Conference Call Transcript 3Q08 Results Grupo Bimbo (BIMBO) October 24 th, 2008

Transcription

1 Operator: Good morning, everyone, and welcome to Grupo Bimbo s 3Q08 results conference call. If you need a copy of the press release issued yesterday, you may download it from the Company s website at Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the Company s financial and operating performance. All projections are subject to risks and 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, Maria. Good morning, everyone, and thank you for joining us today. I will start by reviewing our operating performance in this quarter, and then our CFO, Guillermo Quiroz, will add a few comments on the Company s financial position. As usual, we will be glad to take any questions you may have at the end. Overall, it was a very solid quarter for Grupo Bimbo. We posted double-digit sales growth and reductions in the sales and general and administrative expenses. Furthermore, besides continued pressure on the raw material side, we started to see some easing on the import prices during the last month of the quarter, which allowed us to post the lowest cost of goods sold of the year. Nevertheless, we all recognize that high prices are here to stay, and we will be likely facing other type of challenges going forward. Looking at results by business units, in Mexico net sales rose more than 11%, reflecting a combination of higher average product prices and new launches, as well as better penetration of the non-traditional channel. In terms of category performance, cookies and salted snacks generated good sales growth as well as some market share gain. However, neither our strong sales performance during the period nor the reduction of avoiding expenses on a percentage basis was sufficient to offset higher raw material costs. As a result, we experienced a 30 b.p. contraction in the operating margin when compared to the same quarter of last year. Separately, this quarter we introduced 100% oxo-biodegradable packaging in Mexico. This is major news for the Company and we are the first company in the whole continent to make that important switch. This type of packaging breaks down into water and gases in about three to five years compared to more than 100 years in the regular plastic bags. In the United States, sales rose 10% in USD terms driven by higher average prices and a continued focus on the most favorable mix. Net sales were strongest in the Oroweat, Thomas and Mrs. Baird s brands, while the Hispanic brands saw some good volume gains. On the operating side, BBU was able to offset all the macro economic effects across the business, moving back into positive territory with a 2.3 p.p. swing from where we were in the 2Q, and even surpassing our performance from the year-ago period. 1

2 The improvements that came across the board were a more profitable sales mix, better overall labor indicators, and a more efficient sales and distribution expense, resulting from the economies of scale and better capacity utilization. Moving on to Latin America, the top line grew almost 33%, reflecting new acquisitions such and Nutrella, in Brazil, as well as stronger volumes and higher product prices across the region. In addition, we added some 24,000 new customers in the quarter for a total of 72,000 in the first nine months of this year. And despite the economic instability resulting from the global financial crisis, which in certain countries led to a currency devaluation, shrinking credit availability and pressure on consumption, performance was still very strong in places like Argentina, Brazil, Colombia, and Uruguay. The raw material situation was a challenge in Latin America, as it has been in other regions, and combined with short-term integration costs it led to a 1.2 p.p. contraction at the gross margin level. On the operating side, we reported the highest profit figures in our history, exceeding P100 million for the first time in a quarter. Just in the South American countries alone, the operating profit rose 40%. Nonetheless, there was a small decline in the operating margin due to cost pressures and the start up process of different manufacturing lines, especially in Panama. As I mentioned, we anticipated there would be some new challenges for us going forward, such as lower consumption and more pressure on the FX rates. We are closely watching the global financial situation and maintaining a pragmatic approach to ensure Grupo Bimbo s long-term growth and profitability. At this point I will turn the call over to Guillermo, for a few additional comments on the financials. Guillermo Quiroz: Thank you. Good morning. I will take just a few minutes to address some topics related to the changes in our liability. As you have seen in our press release, even though the consolidated net debt/ebitda ratio remains almost unchanged from last quarter, our cash and debt levels increased [inaudible] during the period. I will elaborate on this further by recalling that back in 2004, with the support of four of our most important banks, we set up a long-term and committed US$600 million rewarding facility to serve any of our corporate purposes. Now, coming back to this most recent quarter, a number of simultaneous events drove to a decision to draw on that facility in July, in the amount of US$475 million. First, we faced some spontaneous and short-term funding requirements, due to the amortization of US$185 million bond that was fully amortized on August 4 th, coupled with cash liquidations of various new investments we made during the year. Second, it came to our knowledge that the restructuring process of Fargo, in Argentina, was successfully and finally moving forward and coming to an end. Thus, the closing and funding of our investment was also considered as a factor in terms of our shortterm cash requirement. Last but not least, at that time we were at the initial stages of assessing a couple of acquisitions that have positively evolved and were part of our potential acquisition pipeline, and could, therefore, contingently demand some extra funding. Those 2

