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Industrias Bachoco, SAB de CV (NYSE:IBA)
Q3 2021 Earnings Call
Oct 25, 2021, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Karen. I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2021 Industrias Bachoco Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you for your attention. I will now turn the call over to Andrea Guerrero. Andrea, you may begin.

Andrea Guerrero -- Investor Relations

Thank you, Karen. Good afternoon and welcome to Bachoco's third quarter 2021 conference call. We released our financials today before the market opened. If you need a copy of the release, please visit our website or request it from our Investor Relations department.

This afternoon'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 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 period of 2020 in Mexican pesos. As a reference, the exchange rate as of September 30, 2021 was MXN20.64 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 -- Chief Executive Officer

Thank you, Andrea and good morning, everyone. As we mentioned in our press release issued today, we faced challenging conditions during the quarter, but still we're able to deliver positive results.

In Mexico, we observed a typical softness in demand for this time of the year, which result in a reduction of around 4% in poultry prices when compared to the first half of 2021. However, also for this segment, we achieved an increase of 9% versus the third quarter of 2020. In the US, main commodity prices such as [Indecipherable] remained strong versus 2020 for both the quarter and the year-to-date. Particularly for this third quarter, we continue to have pressure on the cost side. Grain and soybean meal prices in US dollar remained high, even factoring in the positive impact of the 9% appreciation of the Mexican peso. We observed grain around 50% higher than the third quarter of 2020 while soybean meal was in the range of 20% above the same period in peso terms. This caused an important impact in our cost of sales and in our net margins.

In our other segments, volume sold was down, close to 5%, mainly driven by our balance feed and pork businesses. Balance feed market have experienced some pressures that have resulted in high raw material cost. On the other hand, the downside in pork is a result of adjustment made as part of our integration process in SASA.

The aforementioned condition led us to an EBITDA margin for the quarter of 5.6% versus 10% achieved in the same period of 2020. Regarding year-to-date results, our total sales increased 19.8% when compared to the same period of 2020 with an EBITDA margin of 10.7% versus 6.4% margin in the first nine months of 2020.

Despite the challenges, we continue with a very solid financial structure, attending to our customers and selling all of our production volumes. Therefore, our plans continue toward growth and efficiencies. The strategies then allow us to be better prepared to face the challenges of the industry in which we compete while delivering positive results.

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, our company third quarter '21 net sales increased 10.6% in the quarter when compared with the third quarter of 2020. The increase is a result of higher prices in our business lines for the nine months of the year. Sales were 19.8% higher than the same period of 2020. In the quarter, sales of our US operation represented 26% of total sales compared with a 28.3% reported in the equivalent quarter of 2020. This was the result of an increase in the participation of our Mexican operation. Cost of sales for the third quarter was MXN17,619 million and MXN49,659.7 million for the nine months of the year. This represents an increase of 16.6% of the quarter and 14.8% for the year. This increase was due at the higher cost of our raw materials, both in dollar and Mexican peso terms.

Gross profit for the quarter was MXN2,610 million with a gross margin of 12.9% compared with the 17.4% gross margin for the third quarter 2020. For the nine months of the year, we reached a gross profit of MXN10,787.9 million with a margin of 17.8%. This amount is 29.3% higher than the gross profit reached in the same period of 2020.

Total SG&A for the third quarter of 2020 was MXN1,790.9 million and MXN5,157.4 million year-to-date, representing an 8.9% and 8.8% respectively when compared to sales. For the third quarter of 2021, we reported an operating income of MXN738.4 million with a margin of 3.7%. The operation income for the nine months of 2020 was MXN5,386.1 [Phonetic] million with operating margin of 8.9% higher when compared to the 4.3% reached in the same period of 2020.

EBITDA margin for third quarter was 5.6% that is lower than the 10% EBITDA margin for the third quarter of 2020. For the accumulated nine months for the year, the EBITDA margin was 10.7% higher when compared with the 6.4% reached in the same period of 2020. In the third quarter of 2021, we reported a net financial income of MXN459.6 million and MXN682.2 million for the nine months of 2021 compared with the net financial loss of MXN267.5 million and the net financial income of MXN2,036.8 million for third quarter and nine months of 2020 respectively.

