Gruma, S.A.B. de C.V. (GRUMAB) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Gruma's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Adolfo Fritz, Gruma's Investor Relations Officer, who will present earnings results, and then we will open the call for the question-and-answer session, where Mr. Raul Cavazos, Gruma's Chief Financial Officer and team will be available to answer any additional questions. I would now like to turn the conference over to Mr. Fritz, IRO. Please go ahead, sir.

Thank you. Good morning, and welcome to our second quarter 2026 conference call. We're pleased to be here and thankful for the opportunity to share our results with you. With me today, as always, are Mr. Raul Cavazos Morales, Gruma's CFO; and Rogelio Sanchez Martinez, Gruma's Corporate Finance VP. To start, we'll take a few minutes to share the fundamentals and results for the quarter, and then we'll open it up to any questions you may have. During the second quarter, performance was very solid and promising in our tortilla business and subsidiaries outside of the U.S. In Asia and Oceania, we significantly benefited from the revamped activity in Malaysia, a stellar performance in China with an improving operating leverage, combined with greater retail concentration in Australia. In Europe, our operations exceeded our initial expectations with a wide acceptance of value-added products as we continue to grow our retail distribution footprint throughout the continent. However, in the U.S., our main subsidiary, the overall trend we've been seeing in the tortilla category continued, primarily spurred by price sensitivity and weak consumer sentiment. It was mainly felt in the food service channel, which was the main driver of volume contractions during past quarters. We are estimating, however, that the volume runoff rate in this channel will stabilize by the third quarter so that we may see results on a more even comparative basis once this happens. Additionally, it will allow the market to see with more clarity the evolution in the retail market, which has remained considerably more resilient after the strategy we're implementing. In the corn flour market in Mexico, the core operation remains as stable as always, although experiencing mild volatility from sales to the government during the period, while the solid footing and innovation has positioned Central America as our second most profitable subsidiary. With these fundamentals in place, volumes contracted by 1% due to factors in the food service channel in the U.S. we just mentioned. However, sales increased by 3%, supported by net sales growth in Europe, Asia and Oceania and Central America in addition to the relative strengthening of the Mexican peso against the U.S. dollar. As a result, EBITDA contracted 5%, also reflecting the effects of these dynamics. In our balance sheet, we increased our indebtedness levels up to 1.5x in terms of net debt to EBITDA due to the seasonality of the summer harvest in Mexico. Therefore, most of the additional debt incurred was in short-term debt, some of which will be paid off in the future with the cash we have available. Continuing with our debt profile. During the quarter, we refinanced the peso-denominated note in the amount of $250 million by extending and increasing the amount of existing revolver facilities. The total of these 2 revolver facilities is $425 million and will be maturing in 2031. In the U.S., we continue to navigate a challenging operating environment shaped by weak consumer sentiment and uncertainty in the broader economic outlook. These conditions have affected our commercial channels in different ways and to varying degrees. In the food service channel, customers have returned, which is encouraging. We renewed contracts at lower volumes due to ongoing market uncertainty, which is closely linked to both consumer sentiment and current expected inflation levels, which is impacting household purchasing behavior. As we communicated before, and as I mentioned earlier, we expect this runoff rate to stabilize as we complete the cycle of anticipated client adjustments. Once this progress is behind us, we believe year-over-year comparisons should become more balanced and easier to evaluate. At the same time, the same price sensitivity and consumer behavior has driven stronger demand for private label production, which has reshaped the competitive landscape since 2025 in the first half of this year. In response, we've been executing the strategy we outlined at the beginning of the year, designed specifically to address this more value-oriented market environment. But we had a strong month during the quarter, volatility reemerged in June, underscoring that the market has not yet fully normalized. That said, our strategy remains on track. And as we continue to execute, our objective is to build greater stability over the coming months. As a matter of fact, we can already see this happening. On a sequential basis, net sales were flat, while volumes grew by 1.3%. So it's just a matter of keeping ourselves disciplined and on track with our