3 particular targets did not develop into further stages and are currently not in the scope of our growth strategy. Taking all this into account and considering the very favorable chance of the credit facility, LIBOR + 45 b.p., we regard the drop down to be the right move in terms of being prepared and have precaution. The Company s capacity to generate cash continues to perform well, as you can see in our annual report. So, we may fully or partially pay back these bonds to no better cash allocation in our rights. I also want to elaborate on our derivatives policy in more detail. As you may have seen, on October 10 th, we disclosed the fair market value of the Company s full financial derivatives position, as a response to a suggestion from the Bolsa Mexicana de Valores to all listed companies. In this regard, as clearly stated in the press release, I want to underscore the fact that we have historically utilized financial derivatives only to hedge some primary positions, either assets or liability, on some of the financial activities in which the Company engages. We consider financial derivatives as a means to get more flexibility, to participate in financial markets, and to mitigate some potential risks intrinsically embedded in key financial prices and variables, particularly interest rates and foreign exchange. The details of our derivatives positions are very transparent, and we have always made them available to you in our filing with the Stock Exchange. Looking ahead, Grupo Bimbo will maintain its conservative financial management practices, using only derivatives for hedging purposes. We believe we are very well positioned to address all the challenges the Company faces in the future, not only because of this particular policy but also because of our strong cash flow and healthy balance sheet, which gives us liquidity, flexibility, and a foundation to further growth. That concludes my remarks this morning. So, I would ask Maria, por favor, Maria, seguimos con las preguntas. Robert Ford, Merrill Lynch: Hey, everybody. Daniel, Guillermo, congratulations on the quarter. I thought it was impressive, particularly in light of the raw materials pressure. A question with respect to operations, and then I want to ask a question about acquisitions. With respect to the big reduction, almost 200 b.p. in SG&A, can you give us perhaps some examples of where you were able to find savings given the greater visibility I think that your ERP systems have provided up in the last few years. What you may think you continue to have as you find new ways to benchmark the business and identify sources of opportunities? Good morning. Yes, on the savings side, given that we sort of faced a big challenge given the commodity price increases from last year, I think we are sort of prepared a little bit in advance of the crisis that the world or many industries are starting to face now. And what we did was really prepare ourselves with contingent plans on expenses and trying to see where we could find opportunities to have a linear base. Obviously we have been studying very carefully our cost and our information on where is our profitability coming from and trying to address the issues that this analysis can shed 3

4 some light on. And we are acting on it and it is a continuous project, one that we will also be implementing next year. We see a lot of opportunities still on all fronts; I would say manufacturing we have been increasing the productivity on our labor side and trying to have associates whenever they have some time left on one line to move to the other one, so trying to have really capabilities on different functions. On the logistics side, we have many initiatives trying to reduce the mileage, to increase the capacity utilized by our vehicles, and we can go on and on. On the sales side, it is certainly one of our most important cost components, and there we also have been finding a lot of opportunities trying to have greater averages on there also. That probably can give you a flavor of the things we have been doing. Robert Ford: That is very helpful. With respect to the economic slowdown in the United States, do the unions seem to be at all more flexible when it comes to things like multi-tasking or some of the route structures that you had historically, I would argue that probably gave away too much of the economics. Do you think that the current economic slowdown might provide you more leverage with which to extract or more efficiency in regard to those opportunities? I would say that we are working on that front with the unions. We still believe that at least that is our perception, that thinking is still not so all clear as we have seen in other parts of the world and we hope that we can convey that message. But we have not seen that openness to the realities of the circumstances as we have seen in other places, but we hope that we can keep on making some progress there. Robert Ford: Great. And then with respect to acquisitions, if you could help remind us the magnitude of Fargo and when you look at the landscape in terms of acquisitions, I mean very few companies have a balance sheet like yours today. I am curious as to what your vision is in terms of how quickly you need to proceed, what kind of prices you need to pay given what may very well turn out to be a very prolonged and severe downturn in the global economy, right? I guess I am concerned that you might move prematurely and pay too high a price or assets that in many cases have greater impairment than one might perceive to have. Well, let me tell you a little bit about the industry and what we have seen here even in the United States is that food companies do and that is a story that recently that we look into from McKinsey that actually in the recession periods the food industry does remarkably well, at least in the United States market, partly because of a slowdown or a reduction in the consumption that is taking place away from home in food. So, while maybe the restaurants may face a tight time, people do go back to buying more food and consuming them at home or on brown bag lunches. Particularly in the bread category, that is the case; that this is one of the categories that does better than the average food categories. 4