Our total taxes were MXN380.6 million for the quarter. For the first nine months of 2021, our total tax were MXN1,733.3 million. All the above led us to a net income of MXN817.4 million for the quarter with a net margin of 4%. For the accumulated nine months of 2021, the net income totaled MXN4,335.1 million with a net margin of 7.2%.

Going into our balance sheet, we maintain a healthy financial structure with an increase in total assets of 8.2% when compared to the year-end of 2020. Our net cash was MXN18,269.7 at the end of the quarter, 10.5% higher than our net cash level at the beginning of the year. Lastly, capex was MXN2,251.1 million, which is 43.4% higher when compared to the same period of 2020.

Well, thank you and I will turn the call back to Rodolfo for final comment.

Rodolfo Ramos -- Chief Executive Officer

Thank you, Daniel. Now we are entering into the fourth quarter, in line with the seasonality. Pricing in Mexico for the beginning of the quarter remains weak. Normally demand starts to pick-up toward the end of the year. Pricing of corn remains high year-over-year, but soybean meal is now very close to the level of 2020. In the US, even though breast meat [Indecipherable] starting to come down, it is still higher than previous years. However, grain cost and labor will be challenges to overcome until the year-end. We expect to continue with our capex above maintenance levels as part of our organic growth strategy. Even when we observe uncertain conditions ahead, we continue to focus on our growth plans. We have a very solid financial structure to support our project and which will allow us to face challenges than the future can present.

With that, we will now take your questions.

Questions and Answers:

Operator

[Operator Instructions] And we do have our first question from Fernando Olvera from BoA.

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

Hi, good afternoon, everyone and thanks for taking my questions. I have two [Indecipherable]. The first one is related to the pork [Phonetic] business in Mexico. Can you give us an update of how is the balance between supply and demand so far in October? And can you share, what is your view about pricing in this quarter and in 2022. That's the first one and I have one more related to the US.

Rodolfo Ramos -- Chief Executive Officer

Well, the balance of supply and demand for the rest of the year is going to be tight in terms of supply. Normally, in the beginning of the fourth quarter, the demand is very weak. That's a normal situation because people spend more money in other issues like the beginning of the school, they came from vacations and they are a little bit running out in terms of money. And in the other hand, the supply is good because the weather has started to change and then the daily gain started to improve. So we got a little bit more supply and weak demand all the years, normally this part of the year is the weakest of the year. But at the end of the year, we are expecting a good demand. The demand is going to be there and we are expecting a better balance between supply and demand and that is going to -- we are expecting that that situation is going to remain for the first quarter of 2022.

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

Great. Thank you. And regarding pricing, you have [Technical Issues] on pricing.

Rodolfo Ramos -- Chief Executive Officer

It's very difficult to predict the price, but when you have a good supply and demand and we are expecting for the last part of this quarter, the fourth quarter, we expect to maintain our margin, our regular margins for that time of the year, because right now we have the problem with the cost and we are expecting a better cost for the last part of the year because soybean meal and corn prices had been going -- went down a little bit and so we are going to collect that cost at the end of the year. So we expect to have a normalized margins for the rest of the year and the beginning of the first quarter.

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

Great. And my second question is related to the US. I don't know if you could quantify how much of the pressure on margins came precisely from labor shortages and distribution constraints in the US.

Rodolfo Ramos -- Chief Executive Officer

Well, as you mentioned, labor is -- after the cost of the raw materials, labor is a very, very important issue in the States. And as discussing -- I cannot tell you at this moment, what is the percentage of the margin that is taking that increase in labor, but we have to be competitive and we have to be competitive in terms of salaries. So we had an increase in cost because of that and we experienced some shortages of labor a couple of months ago or something like that. Right now, we are in our way to fully staff our plants and we expect to be totally fully staffed at the end of the year.

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

Great. Perfect. Helpful. Thank you.

Rodolfo Ramos -- Chief Executive Officer

Thank you, Fernando and good afternoon.

Operator

And we do have our next question from Emiliano Hernandez from GBM.

Emiliano Hernandez -- GBM -- Analyst

Hello Rodolfo, Daniel, thanks for the stage for questions. I hope you're doing well. Just a quick one on my side regarding the filing that you made to issue up to MXN10 billion in that certificate. Can you share the strategy there and what would the users of that proceed would be taken into account that you have already around MXN18 billion in net cash?

