Industrias Bachoco, SAB de CV (IBA) Q2 2021 Earnings Call Transcript

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Industrias Bachoco, SAB de CV (IBA)
Q2 2021 Earnings Call
Jul 28, 2021, 7:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is, Richard, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2021 Industrias Bachoco Earnings Conference Call. [Operator Instructions] I will now turn the call over to Andrea Guerrero, Investor Relations, you may begin.

Andrea Guerrero -- Investor Relations

Good morning, and welcome to Bachoco's second quarter 2021 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 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 2021 with comparative figures for the same period of 2020 in Mexican pesos. As a reference, the exchange rate as of June 30, 2021 was MXN19.95 per U.S. dollar. Here with me are our CEO, Mr. Rodolfo Ramos and our Investor Relations, Maria Jaquez.

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

Rodolfo Ramos -- Chief Executive Officer

Thank you, Andrea, and good morning, everyone. During the second quarter, we observed an increase of close to 40% in corn and soybean meal prices when compared to 2020. In this regard, I will focus on efficiencies to our production processes has allowed us to partially offset the negative impact on input costs. On the other hand, when one year removed from the worst in fact of COVID-19, economic expectation are positive both in Mexico and in United States.

According to Mexico, Mexico is expected to grow around 5.8% in 2021, while the economic projection of the Federal Reserve expected for the U.S. an economic growth of 7%. This positive forecast is in combination with a good balance between supply and demand in the markets in which we compete has allow us to successfully transfer the increases in raw material costs to our sales price. Particularly in our chicken segment we observed good labels on demand in the main commercial channels in which we compete, and all of our production was absorbed by our markets. We didn't see neither oversupply condition nor high inventories in the industry in general.

Regarding the U.S., good dynamics in the economy have incentivize consumption of the point that we kept observing good levels of commodity prices during all the quarters and expectation remain strong. Regarding our other segments, both the volume sold and revenue remained strong for the quarter. Our biggest challenge remains in the pork business line, since currently most of our meat needs are from third parties companies, which is currently putting some pressure on margins for this category. As a result of the conditions above, our total sales and cost of sales increased 27% and 16%, respectively when compared to the second quarter of 2020.

We observed an -- we reported an EBITDA of MXN2,437.4 million with a margin of 11.7% and earnings per share of MXN2.46 for the quarter. If we look at the first half of 2021, we reached a net sales of MXN40,218.6 million, which is 25% higher than the six first months of 2020, achieving an EBITDA margin of 13.3%, higher compared to the EBITDA margin for the same period of 2020. The company remained in a healthy financial condition as we reached a net cash level of MXN19,490.6 million, which allow us to continue to the support of our growth plan as we reported the capex of MXN1,307.5 million for the second quarter of '21.

Now, Maria will join us for the discussion of the financial results.

Maria Guadalupe Jaquez -- Investor Relations

Thank you, and good morning, everyone. As a result of the conditions mentioned before our company's second quarter of '21 net sales totaled MXN20,860.9 million, MXN4,429 million or 27% higher than the MXN16,431.9 million reported in the second quarter of 2020. This increase was mainly a result of higher prices across our main business lines as a result of sales mix and the reflection of the effects of higher raw material costs.

Total cost of sales for the quarter was MXN16,901.1 million, representing an increase of 16% when compared to the same period of 2020. The mentioned combination resulted in the gross profit for the quarter of MXN3,959.8 million with a gross margin of 19%, higher when compared to the MXN1,857.4 million, and 11.3% reported in the same period of 2020. For the first half of the year, we reached a gross profit of MXN8,177.9 million with a margin of 20.3%. This amount is higher than the gross profit of MXN4,038.5 million and 12.6% margin reached in the first half of 2020.

Total SG&A for the second quarter was MXN1,729.2 million, representing 8.3% of our total sales, which compares to the MXN1,567 million and 9% of total sales achieved in the second quarter of the '20. Operating income for the second quarter of 2021, totaled MXN2,088.8 million and operating margin of 10%. This is higher than the 0.5% margin reached in the second quarter of 2020. On the other hand, operating margin for the first half of '21 was 11.6% compared to the 2.1% reached in the same period of 2020.

