Gruma: reports fourth quarter 2017 results

San Pedro Garza García / MX. (gr) Gruma S.A.B. de C.V. reported fourth quarter 2017 results. performance in Q4/2017 enabled the company to remain in line with guidance for full year results, despite the temporary disruptions from the hurricanes in the United States in Q3/2017. Highlights:

It should be noted that performance at Gruma USA in Q4/2017 reflected the effect of one less week of operations versus Q4/2016. Therefore, consolidated sales volume was flat and net sales were 3 percent lower. Consolidated results were also impacted by the Peso appreciation effect on Gruma USA figures, when measured in Peso terms.

On a comparable basis, consolidated sales volume and net sales grew 2 percent and 1 percent, respectively.

Consolidated Ebitda declined 1 percent, as Gruma USA was affected by the one week less of operations. Nonetheless, Ebitda margin improved 20 basis points to 16.4 percent, driven mainly by Gruma USA.

Sales and Ebitda from non-Mexican operations represented 73 percent and 69 percent, respectively, of consolidated figures. The company reported USD 1 billion of debt at quarter-end, USD 88 million less than at the end of Q3/2017. Net Debt/Ebitda ratio was 1.5x.

Consolidated results of operations

Q4/2017 versus Q4/2016
Sales volume was flat at 1’037 thousand metric tons. Volume growth at Gimsa and Gruma Centroamérica offset reductions at Gruma USA caused by the additional week in Q4/2016. Excluding the additional week, consolidated sales volume would have grown 2 percent.

Net sales declined 3 percent to MXN 18’331 million in connection with the aforementioned effect of the additional week in Q4/2016 at Gruma USA, and the Peso appreciation on Gruma USA figures when measured in Peso terms. Higher sales at Gimsa and Gruma Europe were offset by the aforementioned effect of the additional week in Q4/2016 and the Peso appreciation during the quarter.

Cost of sales as a percentage of net sales improved to 61.9 percent from 62.5 percent driven by Gruma USA, Gimsa and Gruma Europe. In absolute terms, cost of sales declined 4 percent to MXN 11’344 million in connection with the extra week of operations in Q4/2016 at Gruma USA and the Peso appreciation on Gruma USA figures when measured in Peso terms.

Selling, general and administrative expenses (SG+A) as a percentage of net sales rose to 25.6 percent from 24.3 percent primarily driven by Gruma USA resulting mainly from less fixed expense absorption due to the one week less of operations, and Gimsa. In absolute terms, SG+A increased 3 percent to MXN 4’690 million.

Other income, net, was MXN 187 million compared to an expense of MXN 6 million. The improvement resulted primarily from MXN 171 million financial income related to recovered tax on assets, which had been recorded in Q3/2016 under net comprehensive financing cost.

Operating income was flat at MXN 2’484 million. Operating margin improved to 13.5 percent from 13.2 percent.

Ebitda declined 1 percent to MXN 3’010 million, including the effect of one week less of operations in the U.S. Ebitda margin improved to 16.4 percent from 16.2 percent.

Net comprehensive financing cost was MXN 410 million, MXN 188 million more primarily in connection with (1) the reclassification in Q4/2017 to the other income line of MXN 171 million financial income related to recovered tax on assets; and (2) higher financial expenses due to higher debt.

Income taxes were MXN 234 million, 49 percent less than in Q4/2016 due mainly to a cancellation of deferred taxes at Gruma USA in connection with the corporate tax rate reduction from 35 percent to 21 percent in the United States. The effective tax rate was 11.3 percent.

Majority net income was MXN 1’845 million, 8 percent more due mainly to lower taxes, and the ownership increase of Gimsa from 85 percent to 100 percent in connection with the purchase of Gimsa’s public stake and the minority interest at Gimsa’s plants.

Financial position

Balance Sheet Highlights

Total assets were MXN 60’850 million, an increase of 5 percent primarily reflecting increases in (1) property, plant and equipment, related to the company’s capital expenditures program and the Peso depreciation; and, to a lesser extent, (2) trade accounts receivable at Gimsa and Gruma Centroamérica in connection with sales volume growth; and (3) inventories at Gruma USA and Gruma Europe due to corn procurement.

Total liabilities remained flat at MXN 34’872 million. The increase in trade accounts payable arising from Gimsa’s corn procurement was offset by reductions at other accounts payable related to lower deferred taxes in connection with the reduction in U.S. corporate taxes.