current strategy. Importantly, because most of the recent volume pressure has been concentrated in food service channel, we believe the third quarter will be a key transition period. As execution of our strategy overlaps with the end of the expected runoff, we should begin to see the foundation for more positive results going forward. The U.S. operation closed the quarter with volumes contracting 3% and sales also contracted by a similar amount in line with volumes. EBITDA contracted by 15% in the second quarter, although higher freight and overall distribution costs had an impact in the quarter. The main driver for this change was the volume performance stemming from the food service channel. In Mexico, that has historically been the case, the core operation remained stable with demand from both retail and industrial clients. We did experience some temporary volatility on the back of slower activity in the government programs in addition to a change in mix relative to a year ago, which is gradually improving from what we saw in the first quarter of 2026. As such, volumes remained flat in 2Q '26, while sales contracted marginally. EBITDA and EBIT saw an improvement of 1% and EBITDA margin rose to 10.9%, up 20 basis points from last year. In Europe, we continue to expand distribution with retailers across the continent and with the sale of value-add products where we're seeing growing demand. As you already know, the corn milling business in this subsidiary is highly volatile given fluctuating demand and dynamics in this market that change quarter-over-quarter. During the second quarter of the year, this business experienced lower volume than a year ago and thus hindered the solid performance of the tortilla business in the subsidiary. Therefore, volumes were flat during the quarter despite mid-single-digit growth for the tortilla business on the back of the dynamics I mentioned. Sales grew by 5%, which speaks to the rich mix that is being sold today and the efforts being carried out in the retail channel in the subsidiary. Moreover, the same mix for EBITDA growth of 17% year-over-year, reaching an EBITDA margin of 14.8%. Central America also continues with excellent news with the only constraint being capacity as we've communicated previously. Currently, we're increasing utilization rates and are addressing this challenge with the construction of our new mill in Guatemala, which will help us with the increasing demand we're seeing for Gruma's innovative and high-quality products. We're also contemplating building a new mill for next year, assuming demand remains at its current high level. It is because of these products and our team's excellent commercial efforts that we've been able to expand efficiently across the entire region that this subsidiary serves with volumes and sales rising 3% and 7%, respectively. In turn, this yielded EBITDA growth of 12% and an EBITDA margin of 19%, positioning the subsidiary a strong profitability center for Gruma going forward. In Asia and Oceania, the operation also yielded great results, while Asia recovered from a year ago and both Australia and China are operating at optimal levels. More specifically, Australia has successfully carried out more aggressive commercial efforts in retail space, while China is now benefiting from a new facility in Foshan, which has improved our operational leverage there. Volumes grew by 4%, while sales expanded by 15%. The growth in sales, coupled with our disciplined approach on costs allowed for a significant 47% rise in EBITDA with the region delivering an EBITDA margin of 16.2%. In light of these results and the current market environment, we believe it is appropriate to revisit the guidance we provided at the beginning of the year and adjusted accordingly. We now see a low single-digit volume and revenue decline in the U.S. subsidiary. Given the strategic actions we're taking to accelerate growth in standard and private label products in the United States, particularly in response to current economic conditions, we're also revising our EBITDA margin guidance downward by approximately 200 basis points. Therefore, our guidance for our consolidated results will also be adjusted proportionately to a fractional decline in revenue and volume, and an EBITDA margin contraction of approximately 160 basis points. Given that our principal subsidiary continues to operate in an uncertain and rapidly evolving economic environment, we remain focused on adapting our commercial strategy in the U.S. while executing it with discipline. Our priority is to support sustainable volume growth and further strengthen our competitive position. We believe the actions we're taking today will make the business structurally stronger once the current economic cycle normalizes. Supported by the continued strong performance of our smaller subsidiaries, we're confident the company will be well positioned to achieve new levels of financial performance over the long term. With that, I'd like to open up the call for questions, please. Operator, can you help with that, please. Thank you.