5 So, I would say that we do face certainly not as bad a period as many other industries in the United States, and we still see growth in most emerging markets, or basically all emerging markets next year, even though they might have a slower growth than we had been anticipating. We are not seeing that the industry will be knocked down, and I think that that reflects partly the multiples that we and our peers are reflecting in the stock prices. So, that is our assessment; we have been making acquisitions and we always have an eye for the opportunities that may arise in the horizon. And we do have a process to study them and see when we can make something that can create value for the Company in the medium and long term. I would say that that is as much as I can say about it. Robert Ford: OK. And just besides Fargo in terms of the initial equity payment, liquidation of the bond holders, that sort of thing? It is about US$90 million worth. Robert Ford: Great. Thank you very much. And again congratulations on the quarter. Jose Yordan, Deutsche Bank: Good morning, everyone. My question is about your wheat cost. You mentioned there that you begin to see to be costing cheaper wheat at the end of the quarter, I guess in September. Could you give us any idea of what your wheat costs are going to be in the 4Q relative to the 3Q or relative to last year? And I guess more generally for 2009, with wheat prices sort of a shadow of their former selves, what have you been doing in terms of hedging for next year? Because obviously there could be some interesting opportunities here to lock in some pretty low costs going forward. I see. Armando Giner will answer that question, Jose. Armando Giner: Hi, Jose. Regarding the prices, giving an example for example the wheat flour, we would have lower prices in that as well compared to the 3Q08. But we have to keep in mind that we have to see the effect on the FX that we will face in the last quarter. So, in the end we think that we will be able to offset the pressure in the FX with lower prices in the prices of the wheat flour. So, in the end, comparing on a sequential basis, we will be able to reduce the price of our wheat flour in USD terms. Jose Yordan: But in Peso terms, can you talk a little 5

6 Armando Giner: We will be having lower prices but on the other side we have also contrary effect on the USD exchange rate. So, one against the other will probably be on the same path as we were, depending on where the USD stays. According to some preliminary calculations, Jose, assuming that the exchange rate remains close to P13.00/USD, which is a very subjective assumption, we would be effecting about the same price for flour in 2009 that we have in Because we have cheaper wheat and much more expensive exchange rate; but if that happens, I think that we will be facing an analysis regarding prices in the near future. But regarding the cost of wheat flour that would be the case with the exchange rate close to P13.00/USD. Jose Yordan: So, it sounds like you have already gone and locked in the USD price for a good portion of Armando Giner: Yes, that is correct. In USD terms, and now we have to make some what ifs with the exchange rate. Jose Yordan: OK. Thanks a lot. Eduardo Estrada, Citigroup: Hello, everyone. Well, you partially answered my question, but I would like to ask you specifically where do you see you still have opportunities for pricing, let us say should you be much more aggressive if the Peso stays at or 13.00, and in which countries you still see opportunities of increasing prices? Good morning. We try to be cautious on the pricing situation, given the price history that we have had in the past and the economic situation of the market. But whenever needed and if we do need to raise prices, we will have to adjust them but we try to be very careful as to the amount of price increase that we have. We do not think that we have a lot of room in that sense. Eduardo Estrada: OK. Thank you, Daniel. My second question is related to this line of credit you took. Do you have now the money in USD or did you convert that to Pesos? And well basically I think that you should pay that debt in Pesos but the other part should be taken for acquisitions in USD. Am I right? 6