Shareholders’ equity was MXN 25’978 million, 13 percent more than at September 2017 in connection with the company’s results and the effect of the Peso depreciation.

Debt Profile

Gruma’s debt was USD 1 billion, USD 88 million less than at September 2017. Approximately 86 percent of Gruma’s debt was dollar-denominated.

Capital expenditure program

Gruma’s capital expenditures totaled USD 275 million for 2017, and USD 61 million for Q4/2017. During the quarter, capital expenditures were allocated mostly to (1) the United States, in connection with the new tortilla plant in Dallas, and the expansion of the tortilla plant in Florida; (2) Europe, in connection with the tortilla plant in Russia, the expansion of the tortilla plant in the Netherlands, and packaging automation at the flatbread plant in England; and (3) Mexico, mostly related to the tortilla plant in Puebla, and technology upgrades at Gimsa.

Subsidiary results of operations

Q3/2017 versus Q3/2016

Gruma USA

Sales volume declined 6 percent to 346 thousand metric tons due to an extraordinary effect of one more week of operations during Q4/2016, which occurs every five to six years based on fiscal year-end accounting closings. Excluding the additional week during Q4/2016, sales volume would have grown 1 percent, driven by the retail tortilla business.

The tortilla business fell 6 percent due to the additional week. Excluding that week, tortilla sales volume would have increased 1 percent, driven by the retail channel, where volume benefited primarily from growth at (1) core products such as Super Soft flour tortillas; (2) specialty products such as Street Taco tortilla (a small tortilla especially used for tacos); and (3) healthier alternatives (i.e. organic, gluten free, carb balance). This growth was also supported by increased distribution at club stores and improved formulation of existing products, making them clean label (including a relaunch of the wraps line). Conversely, the food service channel was impacted by the company’s decision to reduce supply of some SKU’s based on profitability.

Corn flour sales volume decreased 7 percent due to the additional week. Excluding that week, corn flour sales volume would have been flat.

Net sales decreased 3 percent to MXN 10’160 million reflecting the additional week of operations during Q4/2016. Excluding the additional week, net sales would have been 4 percent higher in connection with sales volume growth, and a change in the sales mix within the tortilla business favoring higher-priced SKUs, such as the aforementioned Super Soft flour tortillas, the Street Taco tortilla and, in general, healthier alternatives. Also, better management of promotions contributed to the increase.

Cost of sales as a percentage of net sales improved to 55.5 percent from 58.1 percent driven largely by (1) a change in the sales mix toward higher margin SKUs at the retail tortilla business; (2) lower depreciation as accelerated depreciation was concluded during Q3/2017 for assets of the current Dallas plant that will not be used at the new plant; and (3) cancellation of liability insurance provisions to reflect our actual expenses. In absolute terms, cost of sales decreased 7 percent to MXN 5’638 million.

SG+A as a percentage of net sales increased to 30.1 percent from 28.6 percent due mainly to (1) less fixed expense absorption due to the one week less of operations; (2) information technology projects; and (3) settlement with a retail customer related to inventory losses at some of its stores. In absolute terms, SG+A rose 2 percent to MXN 3’061 million driven by the aforementioned factors and also by increased use of cold storage services in connection with the supply of preservative-free products to food service customers.

Other expenses, net, were MXN 21 million as opposed to other income, net, of MXN 30 million in Q4/2016. The MXN 51 million difference mostly relates to corn and natural gas hedging losses during Q4/2017, as well as some asset disposals, while in Q4/2016 the company reported gains for both corn and natural gas hedging.

Operating income rose 1 percent to MXN 1’439 million. Operating margin improved to 14.2 percent from 13.6 percent.

Ebitda was fairly flat at MXN 1’767 million. Ebitda margin improved to 17.4 percent from 16.8 percent.

Gimsa

Sales volume rose 4 percent to 540 thousand metric tons driven mainly by (1) wholesalers expanding their distribution; (2) higher demand from large snack producers in Mexico; and (3) transfer to Gimsa of a snack customer that used to be supplied by Gruma USA.

Net sales grew 5 percent to MXN 5’117 million primarily in connection with (1) the aforementioned sales volume growth; and (2) the net effect of price changes throughout the year related to currency fluctuations.

Cost of sales as a percentage of net sales improved to 71.8 percent from 73.9 percent reflecting lower cost of corn and corn procurement costs. In absolute terms, cost of sales rose 2 percent to MXN 3’673 million due to the aforementioned sales volume growth.

