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Industrias Bachoco, S.A.B. de C.V.  (NYSE:IBA)
Q3 2019 Earnings Call
Oct. 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2019 Industrias Bachoco Earnings Conference Call.

[Operator Instructions] Thank you for your attention.

I would now like to turn the call over to Ms. Andrea Guererro. Ms. Guererro, you may begin.

Andrea Guererro -- Investor Relations

Good morning, and welcome to Bachoco's third quarter 2019 conference call. We released our financials yesterday after the market close. If you need a copy of the release, please visit our website or request it from our Investor Relations department.

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 beliefs based on information currently available and are not guarantees of 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 applicable law, Industrias Bachoco undertakes no obligation to publicly update or revise any forward-looking statement 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 2019 with comparative figures for the same period of 2018 in Mexican pesos. As a reference, the exchange rate as of September 30, 2019, was MXN19.72 per US dollar.

Here with me are our CEO, Mr. Rodolfo Ramos; our CFO, Mr. Daniel Salazar; and our IRO, Ms. Guadalupe Jaquez.

Now, I will give the call to Mr. Ramos.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Andrea, and good morning, everyone. In our business, the third quarter usually is the weakest one. This year was different as the quarter yield better results than our first quarter of '19.

In Mexico, good price conditions observed during the second quarter prevailed for the first part of the third quarter of '19, mainly as a result of a good balance between supply and demand in our poultry segment, while the rest of our line segments remained in good shape.

In the US, we kept observing low prices for white meat and leg quarters. This last one showing a faster than typical seasonal drop, which lead us to similar results in this quarter compared to the third quarter of '19.

The condition mentioned above allow us to reach net sales of MXN15,312.9 million for the third quarter of '19, which is 8.5% higher when compared to the same period of 2018. That increase was due to 8.1% increase in the net sales in poultry and 12.9% increase in others, mainly driven by the higher volumes sold in balance feed. As of the first nine months of the year, our sales totaled MXN46,520.6 million, which is 1.9% higher than the total sales reported in the same period of 2018.

Regarding our cost of sales, our hedging strategies and efficiencies on the production side allow us to keep our total cost under control despite depreciation of 3.4% [Phonetic] of the Mexican pesos versus the US dollars. Our SG&A for the quarter were MXN1,497.6 million, which is 9.8% of total sales, lower when compared to the MXN1,499.1 million and the 10.6% of total sales for the third quarter of '18. This improvement is a result of putting in place a strategy to capture efficiencies particularly in our distribution network.

The aforementioned condition allow us to reach an operating income of MXN1,181.8 million compared to an operating loss of MXN260.5 million reported in the third quarter of '18, with an operating margin of 7.7% and a negative margin of 1.8% respectively. This translates into an operating income of MXN3,680.7 million for the nine months of '19 and MXN3,218.4 million for the nine months of '18.

With that, we reached an EBITDA of MXN1,505.8 million for the third quarter of '19, significantly higher than the MXN76.2 million of the third quarter of the previous year, with an EBITDA margin of 9.8% and 0.5% respectively. As for the first nine months of the 2019, we reported an EBITDA of MXN4,644 million, which is 11.7% higher than the EBITDA of the same period of 2018.

At the bottom line, we reached an earnings per share of MXN1.85 for the quarter, which is one of the highest for the third quarter of the previous five years. Our balance sheet remain strong as we reached a net cash level of MXN13,275.3 million, which will enable us to continue supporting our growth plan.

At this point, I will turn the call over to Daniel for a discussion of the financial results.

Daniel Salazar Ferrer -- Chief Financial Officer

Thank you, Rodolfo, and good morning, everyone. As a result of the conditions Rodolfo mentioned before, our company's third quarter of '19 net sales totaled MXN15,312.9 million, MXN1,198.4 million or 8.5% higher than the MXN14,114.4 million reported in the third quarter of the previous year. This increase was mainly a result of higher prices in our poultry segment and high volumes sold in our other business lines. Regarding the first nine months of the year, we reported a net sales of MXN46,520.6 million, which is 1.9% higher than net sales over the same period of FY '18.

In the quarter, sales of our US operations represented 28.3% of total sales, which is lower than the 30.1% we reported in the same quarter of 2018. This was a result of a higher increase in sales of our Mexico operation.

Cost of sales in the third quarter was MXN12,706.5 million and MXN38,386.7 million in the first nine months of the year. This represents a reduction of 1.9% for the quarter and an increase of 0.6% for the year. This decrease was mainly due to a lower unit cost when compared with the third quarter of '18. Increase versus the nine months of the previous year was mainly due to the higher volume installed.

Gross profit for the quarter was MXN2,606.4 million with a gross margin of 17%, a significant increase over the gross profit of MXN1,158.9 million [Phonetic] reported in the third quarter of 2018. For the first nine months of the year, we reached a gross profit of MXN8,133.9 million, with a margin of 17.5%. This amounted to 8.7% higher than the gross profit reached in the first nine months of the previous year.