7 Yes. Most of our cash, about 80%, is in USD. So, as of today I think we are about US$20 million [inaudible] in our USD position [inaudible]. Eduardo Estrada: OK. Thank you very much. Sohail Ahmer, Lusight Research: Good morning. You mentioned that you have locked in your wheat prices for 2009; is that correct? Is your question that if we have hedged already our wheat acquisitions for next year? Is that the question? Sohail Ahmer: Yes. Not just in terms of the supply but in terms of prices; have you locked in just the supply or the supply added to the prices? The supply and the prices in USD terms. Well, we are not hedging against the USD price. Armando Giner: It varies also by region; some regions do have a longer hedging than others, but we are hedging more now that we have hedged in the past. Sohail Ahmer: Right. So, would it be possible for you to say what percentage increase or decrease you are looking at in terms of wheat prices for 2009? Armando Giner: We do not have a number; what I would say to you it is a little slower, obviously, than the prices that we had this year. That would somehow be offset by the effect on the USD for the Mexican market and some Latin American countries as well. Sohail Ahmer: Right. So, I know you answered the question on prices, but just going back into prices. If you do see the Peso depreciating and I imagine that if the USD does appreciate most Latin American currencies would be affected negatively. Are you going to perhaps make up for the difference to increase in prices, or are you going to absorb that difference? 7

8 Yes, as I was saying before, I think we will remain very we are trying to assess the final impact of the Peso devaluation and trying not to make assumptions on it. And if needed, we will do some minor price adjustments, and we will try to go more for the volume side than just for recouping all the margin. That is our expectation so far. Sohail Ahmer: Right. Just finally, then, in terms of any benefits you get from hedging, do you recognize that for the EBITDA line? Or any benefits that you get you recognize after [inaudible]? No, all the effects, positive or negative, of our hedging go directly in the cost of goods sold. Sohail Ahmer: Great. Thank you very much. Jose Yordan, Deutsche Bank: Hi. I just wanted to ask about your CAPEX program; American companies have been reviewing their CAPEX programs in light of the different outlook for growth next year. And I was just wondering if you could just review what your CAPEX is going to be for next year and whether it has been revised down, and just give us some sense on where to go with that. We are finalizing the projects that we have this year, and also the projects that have been initiated will be finished. But we are in the process of building our budget for next year, and certainly we will be revising the CAPEX needs given the circumstances, and we are tightening the belt. But we do not have yet a number on it. Jose Yordan: OK. Is that something that we will know by the end of the year or will you announce it in the 4Q conference call? I think we will have that figure in January; so, we will take it to the February conference. Jose Yordan: OK. Thanks. Pedro Herrera, HSBC: Hi. Thank you very much. Just a quick question as most of my questions have been answered: regarding what you said, part of your growth in Latin America was from the 8

9 acquisitions and part was not. Would you please remind us exactly where the nonorganic growth is coming from? First question. And the second is in the facilities that you drew down, how much exactly would you have left after the expenditures that you will be having in the Fargo and the other one? And the bond? The organic growth represents half the growth that we posted this quarter in Latin America, so half is coming from acquisitions and half is organically. The way that we can continue with this important organic growth with the penetration of the nontraditional channel and the traditional channel in Latin America, as we have been doing in the last four quarters, especially in Brazil. Can you repeat the second part of your question, please? Pedro Herrera: Yeah, thank you for the first part. The second part is on the facilities that you just drew down, you mentioned a couple the bond and the Fargo in Argentina; how much cash would you have left over after these two issues are addressed? The answer is we really do not know. Of course we will have a very important amount of cash; to be honest with you, we have a very low care in cost to keep that money, and in light of what is happening in the financial markets, I do not feel very induced to pay that money. I really do not know; the cash that we used in the 4Q of the year is also important paying what we call [inaudible], our final year payments. So, we will be considering this again in a couple of months, but I tend to be comfortable with the money there, especially taking into account that the care cost is very low. Pedro Herrera: Sure. OK. Thank you. Operator: There are no more questions at this time. Gentlemen, there are no more further questions; if you would like to make any closing comments. Well, thank you very much all for your time and interest today. Please, do not hesitate to contact us with any further comments or questions you may have. We will be looking forward to speaking with you again soon. Thank you very much. 9

10 Operator: Ladies and gentlemen, the conference is now concluded. You may disconnect your telephones. Thank you for joining, and have a pleasant day. Good-bye. 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. 10