[Operator Instructions] Our first question is from Henrique Morello with Morgan Stanley.

Adolfo, maybe a follow-up and diving deeper on the U.S. trends that you mentioned regarding the channels. So breaking down by channels, if you could provide just a bit more color on what you're seeing in terms of food service and retail and perhaps if you're seeing any encouraging signs in food service already in June or in early July that make you think that things are stabilizing or if it's more a matter of comps in the food service side? And how are you seeing retail competition and retail performance as well? And talking about -- more specifically about retail, if you could break down as well, how is your private label portfolio performing versus your branded part of the portfolio? And how is your head or the company's head around the mix between the 2 in the retail segment, that would be very helpful as well.

1 Sure. Thank you for your question, Henrique. Well, the first part, in terms of the food service channel overall, the stabilization we're talking about is more an end of a cycle. In other words, the comparative basis will be similar year-over-year. As I mentioned just a minute ago, it is everyone that we expected to come back after the adjustments we did has come back, but they've come back wanting contract for lower volume amount. So that has been the case every quarter since this started happening. Now if you remember, it all started with an inflation situation taking place almost 1.5 years ago or almost 2 years ago. And that's spiraled into what's happening today with everything that's going on in the world, where the consumer is just extremely anxious. So that's led them to ask for lower volumes, and that's where we're at. And that's where -- that's why we feel that during the third Q, we'll be able to have a more stable base. That doesn't mean that it will be an inflection point of growth, specifically for the food service channel in specific. In terms of retail, competitive landscape has slowed down. We haven't seen competitors in the landscape as aggressive as they were before. Right now, it's just a matter of being subject to all these outside forces that are not in our control, which is just how the consumer is feeling relative to everything else that's happening around. We believe that the actions we're taking are -- as a response to this effect, and it is something that we're monitoring very closely. As I mentioned a minute ago also, we're pleased to see that on a sequential basis, that inflection point happened during the quarter. We need to see if this is, in fact, a trend going forward and that will evolve into further improvement. But so far, the strategy worked. We know that on a year-to-year comparison basis, it is -- we still have work to do. But the overall trend seems evolving positively. So we're very pleased with that given the context that we're operating under. In terms of private label portfolio, I mean, right now, it's growing probably at around 7%. It is something that we've seen before. I mean we've been accelerating growth in that as you know. We've been seeing also a lot more restraint from the Hispanic community, as we've talked about also in buying or being as proactive buying at retail spaces. So that's also been a challenge for us. I would say that, that which encompasses standard tortilla overall has been the primarily factor behind what we're seeing in retail. Retail right now, probably -- we were accustomed to grow at around mid-single digits, even high single digits. Right now, we're probably growing or flattish even in retail, while in food service, that's where all the contractions are taking place. And in food service, the contractions are in double digits. So that is what is overshadowing what's happening in retail. But in retail specific, that flat behavior that I was talking about earlier is more of a result of the standard tortilla, a.k.a. Hispanic products not being sold as sufficiently as they were before. That's the picture I can give you. Again, in spite of everything that we're seeing in the economy in the U.S., I think the inflection point on a sequential basis is good news.

Our next question is from Ben Theurer with Barclays.

Just staying on the topic a little bit. I would also like to understand to a degree, obviously, with that and the margin guidance being a little bit more softer in the U.S. business. Can we talk about the cost side of the equation? So one, obviously, there was raw material costs, but then there's a second piece around just energy, transportation, et cetera. You've flagged these higher marketing and higher distribution expenses already in the second quarter. So as we look into the second half, first of all, how should we think about the raw material input cost outlook? And then second, beyond that, what are your expectations right now as it relates to these distribution costs that have gone up, but also the marketing costs? How much mix in spending versus not spending? So what's the balance here? And how should we think about the go-forward trajectory on those 3 items?

Ben, I would say that overall, the one challenge that every company, every sector will have is the inflation specifically related to oil derivatives overall. Going forward, it is something that we have accounted for in the guidance, fortunately. Obviously, to a certain degree, if oil shoots up to $150 per barrel, obviously, that's just not being contemplated at this point. But certainly, margin is being contemplated with high fuel prices. These prices are just -- our surcharges over the freight rates that we normally pay. So the variability that you will see during the second half and maybe going forward, depending on how long this lasts will be on the SG&A front. We'll have to see how much inflation that creates, and that would be there and also probably on the packaging front as well in terms of -- within COGS -- so far, at least for the second half of the year, we'll have to see how the year ends with everything that's happened geopolitically and how inflation behaves in light of everything that's also taking place in terms of monetary policy in the U.S. But I would say that for the second half, those 2 items are the ones that we're taking care of.

Our next question is from Renata Cabral with Citibank.