The total SG&A for the third quarter of '19 was MXN1,497.6 million or 9.8% toward sales compared to the MXN1,499.1 million and 10.6% of total sales of the third quarter of last year. For the first nine months of the year, SG&A totaled MXN4,522.8 million or 9.7% of total sales compared to MXN4,373.7 million and 9.6% total sales for the nine months of the previous year. This is a result of a constant effort for the company to continue being competitive and efficient.

Operating income for the third quarter this year totaled MXN1,181.8 million, an operating margin of 7.7% versus an operating loss of MXN260.5 million, with negative margin of 1.8% raised in the third quarter of the last year. The operating income for the first nine months of this year was MXN3,680.7 million, an operating margin of 7.9% higher than the MXN3,218.4 million and a 7.1% margin rate in the same period of 2018.

The EBITDA margin for the third quarter was 9.8% higher than the 0.5% EBITDA margin of the third quarter of the last year. For the first nine months of the year, the EBITDA margin was 10% higher than the 9.1% raised in the same period of 2018.

In the first quarter of this year, net financial income was MXN405.7 million and MXN573.3 million in the first nine months of 2019, both higher than those for the same period of 2018. The increase is mainly attributed to higher exchange rate gain as the Mexican peso depreciated versus 2018 and give our financial structure -- and given our financial structure.

Our total taxes were MXN474.4 million for the quarter, MXN611 million higher when compared to the total taxes reported in the same period for 2018. For the first half of this year, our total taxes were MXN1,246.4 million, MXN273.4 million higher than the income taxes from the same period of 2018, both increases attributable to higher operating income.

All the above led us to a net income of MXN1,113.1 million for the quarter, with a net margin of 7.3%. This income compared versus a net loss of the third quarter of 2018. And for the first nine months for 2019, net income totaled MXN3,007.5 million, with a net margin of 6.5%, which is higher than the net income of MXN2,650.1 million and net margin of 5.8% of the nine months of last year.

Net income per share was MXN1.85 third quarter and MXN5 for the first nine months of 2019 compared to a negative income per share of MXN0.32 and MXN0.00 for the same periods of 2018 respectively.

Going in our balance sheet. We kept our financial structure with an increase of total assets of 4.9% when compared to the year-end of 2018. Our net cash was MXN13,275.3 million at the end of the quarter, lower than the net cash level of MXN13,420.9 million at the beginning of the year. Our CapEx was MXN1,301.2 million as we kept investing in projects to support our organic growth and maintaining our facilities in high level of productivity.

Well, that's all. Thank you, and I will turn the call back to Rodolfo for final comments.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Daniel. We expect the poultry industry will continue with a normalized growth rate in both the markets in which we participate. As we're entering the fourth quarter, we are observing the adjustment in price alone with a typical behavior for this quarter in the last years. As a result, we expect a similar result for those reached in the fourth quarter of '18.

Regarding our raw materials, we continue to look closely its movement and continue with our discipline in our hedging strategies. We continue monitoring uncertainties related to commercial trading and ASF effects, which could potentially have an impact in our business. We will continue to focus in attending to our markets, keeping a healthy financial position and investing in CapEx above maintenance levels in order to grow and be close to our customers.

With that, we will now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Luis Miranda with Santander. Please go ahead.

Luis Miranda -- Santander -- Analyst

Yes, hi. Good morning. Thanks for taking my questions. Rodolfo, a couple of questions. The first one is on your cost and margin. You mentioned volume in Mexico coming to normalized levels. I don't know if you could be a little bit more specific there in terms that -- if I understand correctly, normalized long-term volume growth is close to 2%, 3%. However, on the fourth quarter, we saw this 4.5% decline in country of Mexico. So, I wouldn't know if you're expecting a rebound in the fourth quarter.

And the second question is, when we take a look at orders and we see weaker prices year-over-year, what's driving these prices? You were mentioning volume came from animal food, but I don't know if [Indecipherable] or some kind of mix. If you could elaborate there, please? Thank you.

Daniel Salazar Ferrer -- Chief Financial Officer

Rodolfo, are you there?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Excuse me. Yes, I'm here. The first question about the volume for the fourth quarter, we expect more or less the same levels than this quarter. The reduction was mainly due to the industry in general. The industry had a lower hatchability in order to have the baby chicks to sell it in the farms. So, we have a slight reduction in our hatchability as the industry performed the same way. And on the other hand, because of the mix, we have a lower live weight, around 4% reduction in live weight due to change in mix. We are seeing for this quarter more normalized supply and more or less to keep the same mix.

According to the second question about the animal feed. Animal feed, because we increased the volume of animal feed and the prices are totally different than the prices of live chicken or other products, the total price or the mix of the price is a little bit lower, but animal feed -- the segment of animal feed is doing pretty well.

Luis Miranda -- Santander -- Analyst

Okay. Thank you, Rodolfo.