Our EBITDA margin was 11.7% for the quarter, an increase when compared with the 2.7% for the second quarter of 2020, while for the first half of the year of 2021 and 2020, margins were 13.3% and 4.3%, respectively. For the quarter, we had a net financial expense of MXN97 million for the quarter and the net financial income for the -- of MXN222.6 million for the first half of the year compared to the net financial expenses of MXN122.3 million and the net finance income of MXN2,304.2 million for the same periods of 2020.

Our total taxes were MXN548.7 million for the quarter compared to the favorable MXN11.2 million recognized in the same quarter of 2020. For the first half of 2021, our total taxes were MXN1,352.6 million, higher than the income taxes for the same period of 2020. All the above, led us to a positive net income of MXN1,443.2 million for the quarter, resulted in a 6.9% margin compared to a negative net income of MXN28.2 million and negative 0.2% margin reported in the second quarter of '20. For the first half of 2021, net income totaled MXN3,517.8 million with a net margin of 8.7%, which is higher than the MXN3,141.9 million for the net income and 6.7% margin for the first half of the '20.

Going into our balance sheet, we kept a healthy financial structure with a net cash level of MXN19,490.6 million when compared to the net cash of the MXN16,530.3 million we had at the end of the year 2020. Lastly, our capex was MXN1,307.5 million, an increase of 31.7% when compared to the same period of the 2020.

With that, I will turn now the call to Rodolfo for final comments.

Rodolfo Ramos -- Chief Executive Officer

Thanks, Maria. Even though the second half of the year is seasonally our toughest, so far we are entering with a good balance between supply and demand. Despite that, the comparison with the same period of 2020 will be difficult, particularly considering that the corn and soybean meal prices are still high year-over-year. So far we have been able to transfer some of those increases to our sales price, and we think we can kept doing that to some extent.

However, we are entering a period with the seasonal demand is up. So that might represent some challenges in terms of price increases. In terms of what we can control, we will continue to be focused on efficiencies, improvements in our sales mix and our organic growth strategy in order to keep delivering positive results to our shareholders.

With that, we will now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Mr. Fernando Olvera from Bank of America. Please go ahead.

Fernando Olvera -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, everyone and thanks for taking my question. I have two, if I may, both related to the poultry business in Mexico. Can you comment how does the balance between supply and demand perform month-by-month during the quarter? And how can this sustain pricing in the remaining of the year? Rodolfo, as you mentioned that you were witnessing also a good supply and demand during July, if I understand correctly. And my second question is related to your EBITDA margin. We saw this first half a very solid margin. So how do you expect the margin to go up at the end of the year given the increase in grain costs? Thank you.

Rodolfo Ramos -- Chief Executive Officer

Well, thank you Fernando for your questions. Well, starting with the second one, I expect the EBITDA margins for the second quarter will be more normalized even in the lower part of that of the normalized EBITDA margin and that is because of the cost of the raw materials. In the near future, we don't see any price reduction in the corn and soybean meal prices. So that has going to be put some pressure in the margins. And in terms of supply and demand here in Mexico for the rest of the year, well, we have been very disciplined in terms of cover just the requirements of our customers. We are very, very close to our customers to meet their needs.

And, with a very, very disciplined tracking of their consumption and our production hours and our supply we are just keep very, very close to the met -- to the -- to our customers, and to the market, in general, to see what is effects and -- for the demand side, trying to read that demand very closely. And because we have our projection for almost 13 weeks because of the period of barring the bird in farms, the incubation period, things like that, we know that in the second half is going to be tough because of the demand, because of that seasonality. But with our discipline in our production, I think we can just maintain that -- try to maintain that balance between supply and demand.

Fernando Olvera -- Bank of America Merrill Lynch -- Analyst

Balance, I mean, how do you see pricing? I mean, do you think that pricing could remain relatively positive to help you mitigate grain pressure?

