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Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA)
Q3 2020 Earnings Call
Oct 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Sylvia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2020 Industrias Bachoco Earnings Conference Call. [Operator Instructions]

After the speaker's remarks, there will be a question-and-answer session. Thank you for your attention. I will now turn the call over to Maria Guadalupe Jaquez. Maria, you may begin.

Maria Guadalupe Jaquez -- Investor Relations Officer

Thank you. Good morning, and welcome to Bachoco's third quarter 2020 conference call. We released our financials yesterday after 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 statement discussed in this call.

Except as required by 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 2020 with comparative figures for the same periods of 2019 in Mexican pesos. As a reference, the exchange rate as of September 30, 2020 was 22.11 pesos per US dollar. Here with me are our CEO, Mr. Rodolfo Ramos, and our CFO, Mr. Daniel Salazar. Now I will give the call to Mr. Ramos.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Maria, and good morning everyone. Like we mentioned in our press release, as economic activities began to revive after the lockdown measures during the previous quarter, we observed improvements in the demand, which at the end result in an unusually good third quarter.

During most part of the third quarter of 2020 in Mexico, we observed good pricing condition, mainly as a result of good balance between supply and demand in our poultry segment and an optimized sales mix. As a part of our diversification strategy, this quarter was, we integrated the result of our most recent business arrangement, Sonora Agropecuaria, SASA, which boost the performance of our other business line.

On the other hand, in the US, even when the lift of containment measures resulted in improvement in our value-added segment, we kept observing low prices, particularly for the leg quarters and white meat. We consider this was a result of oversupply condition in old meat types in that market. Even with our fodder process segment, benefits from somehow from best conditions, our current exposure to the commodity market offset that advantage.

The condition mentioned above allow us to reach a net sales of MXN18,292.4 million for the third quarter of 2020, which is 19.5% higher when compared to the same periods of 2019. From that increase, 15.3% was due to the higher net sales in poultry, and 4.1% due to higher sales in others.

As of the first nine months of the year, our sales total is MXN50,462.7 million, which is 8.5% higher than the total sales reported in the same period of 2019. Regarding our cost, we kept observing negative effects due to Mexican pesos depreciation which affected our raw material cost. However, we managed to offset some of this effect with operational efficiencies in our live and processing operations.

Our SG&A for the total quarter was MXN1,600.8 million, which is 8.8% of our sales. This rate is lower when compared to 9.8% reported in the third quarter of '19. This is a result of the focus we have in controlling our controllables. With that, we reached an EBITDA of MXN1,828.2 million for the third quarter of 2020. Higher than the MXN1,505.8 million of the same period of 2019. And EBITDA margin of 10% and 9.8% respectively.

For the first nine months of 2020, we reported an EBITDA of MXN3,213.1 million, and MXN4,644 million for the same period of 2019, with margins of 6.4% and 10% respectively. At the bottom line, we reached an earnings per share of MXN1.38 for the quarter, delivering value to our stockholders despite current challenging conditions.

Our balance sheet remains strong as we reach a net cash level of MXN15,696 million. This strong position allow us to give back to our society through our Social Responsibility initiatives. During the quarter, we extended our donation program, Apoyo de Corazon, in coordination with public and private institutions, we donated more than 296,000 kilos of chicken which benefit more than 1.2 million people across the country.

Our plan is to keep this program in the coming months, as we are aware of the commitment that we have with our society in this difficult time. At this point, I will turn the call to over 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 2020 net sales totaled MXN18,292.4 million, MXN2,979.5 million for 19.5% higher than the MXN15,212.9 million reported in the third quarter of '19. This increase was mainly a result of higher prices in our main business lines. Regarding the nine months of 2020, we reported net sales of MXN50,462.7 million, which is 8.5% higher than the net sales of the same period of '19.

In the quarter, sales of our US operations represented 28.3% of total sales, which are at the same level we reported in the third quarter of last year. This was mainly a result of the depreciation of the Mexican peso quarter-over-quarter. Cost of sales in the third quarter was MXN15,107.6 million and MXN43,239.4 million in the first nine months of the year. These represent an increase of 18.9% for the quarter and 12.6% for the year.

It was mainly driven by the depreciation of the Mexican peso, which not only has a negative impact in our main raw material costs, in peso terms but also have a negative impact in the consolidation of our US operation, as we make investor terms. As a reference, the Mexican peso depreciation was around 13% for both the quarter and the first nine months when compared to the same period of 2019. Gross profit for the quarter was MXN3,184.7 million with a gross margin of 17.4%, an increase of 32.2% over the gross profit reported in this third quarter of 2020.

