to open the Q&A session, please. Adriana Neriga, Accival Asset Management: Thank you. Hello, everybody and thank you for the call. I have a question relating the adoption of the International Financial Standards. I know that you are in the process of doing that and I do not know if you can comment on a possible implication for the different businesses. I do not know if the previous comment changes in the Mexican GAAP are related to this. Well, good morning Adriana. The first part, yes, we are in the process of adopting the IFRS. We do not still have final figures, but starting on January we are starting to build the comparative basis that we will be doing next year that is first quarter to be reported on international rules, say it is the first quarter of 2012 and we will be ready on time to have our 1Q11. And can you repeat the second part of your question about the Mexican GAAP, please? 3

4 Adriana Neriga: Yeah. I thought that maybe the changes at the operational level is related to this, but I do not know if you can comment further on possible implications, maybe at the level of inventories or fixed asset, for example? Do you have comments on this? Yes. We are not expecting any substantial impact on our P&L at all. Some impact, there will be some in our balance sheet, the most important part comes from labor reserves. As you know, in our actual procedures, the differences between the actuarial calculations and reality each year is capitalized and amortized in a long-term period and according to the new rules, those assets, intangible assets are to be completely written off at the beginning of So that will be the most important part of our balance sheet. There are some impacts on our assets, fixed assets, not on inventories, as you know we have very small amount of inventories, but in fixed assets there will be, but very, very small. Adriana Neriga: OK. That is very useful. Thank you very much. Rebeca Sarmiento, Deutsche Bank: Hello. Good morning. I was just wondering if you could elaborate more on the extent of the price increases you have been implementing in Mexico and whether or not you believe these are enough to stabilize margins or do you anticipate having to perhaps do another round of price increases later this year? Yes, Rebeca, good morning. We had a very small price increase in Mexico, at around 3.5% last year, and in the later part of the year, and we will be adjusting it as needed. So far, we had a very small increase this year at around 1% and it is on selective items and brands. So what I am telling you is the impact of the Mexican subsidiary. So that is about what we are putting up to the market and it is going to be a business in which we have to be very careful on increasing our prices as needed, but also trying not to hurt our volumes. So that is what we are hoping to do in the coming months as well. Rebeca Sarmiento: OK, fair enough. And also I wanted to know if there are any additional updates with regards to the synergies you are projecting from the Sara Lee acquisition? No, we are sticking with what we have right now and we are in the process of understanding with more detail the business and the opportunities that we have, but we have not revised our estimates to the market. 4

5 Rebeca Sarmiento: OK. Great. Thank you. Roy Yackulic, Bank of America: Hi. Thank you. Just to get my understanding correct, you are expecting to maintain margins in 2011, because of kind of the dynamics of the ability to increase prices and higher commodity prices, you think that will be neutral on overall margins. But what about the kind of sub-par performance in the United States and Latin America? Are you expecting increased margins that will actually add to results in 2011? Well, in Latin America we will be increasing our margins, definitely from what we ended up having this year, especially on the last quarter. In the United States as a whole is going to be sort of a very similar number. We do have a lot, the impact in prices, what you have to understand is that the valuation of the Peso and other local currencies have softened the impact on commodities, which is not a case in the United States who have felt the full brunt of the impact. So, the increases in prices in the United States market are going to be higher than what we will be facing in other markets due to that consideration. We are expecting similar margins to last year on an overall annual basis, we will probably have different impacts over the quarters, but that is our goal. And overall, we will be definitely hoping to have higher profits this year than what we had last year, but on a margin basis not very much different. Roy Yackulic: OK. And then, another question, can you tell me more about the Bimbo Bread launch in the United States? I know you mentioned something about the soccer team in Philadelphia, but really where else is it occurring and to what extent? Like, what percentage of sales will that bring or what are the targets for that? Well, the Bimbo Bread line is basically in most markets of the United States, not necessarily in all stores in these markets, but it is a launch that happened last year around half of the year. And it is a more value priced brand, select offerings, and we are aiming to have this brand more for sort of a mainstream products than for kind of niche or upscale brand. So, it is a more value oriented brand and it is gaining fraction in many markets, it has been there for many years because it was previously focused more on the Hispanic consumer and now it has shifted more to be on the general market. Roy Yackulic: So can you give me an idea of when it was primarily aimed at the Hispanic market, what was the percentage of your bread sales in the United States and where you think it might go as a general market product? 5