Rodolfo Ramos -- Chief Executive Officer

Well, it's going to be tough to -- it's tough to predict about prices in the future, because the thing is that the third quarter normally is the weakest in terms of demand. But with the discipline that I mentioned, we are thinking that we are going to maintain that the same level. I am not sure if we are going to observe the raw material prices at 100%, but for sure some of those increases. Right now we are trespassing those increases to the sales price. And at the other hand, our efficiencies has been good. We have been very, very close to our productivity. Following the all the results and at all the levels, farms, processing, our supply chain is working very, very well. So we can deliver good result and absorb part of those cost increases to our efficiencies and trespassing some of those increases to the sales price.

Fernando Olvera -- Bank of America Merrill Lynch -- Analyst

Great. Thank you so much.

Operator

Thank you. Our next question on line comes from Mr. Emiliano Hernandez from GBM. Please go ahead.

Emiliano Hernandez -- GBM -- Analyst

Hi, Rodolfo and Richard. Congrats on the results. Very impressive. Just a quick one on capital allocation. You have now reached a very impressive MXN19 billion in net cash. What are the main priorities on deployment there? Could we see maybe a transformative acquisition in the short-term or maybe an extraordinary dividend would make sense?

Maria Guadalupe Jaquez -- Investor Relations

Well, like we have mentioned in the past, we think that and with the results that we're now seeing, we think that we have the firepower to move either way to go after a transformational acquisition or a series of acquisitions, which we think at this point seems more feasible. Currently, we are looking at an opportunity outside. But at this point it's very soon in the process for us to share something with you particularly, but we want to give you the message that we are actively looking that we are participated in some process in order to to make better use of these cash like the priority are in Mexico to grow in other proteins and outside Mexico the priority is in chicken.

Emiliano Hernandez -- GBM -- Analyst

Thanks, Jaquez. That's great color.

Maria Guadalupe Jaquez -- Investor Relations

Thank you, Emiliano.

Operator

Thank you. Our next question on the line comes from Ulises Argote from JP Morgan. Please go ahead.

Ulises Argote -- JPMorgan -- Analyst

Rodolfo and Guadalupe, thanks for the space for questions. A couple more on my side. First goal for you mentioned in your opening remarks, a little bit on the SASA business and maybe you guys facing some challenges there on the supply of pork and how that cost evolution as kind of a ramp up. But maybe can you provide us an update of how the investment there that you were making that the capex for that business to grow like the integration of the business, how that is going? What do you expect probably in the coming quarters from that? And then maybe if you can elaborate a bit more on the U.S. market dynamics. Obviously, we saw there more challenging trends already in the quarter. That's from the very tough comp base from last year obviously. But what are you seeing there in terms of pricing evolution of volumes of how the industries is kind of evolving that would be very helpful. Thank you.

Rodolfo Ramos -- Chief Executive Officer

Well, the first question about the pork industry. For the rest of the year, the situation in the pork side is going to remain in the same direction. Right now, we approved the project to -- the capex project to expand our live production. Right now 80% of the requirements of that business are coming from the third companies. So, right now, we have a huge response to the live price of the hawks. So, right now, the price, the live price, is very high. So that puts a lot of pressure in our margins, because we are buying our raw material for this business at very high price.

Right now, in the last month, we start to see trend to reduce those prices. So, I think, the rest of the year is going to be more friendly in terms of the pricing of the live hawk. Our project, we started our project and we are in line of our expectations in terms of the schedule the building or the expansion of our own capacity to produce our live hawks. Our goal is to have at least the opposite, 80% coming from our operation, our own operations. So and saying that, we are going to expand our international markets, mainly Asia and even the United States. Right now we have a huge opportunity in that side of the business to export to some international markets, including United States.

In terms of our the situation of the U.S. industry and the volumes, right now we are seeing a pretty good balance again between supply and demand. Even the inventories at this time are lower than the frozen inventories of chicken compared with the same period of the last year. So demand is there and with the opening of all the states we are seeing the rebound in the -- for the demand side. And even the pricing of commodities, breast meat, leg quarters on a good level. This was a small reduction, but I think because of the inventories we are going to see a good demand and a good balance between supply and demand. The main problem there as you know is labor. Labor is putting a lot of pressure in all the processes.