For the first nine months of the year, we reached a gross profit of MXN7,223.3 million with a margin of 14.3%. This amount is 11.2% lower than the gross profit decreased in the nine month of 2019. Total SG&A for the third quarter of 2020 was MXN1600.8 million or 8.8% of total sales compared to the MXN1,497.6 million and 9.8% of total sales of the third quarter of last year. For the nine months of 2020, SG&A totaled MXN4,740.6 million or 9.4% of total sales compared to MXN4,522.8 million and 9.7% total sales for the nine months of -- in 2019.

On the other hand, we had other expenses of MXN99.2 million for the third quarter of 2020 compared to the other income of MXN73 million of the same period 2019. In this line with the COVID-related expenses not applicable to SG&A, in addition to the sales of unused assets as well as other by-products.

Operating income for the third quarter of 2020 totaled MXN1,484.8 million, an operating margin of 8.1% higher than the MXN1,181.8 million and the 7.7% margin reached in the third quarter of 2019. This operating income for the nine months of 2020 was MXN2,171.5 million, an operating margin of 4.3% lower than the MXN3,680.7 million and the 7.9% margin reached in the same period of 2019.

The EBITDA margin for the third quarter was 10%, which is higher than the 9.8% EBITDA margin of the third quarter of the last year. For the nine months of the year, the EBITDA margin was 6.4% lower than the 10% reached in the same period of 2019. In the third quarter of 2020, we have a net financial expenses of MXN267.5 million, a net financial income of MXN2,036.8 million in the nine months of 2020. Those figures compared to the net financial income of MXN405.7 million and MXN573.3 million for the third quarter of '19 and the nine months of '19 respectively.

The decrease in the quarter was a result of an appreciation of the Mexican peso with respect to the binding record in the second quarter of 2020. For the first -- third quarter of 2020, we have income taxes of MXN359.2 million lower than the MXN474.4 million in the third quarter of '19. For the nine months of 2020, our total taxes were MXN1,208.3 million, which is 3.1% lower than the MXN1,246.4 million reported in the same period of 2019. All the above led us to a net income of MXN858.1 million for the quarter, with a margin of 4.7%.

For the first nine months of 2020, the net income totaled MXN3,000 million, with a net margin of 5.9%. The net earnings per share was MXN1.38 for the quarter. While for the nine months of the 2020, we reached a net income per share of MXN4.93 compared to the net income per share of MXN1.85 and MXN5 for the same period of 2019 respectively.

Going into our balance sheet, total assets increased 4.2% when compared to the year end of 2019. Our net cash position was MXN15,696 million at the end of the quarter, higher than our net cash level of MXN14,254.3 million at the beginning of the year. Our capex was MXN1,570.1 million, and we have maintained our plan of spending around $1 million by the end of 2020. Those projects will support our organic growth and maintain our facilities at high level productivity.

Well, with that, I will turn the call back to Rodolfo for final comments.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you, Daniel. During the quarter, we observed the poultry industry very focused on adapting to new condition, and new levels of demand. We are entering the fourth quarter of 2020 in good shape to face the challenges that might come. So far we think that our landscape would be more favorable in Mexico than in the United States at least in the short term. Therefore, in that geography, we are working toward making our product mix, more efficient and trying to step out of the commodity market as much as we can.

In addition, corn and soybean meal current prices will put pressure in our cost of sales. So being efficient in our production processes will be key to partially offset that effect. We will also be focused on the integration of the SASA operation in order to capture the synergies that we were identified so far. So far we are on track on this regard.

Last but not least, we will reinforce our commitment with our communities as we work on the third phase of our social responsibility strategy. With that, we will now take your questions.

Questions and Answers:

Operator

[Operator Instructions] And the first question comes from Hector Maya from Santander.

Hector Maya -- Santander -- Analyst

Hi, thank you very much. Congratulations on the results, and thank you, again for taking the questions. Just a couple of questions. I wanted to know for the US, you must have approximately 5% sales increase in dollars. Just wanted to know if this was mostly explained by volume or how much from that came from higher prices? And if you could help us understand if the demand reduction and oversupply in the US that you have been seeing recently has continued or how that environment has been changing recently? Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well, in terms of -- in terms of volume, here in the states, we increased 4.2% and the rest of the balance is in price. So it's a little bit more in price than volume. So we increased the price and 4.2% the volume. Yeah.

Hector Maya -- Santander -- Analyst

Thank you. And regarding the oversupply and diminished demand in the US?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well, the oversupply which [indecipherable] oversupply because right now the prices of the leg quarters are very low according to the UB, and the breast meat, white meat, it's still very low compared with the regular or normal prices. So we're seeing an oversupply. So the prices are lower than normal mainly in leg quarters.