My question is related to the Mexican operation. So the organic growth remained below your long-term algorithm despite the stable pricing. So I would like to ask if you could elaborate on whether demand weakened sequentially through the quarter or if trends were more to stabilize in the end of the quarter and the performances in different channels across Mexico as you gave some color related to the U.S.? And just adding to that related to Mexico is about pricing and pricing has remained disciplined despite soft consumption. Do you still see room for pricing realization going forward or we should expect the revenue mix to become volume driven?

Sure, Renata. Thank you so much for your question. In general terms, Mexico is stable. We -- as you know, we're trying to be in line with the traditional method. So there are no arbitrages in place. However, we've been protecting the prices that we give our products on over a substantial period of time, if I'm not mistaken, over the last 36 months or so. So with everything that's taking place, we have adjusted prices slightly. However, those -- the effect of that price increase, you won't see that until the next quarter and going forward. You didn't see that this quarter. And it was just in line with the inflation that we're feeling at this point. We don't see maybe what you see in other companies or assets that you look or that you report on and you analyze, we haven't seen a pullback from the consumer. What you're seeing there is just one, the change in mix and lower government programs that are in place each year. So whether it's for humanitarian purposes or others, there are certain government programs in place each year that had a little bit of volatility on the volume side and the mix also affects on this front. We did have, as we announced a quarter ago relative to a year ago, we did have a change in -- a slight change in mix in our industrial portion of the business. That mix has evolved positively. So it's returning back to where it was. But on a comparative basis year-to-year, it still changed. So we are estimating that by the third and fourth quarter, we'll have the mix back in place. And also, we'll have some positive effect coming in from the price adjustments that we carried out.

Our next question is from Diego Serrano with HSBC.

So you gave a pretty good color on the food service business, and you pretty much answered my question. I just wanted to understand a bit more what's driving the weakness. I mean, trying to get a sense if it's mostly weaker consumer sentiment or if you are still seeing any impact from immigration issues affecting the Hispanic consumer.

It's really both. In food service, I mean the Hispanic consumer effect is more in retail rather than food service. It has some effect in food service, obviously, for the same reasons that it's taking place in retail, but it's more weighted on retail. In food service, what we're seeing is just much inflation relative to the purchasing power of the average consumer. The flow in all restaurants or QSRs in the U.S. is not as it used to be. And whoever goes or whoever is part of this flow will tell you that prices in the U.S. are not a little bit are way higher than what they used to be. So the regular people are just taking lunchboxes to work now instead of heading out for a quick lunch outside of the office. For example, they're not dining out at the end of the day. They're heading back home or having something at home with friends and family. So it's the environment has changed the social dynamic from maybe venue-oriented dynamics to at-home dynamics when it comes to socializing with friends or families. And that is something that we've been grappling with, not only us, but everybody else in the industry just because overall flows are down, and that is obviously not good for anybody in the sector overall. So that is -- what is -- what took place or what is taking place in the food service channel.

Our next question is from Froylan Mendez with JPMorgan.

Can you hear me?

Yes, we can hear you.

Can you maybe help us make a simple bridge for the U.S. margin contraction this quarter? I want to understand what were the biggest drivers, if it was mix, pricing or it was more on the gross margin side? Can you help us size the top 2, 3 items in the contraction this quarter?

Sure, no problem. Well, I mean, if you look at the gross margins themselves, they were not -- I mean, there was an effect there, but it wasn't as drastic as an EBITDA margin or EBIT margin. The overall effect of what's happening is you have 2 points of pressure. One is the volumes at the food service channel, which obviously drive down revenues proportionately. And secondly, on the retail channel, you're producing more private label and more standard value-add products to have an answer to the sensitive consumer. And in addition to that, we're also increasing shelf space in value-add and Better For You products. So in retail, you have a dynamic where, yes, you're producing more private label overall, trying to offset that with more Better For You value-add products. But in reality, in the grand scheme of things, you will have more private label production to incentivize volume growth. So that additional increase of private label in addition to the volumes that were lost in food service are the drivers behind both volume decline, obviously, revenue decline, which is in line with volume decline and also margin decline. As you already know, private label has a substantial lower margin than other products in the market. So that is the effect right there of what you're seeing. So everything that you're seeing margin-wise is just a reflection of the strategy that we're carrying out in order for us to cater to the sensitive consumer in the context that we're living under.