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Good morning. My name is Keith, and I'll be your conference operator today. At this time, I would like to welcome everyone to Kuo's Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Alejandro de la Barreda to begin his presentation. Sir, please go ahead.
Thank you, Keith, and thank you, everyone for joining us today to go through Kuo's first quarter 2018 results. Together with me is our CFO Jorge Padilla and Antonia Gutierrez, our Investor Relations Officer. We will be following a webcast and we'll hold a Q&A session at the end of the presentation.
I would like to start with a general overview of the quarter with more details on the dynamics of each business segment. Later, Jorge will explain Kuo's financial position to finalize the call with an outlook for the remainder of the year.
Starting in Slide #3. We show financial highlights for the first 3 months of the year. Our revenues accounted MXN 9.9 billion, 4% lower than first quarter 2017. During the quarter, we continue to notice strong performance from the consumer sector, mainly in the Pork Meat business. In addition to higher demand on Megamex, our U.S. branded Pork Meat.
This was partially offset by lower raw material prices in the petrochemical business and its lower demand in the automotive sector.
On consolidated basis, exports accounted for 53% of total revenues, a balance that bring us flexibility and growth opportunities in U.S. and Europe.
EBITDA during the quarter increased 8%, year-over-year, totaling MXN 1.4 billion with 150 basis points margin expansion to reach 13.7% EBITDA margin and 10.9% operating margin with all sector recording double-digit margins. Due to result of the solid performance of consumer and chemical sectors, which benefited from improved sales mix and operating efficiencies.
It is worth highlighting Pork Meat operating results that were favored from higher sales price showing strong result through different channels. Underscoring Maxicarne network as well as the export channel.
Polystyrene business also performed strong with its focus on differentiated products in addition to a strict control over expenses in all business units.
Automotive sector showed decrease in both, in revenue and EBITDA, mainly explained by lower demand on engine parts in the aftermarket business as well as lower manual transmission sales.
Moving to next slide. On the consumer sector, we record a flat figure in revenues with a 9% EBITDA increase. We noticed a strong domestic demand in the Pork Meat business, Distribution channel kept growing at a steady pace. Maxicarne network finished the quarter with 450 stores in operation with higher traffic and ticket average. Similarly, we increased our exports to Japan and South Korea, underscoring the entrance in the Chilean market.
Herdez Del Fuerte showed solid dynamics in Megamex with increasing demand in guacamole, salsas and dips under our flagship brands Wholly Guacamole and Herdez.
Operating income and EBITDA grew 8% and 9%, respectively, due to their price mix and operating efficiencies.
Corn and soy paste prices show a downward trend, while avocado prices remain stable.
EBITDA margin expanded 105 basis points to reach 13.7%. During the quarter, we continue investing in the Pork Meat business to complete the growing plan on time.
Consumer sector accounted for 45% of consolidated revenues and 44% EBITDA.
Moving to Slide #5 in the chemical sector. We record at 7% revenue decrease, which is mainly explained by lower raw material prices, specifically butadiene & styrene. That effected the results of the synthetic rubber business. However, demand on leading applications for asphalt and adhesives remained stable during the quarter.
Polystyrene experienced strong dynamic, particularly on value-added products. We continue focusing on R&D to capture a broader base of clients.
Operating income and EBITDA record 12% and 10% increase, respectively. This was a result of better product mix and cost efficiencies in both business.
EBITDA margin had an expansion of 230 basis points, reaching a 14.6% margin. This sector accounted for 37% of solid consolidated revenues and 39% of consolidated EBITDA.
Moving to the automotive sector. We noticed lower dynamics in both business units. In the Transmission business, we experienced lower demand on manual transmissions with higher-components' demand, particularly in Volvo and Daimler.
Aftermarket business experienced lower demand on engine parts. Operating income and EBITDA decreased due to the declining revenues in addition to higher cost related to new projects.
In addition to a lower peso dollar exchange rate. During the quarter, we continue with the investment for the development of a new generation of high-technology transmission.
This sector accounted for 18% of Kuo's consolidated revenues and 17% EBITDA.
In the Slide #7, I will sort of explain CapEx distribution during the quarter. More than 60% was allocated in the Pork Meat business.
We continue with investment to complete the construction of the food and processing plants. I'm glad to share with you that both plants are in a very advanced stage and will be opening, I feel it is next May.
We'll keep executing the required CapEx to grow our farms and distribution channels to double the capacity of the entire business according to plan.
On the Transmission business, we allocated 18% of total Capex. We continue building the necessary infrastructure for the development of the [ DCPs ].