Daniel Salazar Ferrer -- Chief Financial Officer

Thank you, Emiliano. Well, the rational behind this strategy is to have an open financial avenue for Mexican peso in the Mexican market, because before that, we didn't have authorized program for getting that market. So actually we don't have a specific proceed for this capability. We saw the program only to have the capability to do so. The idea is to have this possible financial capability for future acquisition, for future world strategy. Actually, we don't have a precise proceed for this capability.

Emiliano Hernandez -- GBM -- Analyst

That's very clear, Daniel. Thank you very much.

Daniel Salazar Ferrer -- Chief Financial Officer

You're welcome.

Operator

And we do have our next question from Alan Alanis from Santander.

Alan Alanis -- Banco Santander SA -- Analyst

Sure. Thank you so much. Hey, Daniel. Hey, Rodolfo. Congratulations on the results. The first question is more about the elasticity of pricing in Mexico. Are you seeing any difference? It seems that you are being able to take pricing in the mid-teens and volumes are holding up. Any comment that you can make in terms of the changes or if it remains the same, the elasticity of the Mexican consumer in the consumption of poultry?

Rodolfo Ramos -- Chief Executive Officer

Well, thank you, Alan. Well, the prices of the chicken is better than the last year. The problem is the cost, because of the raw material, but right now the prices are good in terms of the equivalent of the last year. So we expect that the prices are going to hold that level, and even we expect better prices at the end of the year. So in that, we are seeing, as I mentioned before, the margins are comparably more or less in line with the seasonality of the last part of the year.

Right now, the levels of the pricing is very weak, as I mentioned before, but we are expecting that -- rebound in those prices. Remember that more than 50% of the Mexican market is kind of a commodity. Live market accounts for one-third of the market and traditional market is with live and the traditional markets account for more than 50% of the total market. So the volatility is there, and right now we are seeing a recovery in prices, in line with the seasonality, and right now we are just in front of the date, which is November 2nd, and normally that date is a very good date for chicken consumption.

Alan Alanis -- Banco Santander SA -- Analyst

Got it. Got it. Yeah, I mean, it should be very resilient versus other propanes and as you said, a lot of it is the commodity. Let me ask you a different question and start by saying that the objective of the question is just to understand, I'm not suggesting that you do one thing or another, I just want to understand, you have almost MXN1 billion of cash right now, and then you have this approval for issuing bonds for another MXN10 billion, which is another $500 million. So your ammunition or your weapons are -- you can deploy $1.5 billion without any big problem. Now whatever you acquire, whatever you deploy on that, my sense and correct me if I'm wrong, is that it will be at a multiple that is higher than the 3.5 times EBITDA that you are currently trading. In other words, whatever you acquire will have to be a six or seven, or maybe depending if its processed food, more higher than that.

And I guess the question here is, why -- you can use two thirds of your available cash and buy your own shares. What's the rationale behind not doing that, behind saying, yes, I know that my stock is trading at 3.5 times EBITDA, but I still think that it'll be better in the long run for all the shareholders, particularly the controlling shareholders to continue doing acquisitions at a multiple that might be, well, in some instances below [Indecipherable], then it'll maybe twice as much as your multiple is trading. And again, my objective is to try to understand what the thinking of the board and the control group. I don't know if it's a fair question or not. Hopefully it is.

Rodolfo Ramos -- Chief Executive Officer

Yes, thank you, Alan. Of course, this is a possibility, and this is something that we have discussed with the board. But our priorities to deploy this bunch of money in continued evolving and the speed of our inorganic growth in the future. We do what you are suggesting, somehow could slow down our speed in the future growth. Anyway, it's a valid question and an option that we are evaluating among other options. But the rationale for not doing that in this moment, is because our priority is to deploy the money for our organic and inorganic growth strategy.

Alan Alanis -- Banco Santander SA -- Analyst

Got it. And in the inorganic growth, your preference is right now for pork over poultry, and maybe pork in -- yeah, that's fair, correct?

Rodolfo Ramos -- Chief Executive Officer

Well, not necessarily. In Mexico, we're looking for a different kind of proteins, different kind of business lines and the poultry is more outside Mexico.