Operator

Thank you. Our next question comes from Miguel Tortolero with GBM. Please go ahead.

Miguel Tortolero -- GBM -- Analyst

Hi. Good morning, everyone, and congratulations on the results. The first question is regarding ASF. I mean, you've had a very good couple of quarters. And it seemed that we haven't yet seen the effect that the African swine fever could have on prices in Mexico. So I just would like to hear your expectations or how these expectations have changed regarding this ASF issue specifically for next year. And the second one, if you could comment a bit further on the dynamics you're seeing in the US. Thank you.

Daniel Salazar Ferrer -- Chief Financial Officer

Yes. Thank you, Miguel. This nine months of the year, the ASF for the Mexican industry has a natural or, I can say, maybe a little bit negative effect in the swine industry in Mexico, just in the swine industry, in the pork industry in Mexico, because the trade war with China didn't allow the United States industry to export to China. And then that oversupply in the US came to Mexico during the first nine months of the year at very low prices. Well, it's more than a positive effect, I can say. I can see neutral effect or, as I mentioned before, a negative effect.

But the thing is that the last month, from July to August, the GYZA [Phonetic] report an increase of more than 3 digits increase in export to China. The reference is too low. But I think the end of the year and in 2020, we are going to start to see a positive effect of the ASF. So we are more positive for the 2020 with the ASF effect.

Miguel Tortolero -- GBM -- Analyst

All right. Thank you. And the second one was on the expectations or, in general, the dynamics you're seeing in the US that you've already talked a little bit in this comment. But just in general, what are your expectations for the coming year?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Yeah. The next year -- the next year 2020 for the US industry is going to be a tough year because, as you know, there are some new complexes that are right now under production. So, you can see the last quarter, we saw a sharp reduce in the breast meat prices, mainly in the leg quarter prices. So that is because another -- mainly an oversupply.

We are expecting that with the ASF effect, we can offset that overproduction. But right now, the prices of -- the commodity prices in the US industry are lower than other years. So it's going to be a tough year because of that oversupply, but we are expecting a rebound with the ASF effect.

Miguel Tortolero -- GBM -- Analyst

Okay. Thank you, Rodolfo.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Miguel.

Operator

All right. Thank you. Our next question comes from Ulises Argote with JPMorgan. Please go ahead.

Ulises Argote -- JPMorgan -- Analyst

Hi, guys. Thanks so much for the call and for the space for questions. A couple from my side, if I may. First, on -- the first one that I wanted to ask is, are you seeing any change in the import dynamics right now kind of linking to process into what you were saying there, Rodolfo, in the US dynamics kind of lower prices for the leg quarters, lower prices for breast meat. So, any changes that you're seeing there? How is this new extended quarter from the Secretaria de Economia fitting into the equation? And also anything relevant kind of changing from the dynamics with Brazil?

And then, the second one, if you can comment kind of on what you're seeing in terms of your hedging policy, given the recent volatility we've seen on corn and soy prices maybe for the last part of the year and if you already have some visibility for the start of 2020, that would be very helpful. Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Okay. The first one, the dynamics of the importation, it's -- we are expecting -- right now, I think we are more or less in balance. We saw the last quarter, the amount of the imports as a percentage of the total production and consumption here in Mexico remain stable. And we are seeing that, that situation is going to keep that way for the rest of the year. And we are expecting for the next year, the 2020, to stay at those levels. According to the curas [Phonetic], we are doing some lobbying in order to maintain the curas out of the equation, mainly the Brazilian production. So, because right now, there is no reason to have those curas. So, the main thing is the prices in the United States, and we are expecting price recovering as seasonally occurs every year. So that is going to help to maintain the same amount of input as a percentage of the total consumption.

Regarding our hedging strategies, normally for this part of the year, we use to supply our plants with domestic [Technical Issues] which is the harvest that we have in the center part of the country. Normally we acquire our grain over there, which is a little bit cheaper than the US grain. So, for the rest of the year, we are seeing no impact in the raw material cost for our plants.

For the 2020, it's very tough to predict what is going to happen with the 2020 harvest. But anyway, anything that we have, any price, and we've closed -- or any contracts that we've closed with our customers, we hedge at the price -- at the current prices. So, we don't speculate with that, and if we will want to keep running the same way.

Ulises Argote -- JPMorgan -- Analyst

Perfect. Thanks so much for that guys.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Ulises.

Operator

[Operator Instructions] And at this time, we have no further questions. Turning the call back for final remarks.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Okay. Thank you, everyone, for joining us this morning. If you have any further questions, please contact our Investor Relations area. We will be glad to assist you. Thank you very much, and goodbye.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Andrea Guererro -- Investor Relations

Rodolfo Ramos Arvizu -- Chief Executive Officer

Daniel Salazar Ferrer -- Chief Financial Officer

Luis Miranda -- Santander -- Analyst

Miguel Tortolero -- GBM -- Analyst

Ulises Argote -- JPMorgan -- Analyst

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