During the rest of the year, we will actively exercise the CapEx required in both projects to finalize investment in time with -- that we -- with the announcement that we made in -- by May 2016.
The remaining CapEx was allocated between the Synthetic Rubber Polystyrene, followed by Herdez Del Fuerte and Aftermarket business.
Therefore, 86% of CapEx was allocated in growth projects and 14% was maintenance.
During the quarter, we executed MXN 885 million in CapEx.
At this time I would like to turn the call to Jorge, who will further discuss our financials. Please, Jorge.
Thanks, Alejandro. And again, thank you, everyone, for joining us to talk about the most recent results.
So I will continue on Slide #8, to further explain the debt structure in nonoperating financial items. In this slide, we have snapshot of our capital structure.
On the upper left side chart, you can see the net debt to EBITDA ratio at 1.8x at the end of the quarter, which is still on the lower range of our internal target.
This is very relevant. Since we achieved a healthy ratio, despite the large investments carried out during the past 12 months.
As Alejandro mentioned, we had a good EBITDA generation during the quarter, which contributed to this ratio as well.
We expect this ratio to increase mainly in the next 2 quarters always within our internal target of 2.5x, as we have said several times in the last quarters.
Meaning, by the end of the year we're expecting to be on the higher part of our internal target.
At the end of the quarter, net debt amounted MXN 9.8 billion. A higher figure than the previous quarter, which is mainly explained by CapEx investments and higher working capital requirements.
Also, interest coverage ratio, was at a healthy 7.8x and the weighted average cost of our total debt was 5.7%. On the lower part of the slide, we showed several types with a debt breakdown, which is 91% denominated in foreign currency, 68% in fixed rate and 92% in long term.
During the first quarter of 2018, we recorded net financial expenses of MXN 518 million, explained mainly by a foreign exchange gain of MXN 831 million, derived from the appreciation of the Mexican Peso against the U.S. dollar during the quarter and the interest paid in the amount of MXN 170 million.
We also recorded income tax of MXN 278 million and a net majority income of almost MXN 1.3 billion.
Now I would like to turn the call back to Alejandro for his closing remarks.
Thank you, Jorge. And before I finish the presentation, I would like to share with you what we foresee at headwinds and tailwinds for our business in the coming months.
As tailwinds, we experienced a strong dynamic [indiscernible] to exports mainly to the U.S. and Europe, we will take advantage of this context to increase our coverage overseas and continue to diversify our operations.
Also CapEx investment was executed according to established plans in a timely basis. The completion of this program will be key to ensure scalable growth in future years. These should let us take a better position in the global market.
Lastly, our financial strengths reflected on healthy leverage ratios should bring us the flexibility to complete our growth projects in time and due form, while operating at maximum capacity.
As headwinds, we believe market volatility will be a given during the rest of the year. Locally, we expect on ease in financial markets and FX movement coming months.
Also NAFTA negotiation will continue to bring uncertainties to financial markets on [ tail ] and [indiscernible]. With all the information we have in hand, we will continue to focus on our core businesses, while [ taking ] this special curve of our financial structure.
At this moment, I will ask the operator to open the lines for the Q&A session. Operator, please.
[Operator Instructions] We'll take our first question from Filipe Botelho with PineBridge Investments.
I would like to understand what are the sources for financing CapEx this year? It will be in local currency, hard currency, redemption of the bond, is there a possibility? I think, that's my question.
Filipe, so the answer to that is we are financing ourselves from 2 sources. The first is cash flow from operations, and secondly, we secured committed credit lines. We currently have secured credit lines in the vicinity of MXN 250 million, which is well above our needs. So all of that is -- well not all of that, but 80% of that is in dollars. So far we've used dollar financing. And this is mainly because Kuo is a net producer of dollar, that is why we finance ourselves in dollars. So the other answer to the question is we're not expecting to further open our bonds that we issued last year.
[Operator Instructions] We'll go next to Pedro Cardoso with Banco Finantia.
I just have a couple of questions following the tariffs imposed by China on the U.S. meat export -- Pork Meat exports. How do you see it affecting your exports to the U.S.? And second one if you could provide accrual regarding your expected net leverage for 2018?
Thank you, Pedro. Considering the potential tariff from imports of U.S. Pork Meat to China. Well, China represents a very important market as you know for the U.S. pork producers is almost 1/3 of the total exports reaching USD 1 billion. If you can take in consideration, 100% of our exports, above 85% our exports are focused in Japan and South Korea. U.S. represents for us less than 5%, so we don't proceed. We don't expect a material impact on our exports to the U.S.
We're opening other markets. As I mentioned during my speech, Chile is a new market for us. Chile now is almost the same size in terms of volume in Canada. So our presence -- we're increasing our presence beyond Japan and South Korea to other countries.