Alan Alanis -- Banco Santander SA -- Analyst

Got it. Thank you so much again and congrats and again, I was just -- I'm just trying to understand the rationale. Thank you so much for taking my question.

Rodolfo Ramos -- Chief Executive Officer

Thank you, Alan.

Operator

And we do have our next question from Ulises Argote from J.P. Morgan.

Ulises Argote -- J.P. Morgan -- Analyst

Hello Rodolfo, Daniel. Thanks for the questions. Just one quick follow-up here on the cost side of the equation, I think the rest of my questions have already been answered. But can you comment a little bit on how the costs are shaping up now toward the fourth quarter, and in particular, and maybe into the first part of 2022, kind of factoring in your three month rolling hedge. Did we get the peak here in the third quarter in terms of cost pressure, or do you still kind of expect to see that lingering for a couple of quarters more? Thanks.

Rodolfo Ramos -- Chief Executive Officer

Well, right now the cost of corn and soybeans are more or less stable. Corn is holding at around 5.3, which is still higher than the last year, but I think has been stable for a couple months and I think it's going to remain for the rest of the year. And in terms of the freight and things like that, we already closed some of our vessel freight up to -- at least for the first quarter of 2022. So our basis in terms of freights are already booked at very decent levels. Basis, we have the whole year with basis, and right now we are looking for the basis for the first order of 2022 and those markets are very firm and for that reason, we are looking for those -- to book that kind of product.

Gas and other issues that impact the cost, we don't have any hedge about gas or even soybean oil and we are just following those markets in order to see an opportunity to book those ingredients or materials to hedge our consumptions in that regard.

Labor is an issue. Labor by far is 23% higher than the last year and here in Mexico, we are expecting an increase according to the regular inflation, which is around 6%, 7%. I think the minimum wage is going to increase that level. And in the States, I think it's going to remain high. They are already high, and I think it's going to remain with that trend. Important thing about labor in the States is availability, because we need to cover and to fully staff our plants, and we are struggling in order to achieve that -- in that matter. So that's the situation -- that's what we are expecting in terms of the cost. Right now, as we see [Phonetic] oil is close to $90, $85 per barrel, so it's very, very high. So that's going to impact that.

Ulises Argote -- J.P. Morgan -- Analyst

Yeah, that's super helpful, Rodolfo. Thanks for that. So, basically from your comments, I get that we shouldn't really expect any less pressure in the cost side of the equation, let's say for the fourth quarter, right? That kind of sequentially should be very similar to what we saw right now in the third quarter.

Rodolfo Ramos -- Chief Executive Officer

Yes.

Ulises Argote -- J.P. Morgan -- Analyst

Okay, perfect. Thank you so much, guys.

Rodolfo Ramos -- Chief Executive Officer

Thank you, Ulises.

Operator

And we do have our next question from Jay Hill from Tweedy, Browne.

Jay Hill -- Tweedy, Browne -- Analyst

Hi Rodolfo. Hi Daniel. Good afternoon.

Rodolfo Ramos -- Chief Executive Officer

Hi Jay.

Jay Hill -- Tweedy, Browne -- Analyst

Hi guys. Hey look, thank you very much for taking my question. I'm going to sort of piggyback on the question that Alan asked earlier, but look, over the last decade, it's very clear to me that Bachoco has been managed extremely well, and you guys have created a lot of shareholder value. But this value is not currently being recognized in the stock market. And just to give you a sense of the value creation, I think given sort of the cyclical nature of your business, I believe the best long-term measure of value creation is your growth in tangible book value per share, plus cumulative dividends paid per share over time. And since 2010, on this measure, you've grown tangible book value per share, plus cumulative dividends per share at a compound annual rate above 11%. Over that same period, you guys have generated an average return-on-equity of a little over 11%, which is really a great result despite the fact that you guys have an inefficient capital structure with large net cash that you've held throughout this period.

So look, the stock market is clearly not recognizing the strong, long term financial track record that your company has generated. To me, Bachoco is ridiculously cheap on any normalized earnings valuation measure. The guide earlier talked about 3.5 times EBITDA, but on any sort of long term measure of normalized earnings, your stock is extremely cheap, it's frustrating to be a shareholder. I suspect your board is also frustrated and also recognizes the very cheap valuation.