6 It is a small brand in terms of revenues for our Company in the United States and it is just starting, so what I can tell you is that on the mix, it is contributing, it was one of the most important contributors of growth. But on value, especially on the bread side, it these still not a significant one as the other regional or national brands that we have. The brand comprises also other segments, such as the sweet rolls and the other type of bread products which are not encompassed in this national launch. But it is a small brand. Roy Yackulic: Thanks. Stuart Jackson, Southeast Asset: Yes, thank you for your call. I missed the beginning of the call and I just wanted to ask about your policy in terms of the hedging wheat prices and other commodities, including sugar? Yes, sure. Good morning. At this point in time as well it has been a steady policy and practice within the entire Group, currently we have an average all across the board of operations of three to four months of hedge which is consistent, as I said, with our historical practice and policy related to wheat. And sugar is different in every market, in every country that we are in, so we could not tell any specific move over sugar at the consolidated basis. Stuart Jackson: OK. Thank you. I appreciate that. Dorothy Craig, Neuberger Breman: Hi. Thanks for having the call. A couple of quick questions. You talked about pricing you have taken in Mexico so far. Could you also give a little more color on the percentage of the portfolio in which you have taken pricing in the United States, and the extent of those increases? And then a quick follow up on leverage. Now that leverage is up slightly from where it was last quarter, where do you expect that to be post close of the Sara Lee transaction, and where you see that going forward? Thanks. Dorothy, good morning. On the United States we have had so far, I believe, two rounds of price increases. And we have increased prices differently at the different categories or brands, but it has been at the end of the day sort of an all across the board increase. And the range of the price increases has been in average around 5% to 6% so far. But we will be updating these prices as they are needed, if costs increase higher than that. 6

7 OK. And, quickly on consumer reaction on that to date? Excuse me? Have you seen any impact, I mean? Yes, we have seen softness in some parts of the market. I would say more on mainstream brands than on particular high margin or upscale brands. So the effect on volume overall has not been significant, but we have seen in some categories or brands a higher impact. OK. Thank you. And then, just an update on where you expect leverage to be post the close of the Sara Lee transaction? We are still under the legal process. Expectations are now to be ready by June, July this year. You mean the leverage? Leverage. I thought you had said 2.6%. Our expectation is about 2x EBITDA, and we are expecting, once we do make the payment for Sara Lee, to be close to 2.5x. OK. Thank you. Adriana Neriga, Accival Asset Management: Thank you. Hello again. You mentioned previously that you expect a higher CAPEX allocation for this year. Could you give us an idea of the forecasted amount, and how it will be allocated, please? We will be expecting around US$400 million in CAPEX, and this is a significant hike from last year, which I believe was around US$290 million. Allocation will be mostly to manufacturing assets, and those will happen mostly in Brazil, the United States, and all across the board at the end of the day, but those would be probably the two key 7

8 countries where we would be investing. Adriana Neriga: Thank you. And another question, if I may: are you expecting any change in your dividend policy for this year? No, we will remain as we have been doing it in the past years, and we will have the Annual Assembly in April. Adriana Neriga: Thank you. Sam Budare, JPMorgan: Thank you. Good morning everyone. My question on margins has been already answered, but let me ask you a question on the United Sates operations, actually. I mean, how do you envision the competitive landscape in the United States for 2011 in terms of volumes and value share there? And if you just comment on that a little bit. Thanks a lot. We are not seeing any changes from the past. The industry is quite competitive and will remain so. The consumer is still stressed, and we are hoping for better atmosphere, but at the end of the day, we are focusing on trying to do what we have to do, and that is why we have been saying that we will remain competitive and we will be very careful on our actions on both fronts on preserving or maintaining our margins, but being very tactical and prudent on how do we go about those price increases. We do not foresee any changes and basically we sense we will remain as it has been in the past years. Sam Budare: Great. That is very helpful. Just to follow up on that, what is the CAPEX guidance that you can provide on the United States operation specifically, for 2011 and maybe even 2012, after the Sara Lee acquisition? When we announced the acquisition, we had a comment on our goals for the next four, five years after the acquisition on investing around US$1 billion in renewing the infrastructure and the manufacturing capabilities of the new entity, and we remain committed to that goal. So, in essence what we will be doing this year is hiking up our investments from last year in line with the trend that we already announced. So it is not going to get to US$200 million, but it will be in between what we had last year, which was around US$80 million, and we will be increasing it halfway this year. 8

9 Sam Budare: Excellent. Thank you so much. This was very helpful. Have a good day. Dorothy Craig, Neuberger Breman: Thanks, guys. One more follow up. I missed the beginning of the call trying to get in, but in terms of revenue outlook for 2011, I know you kind of expect the margins to be flat, but in terms of top line, what you are expecting on a consolidated basis in 2011? Volume-wise we aim for a growth this year, and it will vary by regions and in some we do not expect any growth and in some others we do. But volume-wise we would expect to have sort of around 3% to 4% growth, and revenue-wise will depend on the impact of the prices and the maintenance of the volumes. But we hope it can be higher than that. That is including Sara Lee or is that organic? Just the existing business, including the Vero part, which is already integrated, but not Sara Lee. OK. Thank you. Operator: At this time I am showing no further questions. I will now turn the floor back over to management for any closing remarks. Well, 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 might have, and we look forward to speaking with you next quarter. Operator: Thank you. That concludes today's conference call. You may now disconnect. 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