China represents less than 1% of this and is an opportunity. And the products consumed in the U.S. are different than the [indiscernible] exports to Mexico. U.S. have a deficit on bacon and wheat. That's basically [indiscernible] to close -- that market. Then in your second question.
Yes, on the second question -- So the net leverage that we're expecting probably by year-end should be under vicinity of $630 million, which translates into a net leverage ratio of around 2.4. Again, I want to reemphasize that the way Kuo is kind of rushing the latest leverage it's in a net debt to EBITDA ratio, and we have an internal target to maintain ourselves between 1.5 up to 2.5x. So we will be below the higher end of that range.
And it's important to mention that this is an internal target, it's not a covenant from the bank. We expect 2018 will be the peak in terms of the CapEx investment next year with that lower number. And by the beginning of 2019, we expect to have the results and profitability coming in the Pork Meat business of the core [indiscernible] business. We're in process.
[Operator Instructions] And we can take a question from Liliana Juarez with GBM.
My question is regarding also the import tariff from China to the U.S. Do you see any implications in the Pork business? I mean, can you share with us? What are your biggest concerns related to this? And do you see any material impacts, I mean, in price or in production? Also do you think there's a risk that the U.S. could potentially look for other Asian markets to address the situation going in China? Do you see a risk that the U.S. could try to steal markets in, I don't know, Japan or Korea, but could affect you in some way?
Thank you, Liliana. Regarding potential changes in global trading conditions that could bring the important changes in Mexican, not only Kuo Mexican balance trade. We foresee risk, but also opportunity.
Risk in terms of what is going to happen on the prices -- the final prices of the Pork Meat. U.S. export, not only to Mexico, they also export to Japan and South Korea, China. So at the end, it will be a reconfiguration of the market, but on the other hand what's going to happen on -- with the raw material prices. U.S. exports corn and soybean -- soy paste to China to Mexico.
So at the end of this moment, to -- we don't have a clear picture of what's going to happen. We foresee both opportunities and risks. For that reason, I was mentioning to Pedro that we constantly are -- we're opening the segments, if you take into consideration, our business model, we do not sell live hogs, that the live hogs represent less than 20% of our internal pork sale. We have different segments and very profitable segments.
If you compare our business with some of our peers, we have sustainable double-digit margins. Our Mexican stores reached 35% of the porks' revenues at the end of March. We expect to complete the year with 400, 500 Mexican stores.
Export Market is a very important segment. We visited Japan 3 weeks ago. They are opened to not just import our chilled pork, they are also interested in different costs, special products. We're producing in the new facility that we're investing in technology. So opportunities are really very high in Japan, Chile, and well they -- we're also increasing our presence in the Mexico area with value-added products.
So at the end, we feel our business model is, let's say, more defensive against these potential changes.
Okay. And regarding the possibility of the U.S. gaining market in other Asian countries, did you see this as a possibility? Or I don't know. Mainly in Korea and Japan, what could potentially affect you? I mean, do you see the U.S. looking for this market in order to compensate their China exports?
At the end, if they have a 25% tariff they need to find and increase their presence in other countries. Of course, it's a possibility, but again, we are increasing our portfolio to value-added products. We are very competitive in terms of cost, we increase, we're ready-to-eat and ready-to-cook products. So at the end of this, we are competing on a global market and the -- our business model, I personally feel is very, very strong in order to accomplish this dynamic that would be changing in the coming future.
[Operator Instructions] And we do have no -- we have further -- no further questions at this time. I'll return the floor to Ms. Gutierrez for any web questions.
We have one question from [ Luis Vega, GBS ]. And could you give us an estimate for the effective interest rate for this year and going forward?
Yes. So the effective interest rate for the group should be in the vicinity of 6%. But I used the vicinity term because, obviously, part of our debt is floating rate, so it moves up and down and also there's an exchange effect in the way we report figures. We currently recorded a 5.7%, so I think for a medal -- modeling purposes, it's fair to say the 6%, it's fair enough. I would also like to stand that over 2/3 to little over 2/3 of our debt is fixed at 5.75% coupon, so that's sort of the way I would model the effective interest rate going forward.
We don't have any further questions, Keith.
And we have no other phone questions at this time. I will turn the floor back to you, Mr. de la Barreda, for any closing remarks.
Thank you, Keith. And thank you all of you for your time and valuable questions. We hope to hear you from here on our second quarter results next July. In the meantime, please feel free to contact us with any questions you may have. Have a nice day.
And this will conclude today's program. Thank you for your participation. You may now disconnect. Have a great day.