So my question to both of you is, look, you've got this large net cash position, currently represents over 40% of the market cap, and you've got this very low stock market valuation. Why doesn't the board adopt a shareholder repurchase plan? That's one. And then two, I know you guys want to do M&A, that's great. I think there's enough money to do both. And then I have a follow up.

Daniel Salazar Ferrer -- Chief Financial Officer

Yes, of course you are right. You have made a good analysis and we have issues that we deal, before. And as I mentioned to Alan before, this is an option that we are [Indecipherable] among others. So it's a possibility, given the current value that the company is performing. But as I mentioned before, our priorities to deploy the money that we have for our strategy. Of course, we need to increase the speed of our M&A activity. But you're right. There is no -- an obstacle, we perform both options. In any case, this is something that we are evaluating right now. We don't have any decisions in that regard.

Jay Hill -- Tweedy, Browne -- Analyst

Well, I appreciate that response, Daniel and I hope the board will seriously consider repurchasing shares. Again, I think you could repurchase shares and do buybacks. And then I would also -- just to piggyback on what Alan said earlier, look, there's always a trade-off between, how should you -- what's the best use of spending the shareholders money? Is it on M&A, or is it on share purchase, and I would find it hard to imagine that you could find an M&A candidate that's more attractive than buying your own shares in the open stock market? So please, please consider that. I think it makes a ton of sense for all of your remaining shareholders. Thank you, Daniel and Rodolfo.

Rodolfo Ramos -- Chief Executive Officer

Thank you.

Daniel Salazar Ferrer -- Chief Financial Officer

Thank you, Jay. Of course, be sure that whatever we decide, we will take into consideration the best interest of our investment community.

Operator

[Operator instructions] And we do have our next question from Juan Ponce from Bradesco.

Juan Ponce -- Bradesco -- Analyst

Hi, good afternoon, Rodolfo, Daniel. Thanks for taking my questions. Regarding the electricity bill currently in the lower house, I would like to hear your thoughts on the potential impact on your business. What percent of the cost is electricity and how much of the energy is sourced from private producers? Thanks.

Rodolfo Ramos -- Chief Executive Officer

Well, the utilities or energy bill accounts for no more than 3% of our total cost. That includes gas, natural gas, propane plus electricity. Electricity per se is 2.5% of our total cost. So the impact is going to be very, very low. In the other hand, right now we have our own generation, that allows to have at least 20% lower cost than the regular cost of the CFE. So the impact is going to be not material.

Juan Ponce -- Bradesco -- Analyst

Okay. Thank you very much.

Daniel Salazar Ferrer -- Chief Financial Officer

Thank you, Juan. Saludos.

Operator

And we have our next question from Fernando Olvera from BOA.

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

Hi thanks for the follow up. Just a quick one. Can you explain the higher capex this quarter please, and if you have any update about the acquisition of RYC Alimentos? Thank you.

Daniel Salazar Ferrer -- Chief Financial Officer

So in terms of the capex, the increase is because, we are increasing the speed of our pipeline of capital expenditure, not for additional capital expenditure that we want to perform. And regarding the RYC Alimentos, we are still waiting for the antitrust authorities authorization. But we already know it that the -- the concern that they have is regarding the anti -- the non-compete provision that we include in the SPA. So we don't know if the authorities will ask us to change that provision or not, but we are in that point of the review. Probably in the next month, we will have a resolution and we will let you know, as soon as we know.

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

Great. Thank you, Daniel.

Daniel Salazar Ferrer -- Chief Financial Officer

Thank you, Fernando.

Operator

And I am showing that there are no more questions at this time.

Rodolfo Ramos -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Andrea Guerrero -- Investor Relations

Rodolfo Ramos -- Chief Executive Officer

Daniel Salazar Ferrer -- Chief Financial Officer

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

Emiliano Hernandez -- GBM -- Analyst

Alan Alanis -- Banco Santander SA -- Analyst

Ulises Argote -- J.P. Morgan -- Analyst

Jay Hill -- Tweedy, Browne -- Analyst

Juan Ponce -- Bradesco -- Analyst

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