Hector Maya -- Santander -- Analyst

Thank you very much. Very clear. Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Thank you.

Operator

Our following question comes from Ulises Argote from JPMorgan.

Ulises Argote -- JPMorgan -- Analyst

Hi, gentlemen. Good morning. Thanks for the -- for the space for questions here. A couple on -- on my side as well. The first one, I think on kind of following up on the remarks Rodolfo that you're making on the incremental cost there for corn and soy. Anything else that you guys could do to kind of manage the pressure here beyond the hedges, beyond kind of this -- these product -- production efficiencies that you -- that you kind of mentioned. Is there any space for you to, I don't know, increase the buying of corn in the domestic market?

If I'm not mistaken, you usually buy like 60% to 80% in the US market. So would that kind of help you guys at all? And maybe if you can also comment on how you are thinking on this regard kind of on the profitability levels for next year. Should we be thinking going back to levels similar to 2019 or -- or even better than those levels. What's more or less the -- the outlook that you guys have on this? Thank you.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well about the opportunities to buy corn here domestically, I think Bachoco is very well positioned to have the benefit of that local crop -- crops. And you're right, it is one of the most important strategies in order to reduce our raw material cost to -- to acquire some domestic crops or corn in Northwest in the center part of the country, not Northeast even. So we can have a better corn or grain input cost.

For 2021 is very difficult to predict whether it's going to happen. Normally, it takes often four months to six months to trespass the cost increase to the -- to the market. So it's -- at this moment, it's very difficult to predict that because we're going to have a different situation with the -- with the demand side. It's not going to be a 100% normal year. So it's going to be -- it's going to depend of the balance again and supply and demand. We have a more or less trend line of the -- of the supplied, but the demand -- is very difficult to predict the demand at this -- at this time.

Ulises Argote -- JPMorgan -- Analyst

Okay. That's perfect. Thank you very much. And then one follow-up. In Mexico, if I may, kind of on the improving prices obviously that we saw during the quarter, did you see or are you seeing any kind of pressure from other domestic players kind of increasing the supply levels to kind of try to take advantage of these higher prices? Or how are you feeling that the demand is kind of evolving. I mean, the supply, how is evolving on that side?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well, it's -- I really don't know what is -- our competitors are doing in terms of their strategies in terms of volume. But what I can tell you is that in the demand side, poultry or chicken is the best -- the best protein at this moment is -- it's the more affordable, it's the quality and everything, all the advantage than the -- the chicken meat has. So we're taking some market share of the other proteins as an industry not just as a company, also the industry is expanding there. But the capital consumption even if it in a crisis -- economic crisis because of -- because it's a very affordable protein.

Ulises Argote -- JPMorgan -- Analyst

Okay, perfect. Thanks. Thanks for the color.

Operator

The next question comes from Emiliano Hernandez from GBM.

Emiliano Hernandez -- GBM -- Analyst

Hi, Rodolfo and Daniel, hope you're doing well. Thanks for taking my question. Can you comment on the dynamics you're seeing in the pork market in Mexico, as well as in the export market? What do you expect in terms of prices and demand going forward in this market?

Rodolfo Ramos Arvizu -- Chief Executive Officer

Well, right now, the pork industry is very active exporting to China. So pricing in -- prices in Mexico has been good for the producers in this last month. The volatility in the pork live market is very high. But right now, the prices are in a good shape, live pork. That right now, we have the balance between our live production and our processing and export prices because when the live market is very high that hurts, the companies to processed swine. So with our balance the -- and the synergies that we are making with -- with our live production, our -- and our new part of the business, which is processed, we're well balanced. And we're having good times with the export to China, Japan, even the United States. So it's -- right now, it's a good time for the pork industry.

Emiliano Hernandez -- GBM -- Analyst

Thank you. Rodolfo. That was very clear.

Operator

[Operator Instructions] We have no further question at this time.

Rodolfo Ramos Arvizu -- Chief Executive Officer

Okay. Okay, if there are no any questions, thank you very -- thank you, everyone for joining us this morning. If you have any other questions, please contact our Investor Relations area, who will be glad to assist you. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Maria Guadalupe Jaquez -- Investor Relations Officer

Rodolfo Ramos Arvizu -- Chief Executive Officer

Daniel Salazar Ferrer -- Chief Financial Officer

Hector Maya -- Santander -- Analyst

Ulises Argote -- JPMorgan -- Analyst

Emiliano Hernandez -- GBM -- Analyst

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