So we are seeing a lot of disruption in line of the supply chain, some in the live production, some in the processing, some in the transportation, and all the areas of the industry are affected by the shortages of labor. So we are following very closely the policies of the U.S. government in terms of the unemployment health and team that the government is given to the people in order to build the best strategy to staff our facilities. At this time, we're running at our capacities, but with a lot of effort to find labor. That's the main issue, labor.

Operator

Thank you. Our next question on the line comes from Alonso Garcia, Private Investor. Please go ahead.

Alonso Garcia -- Private Investor -- Analyst

Good morning, Rodolfo. I have a question. I expect management to keep track of performances competitors, because I consider it a healthy habit. How would you analyze and compare Bachoco's performance in comparison and with the volatility movement of competitors' performance just like say Tyson Foods in the U.S. market, meaning the correlation between their performance and yours.

Rodolfo Ramos -- Chief Executive Officer

Well, in terms of the benchmark, we participate in every stance and we use the vigorous just in production. And in terms of the market we use just the public information and exceeds in the market and that's it.

Alonso Garcia -- Private Investor -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question on the line comes from Guadalupe Villar from Credit Suisse. Please go ahead.

Guadalupe Villar -- Credit Suisse -- Analyst

Hi, good morning, Rodolfo and Guadalupe. Congratulations on your results. My question is regarding the electricity demand in the sense that do you see the demand more resilient now to price increases? That will be my first question. And in terms of regions, where do you see a clear improvement in terms of consumer demand?

Maria Guadalupe Jaquez -- Investor Relations

Hi, Guadalupe. Well, in terms of the part of your first question our pricing is very much correlated to GDP that we have and also it has a strong correlation with the grain prices. So, like Rodolfo have mentioned before, for us is very important to follow with the economic growth both in Mexico and the U.S. As long as there is a growth in that side, we think that we are -- that gives us a chance to actually track fast the increases in raw material costs and that is something that we have been seen in these quarters, because all the elements are putting in that way. Like he mentioned also in his remarks, as long as this is something that is sustainable and also there is the supply and demand imbalance in the market, we think that that situation could be sustainable as well.

Guadalupe Villar -- Credit Suisse -- Analyst

That's very clear. And in terms of the region, where do you see a clear improvement?

Maria Guadalupe Jaquez -- Investor Relations

In terms of the regions, when you talk about regions, do you referred to Mexico and the U.S. or regions within Mexico?

Guadalupe Villar -- Credit Suisse -- Analyst

If you are more particular within the countries that would be very helpful.

Rodolfo Ramos -- Chief Executive Officer

Well, in Mexico we have a particularly three regions, the north part of the country, central part and the south, and we are seeing a balance in the normalized market. For instance, the southeast of the Mexico, it's more important, the live chicken business and that's a segment of the business has been very good in terms of the balance between supply and demand. So prices are normalized. The central part of the country is a combination of traditional market and the supermarkets and the retail market. So right now, the traditional market is in a very good shape too. And in the north part of the country, the consumption is more to the retail, the bigger supermarkets and the daily works and the food service. So, right now the north part of the country, it's normalized in terms of the supply and demand.

Right now we are seeing a rebound in the consumption of the food service in, for instance, in the Riviera Maya. Riviera Maya, the hotels start to ramp up in terms of the occupancy and we are seeing a recovery in those consumption. In the United States, as I mentioned, the disruption in the supply chain has been -- maybe because of the shortage of labor. There is a lot of the disruption not just in production or processing. but in transportation and in the -- at the round of the supply chain, there is some disruption that we have been dealing with in this quarter and we expect for the rest of the year that we are going to have that challenge. So our strategy there in the U.S. operation is to maintain our working force and our processing facilities. So we are not seeing any other big issue there.

Guadalupe Villar -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

And thank you. [Operator Instructions] Our next question on line comes from Hector Maya from Santander. Please go ahead.

Hector Maya -- Santander -- Analyst

Hi, thank you very much Rodolfo and Guadalupe. Thank you for taking my questions and congratulations on your results.

Rodolfo Ramos -- Chief Executive Officer

Thank you.