SG+A as a percentage of net sales increased to 17 percent from 15.2 percent due mostly to (1) higher freight expense, resulting from higher sales volume to customers where the company absorbs this expense, higher tariffs, and higher intercompany shipments in order to enhance customer service; (2) higher marketing and information technology expenses. In absolute terms, SG+A rose 17 percent to MXN 867 million.

Other expenses, net, of MXN 41 million, represented a MXN 45 million change, mostly resulting from losses in natural gas hedging versus gains in Q4/2016.

Operating income increased 1 percent to MXN 536 million and operating margin declined to 10.5 percent from 10.9 percent.

Ebitda increased 1 percent to MXN 742 million. Ebitda margin declined to 14.5 percent from 15.1 percent.

Gruma Europe

Sales volume decreased 3 percent to 85 thousand metric tons, driven by the corn flour business, mostly related to (1) the company’s decision to reduce supply to some clients in Ukraine and Türkiye in order to avoid collecting risks, and (2) to lower demand arising from a difficult economic environment in the Middle East. The tortilla business rose 8 percent resulting primarily from (1) increased distribution at retail and food service channels in Russia due, in part, to the company’s expanded production capacity in this country; (2) increased coverage at large supermarket chains in Spain; (3) expanded customer base in France in connection with Gruma’s entry into the retail channel in this country in mid-2017; and (4) increased consumption of kebabs, particularly in Germany.

Net sales rose 7 percent to MXN 1’310 million despite the aforementioned decline in sales volume, due mainly to (1) the change in the sales mix toward the tortilla business; (2) better sales mix within the tortilla business toward the retail channel, particularly with company’s own brands; and (3) the appreciation of the euro and the British pound against the dollar.

Cost of sales as a percentage of net sales improved to 73.9 percent from 76.4 percent reflecting primarily (1) production efficiencies at the tortilla business, which resulted in lower costs for raw materials and packaging; and (2) lower amortization of intangible assets as some of these have been fully amortized. In absolute terms, cost of sales increased 4 percent to MXN 969 million in connection with the sales volume growth at the tortilla business, whose products are more value-added that at the corn milling business.

SG+A as a percentage of net sales rose to 22.9 percent from 21.3 percent, and in absolute terms, SG+A increased 15 percent to MXN 299 million mainly driven by the tortilla business in connection with selling expenses related to increased presence at the retail channel in several countries.

Other income, net, was MXN 3 million versus other expenses, net, of MXN 20 million in Q4/2016. The MXN 23 million variation relates mostly to asset disposals in Q4/2016.

Operating income was MXN 45 million, compared to MXN 9 million, and operating margin rose to 3.4 percent from 0.7 percent.

Ebitda increased 71 percent to MXN 107 million, and Ebitda margin improved to 8.1 percent from 5.1 percent.

Gruma Centroamérica

Sales volume increased 6 percent to 55 thousand metric tons due mainly to (1) extraordinary corn flour sales to government channels in Guatemala; and (2) extraordinary corn flour sales in Honduras related to built-up of inventories amid political uncertainty.

Net sales were flat at MXN 1’282 million; the aforementioned increase in sales volume was fully offset by the Peso appreciation.

Cost of sales as a percentage of net sales increased to 62.5 percent from 60.3 percent mostly driven by higher raw material costs, especially corn, and rice; and higher energy costs. In absolute terms, cost of sales increased 4 percent to MXN 801 million in connection with the aforementioned increases in sales volume, raw materials, and energy costs. The increase in cost of sales was partially offset by the Peso appreciation.

SG+A as a percentage of net sales improved to 29.6 percent from 30.6 percent due mainly to lower marketing expenses. In absolute terms, SG+A declined 3 percent to MXN 380 million principally resulting from the aforementioned lower marketing expenses and the Peso appreciation.

Operating income as a percentage of net sales declined to 7.8 percent from 9.3 percent due mainly to the aforementioned increase in costs. In absolute terms, operating income decreased 17 percent to MXN 100 million.

Ebitda declined 11 percent to MXN 134 million. Ebitda margin decreased to 10.4 percent from 11.6 percent.

Other Subsidiaries and Eliminations

Operating income declined 8 percent to MXN 364 million. This resulted mainly from the Peso appreciation effect largely related to Gruma USA.

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