Hector Maya -- Santander -- Analyst

I couldn't join, sorry, I couldn't join in the beginning. So, sorry if this was already asked. But considering the second half of the year has a more difficult comparable base and also taking a look at the current raw material price environment, where do you still see opportunity to continue implementing pricing? I mean, even in sequentially terms, in sequential terms what channels still have room for further improvement, and specifically what SKUs? And after that I would have a follow-up.

Rodolfo Ramos -- Chief Executive Officer

Well, Hector, it's going to be tough to increase the prices for the second half, mainly because seasonally the third quarter is the weakest quarter and it's not going to be -- it's going to be tough to trespass cost increases to the price at the end of the year. But, well, at this moment, the margins that we are expecting a more normalized EBITDA for the second half of the year, let's say, in the upper part of one digit or I think we're expecting a normalized EBITDA for the second half. And I'm taking into account just right now the volatility of the raw materials is huge. But right now the prices have been, let's say, $5.50 to $5.70 per bushel. So our cost is already impacted by those raw material costs. If the raw material cost remain on those levels, we are not going to have a cost increase for the second half.

The comparison against the -- versus the same period of the last year is going to reflect cost increased, because we are taking in account different base of comparison. But if we compare the second quarter with the third quarter, the cost increases cannot be minimum in terms of raw materials, because we're already impacted those cost in our figures. So we are expecting a good growth for the last parts of the year. So,if -- weather-- right now we are in the weather market and so we are expecting -- we are not expecting cost increase for the balance of the year.

Hector Maya -- Santander -- Analyst

Yeah, very clear. And you were mentioning about the raw material prices. We saw over $7 per corn bushel by the end of April. Now, as you were saying, we are just seeing USD5.50 to USD5.70 per bushel. So what -- are you taking advantage of this? I mean, I know, it's a higher price compared to what we were seeing last year, but it's still an opportunity when you're compare the prices that we were seeing in April. So are you taking any different approach to this new price to kind of consider inventory management for next year or something different with our strategy?

Rodolfo Ramos -- Chief Executive Officer

No, not all. We don't like to speculate about these kinds of things. And our policy is to have some more than two months in advance of our raw materials. But the only difference is our domestic corn product, because we normally supply our requirements in the season when there is some harvest in Mexico, for instance. The last month we acquired the corn for our northwest operation coming from the local production area. And that is very efficient for us, because the northwest of the country is far away from the production areas in the United States, the Midwest. So, the freight to get to that area is very high. So, makes sense to have a more than two months progress in that area using that advantage that we have a local production in Sinaloa state mainly.

The other important area, domestic area is here in the central part of the country. We have a very nice corn and soybean production here that is where our largest plants are located. So we have a season when we use the domestic and local corn. So, it's in general terms in the past we are importing. We don't have more than two months of coverage. It can be the physical product or can be just the futures of grain, but no more than that. The only other thing that we normally do is to hedge all the long-term contracts with our customers. So, if our customers wants to one price for whole year, we hedge that price or that cost to have a margin with them. So that's our strategy and we have been very disciplined following that process.

Hector Maya -- Santander -- Analyst

Excellent. Thank you. Thank you very much. And again congratulations on the results. Thank you.

Rodolfo Ramos -- Chief Executive Officer

Thank you very much.

Maria Guadalupe Jaquez -- Investor Relations

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call over to our presenters for closing remarks.

Rodolfo Ramos -- Chief Executive Officer

Thank you very much. Okay. Thank you very much for all -- for joining us this morning. If you have any further questions, please contact our Investor Relation area who will be glad to assist you. Thank you very much.

Maria Guadalupe Jaquez -- Investor Relations

Thank you.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Andrea Guerrero -- Investor Relations

Rodolfo Ramos -- Chief Executive Officer

Maria Guadalupe Jaquez -- Investor Relations

Fernando Olvera -- Bank of America Merrill Lynch -- Analyst

Emiliano Hernandez -- GBM -- Analyst

Ulises Argote -- JPMorgan -- Analyst

Alonso Garcia -- Private Investor -- Analyst

Guadalupe Villar -- Credit Suisse -- Analyst

Hector Maya -- Santander -- Analyst

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