Grupo Bimbo, S.A.B. de C.V. (BIMBOA) Earnings Call Transcript

Good afternoon, everyone, and welcome to Grupo Bimbo's Third Quarter 2026 Results Conference Call. [Operator Instructions] If you need a copy of the press release issued earlier today, it is available on the company's website at grupobimbo.com. Before we begin the presentation, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I'll now turn the call over to Mr. Alejandro Rodríguez Bas, Chief Executive Officer of Grupo Bimbo. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us today. With me today are our Chief Financial Officer, Diego Gaxiola; and the President of Bimbo USA, Greg Koehrsen, along with members of our finance team. Before we begin, I want to recognize our more than 152,000 associates around the world. Their commitment to serving our consumers and customers every day is what drives our performance, and I want to thank them for another strong quarter. The third quarter demonstrated the strength and resilience of our business. Excluding foreign exchange, net sales increased 3.6%, supported by price/mix, positive volume and, to a lesser extent, recent acquisitions. Importantly, that growth translated into stronger profitability. Adjusted EBITDA margin reached 15.7%, an expansion of 100 basis points, while net margin increased 80 basis points to 3.9%. We delivered these results despite a consumer environment that remains challenging in several markets. Inflation continues to pressure household budgets, but our performance reinforces what we have long believed. Bakery and snacking are resilient. Everyday categories and our scale brands, geographic diversification and execution capabilities are powerful competitive advantages. Our focus is not simply on growing. It's on growing profitably, consistently and sustainably. Let me turn to our regions. In North America, the recovery continues to gain momentum. Net sales grew in U.S. dollars for a third consecutive quarter, providing further evidence that our transformation is delivering results. Volumes remain soft as consumers continue to manage their spending carefully. At the same time, our sales trajectory is clearly improving, supported by stronger revenue growth management and a better marketplace execution. We're also seeing progress where it matters most. We gained share in 4 of our 6 categories and margins improved for consecutive quarter. Our productivity agenda continues to deliver across the value chain. We're reducing waste, improving recipes and packaging, operating our plants more efficiently optimizing our manufacturing footprint and routes, strengthening, sourcing and simplifying the organization. The important point is that these improvements are structural, not temporary. We're building a more competitive, efficient and agile North America business. We're encouraged by the progress, but we are not declaring victory. The transformation will not be completed until North America returns to sustained profitable volume growth. That remains our objective. Mexico delivered another outstanding quarter. The business continued to grow profitably while strengthening consumer preference with contributions across categories and channels. Adjusted EBITDA margin expanded 200 basis points to 22.4%, driven primarily by a strong top line performance and a lower cost of sales, supported by a stronger exchange rate and lower waste. EAA also delivered an excellent quarter. Almost every business in the region grew in local currency despite a demanding comparison base, while adjusted EBITDA margin expanded 110 basis points to 12.3%. So particularly strong performance across Bimbo QSR, India, the Balkans and the U.K, complemented by a small contribution from our recent acquisition, Bonel in Tunisia. Latin America was more mixed. Most of our markets continue to show healthy sales momentum while profitability was affected primarily by Brazil. Brazil remains our priority. We're taking targeted actions to strengthen commercial execution and advanced integration of Wickbold, and we expect those efforts to increasingly contribute to performance. As a reminder, beginning next quarter, Wickbold will no longer be included in our inorganic growth contribution following its acquisition in October 2025. Let me close with how we see the business going forward. [indiscernible] but we're also clear about what comes next. Our priority is to build volume momentum while continuing to protect and expand profitability. As we move forward 2027, we remain mindful of a more inflationary environment. But we enter it with significant strengths, a diversified geographic and category portfolio, leading brands, a strong innovation agenda, a meaningful productivity pipeline and above all, exceptional people. Those advantages give me the confidence in our ability to navigate what comes next, and continue delivering profitable, sustainable growth over the long term. With that, let me turn the call over to Diego to take you through the financial results in greater detail.

Thank you, Alejandro, and good afternoon to everyone. We appreciate you taking the time to join us today. This quarter represents one of the clearest demonstration of the strength of our business model in recent years. We delivered broad-based growth across geographies, continued margin expansion, strong cash generation and further deleveraging, all while continuing to invest behind our brands, operations and long-term growth agenda. Throughout the year, we have consistently delivered growth through both volume and price/mix, demonstrating not only the resilience of consumer demand for our brands, but also our ability to capture growth while maintaining pricing discipline. We believe this combination is the strongest indicator of the quality and sustainability of our growth profile. We reached a record EBITDA margin at 15.7%, a 100 basis point expansion versus last year, which is the largest third quarter improvement we have seen in more than a decade. This also marks our fifth consecutive quarter with EBITDA margins above 14%, providing further evidence that the improvements we have made across our network, manufacturing footprint, revenue management capabilities and operational execution are becoming embedded in the business. One of the standout highlights of the first 9 months of the year was our free cash flow generation. The strong EBITDA performance together with improvements in working capital, allow us to generate approximately MXN 17 billion of free cash flow, even after investing approximately MXN 12 billion in CapEx. This strong cash generation also allow us to further deleverage the company, bringing net debt to EBITDA down to 2.4x, even after returning MXN 6 billion to our shareholders. Moving on to our guidance. It's worth taking a step back for a moment. We started the year expecting a slight EBITDA margin expansion. And as our results came in consistently ahead of our expectations, we have raised our guidance quarter after quarter throughout the year. Today, we are raising our guidance once again, marking the third upward revision this year and reflecting both the strength of our year-to-date performance and our increasing confidence in the trajectory of our business. So we're raising the lower end of our full year adjusted EBITDA margin guidance from 70 to 85 basis points, resulting in a new range of 85 to 120 basis points of expansion as compared to 2025. On the top line, we continue to expect net sales, excluding FX, to grow at a mid-single-digit rate, which translates into flat to a low single-digit decline in pesos. Looking ahead to 2027, we see a number of encouraging drivers across the portfolio. We expect continued benefits from the transformation initiatives underway in North America, sustained profitable growth in Mexico, improving performance across Latin America and a continued momentum in EAA. At the same time, the investments we have made in capacity, distribution automation and digital capabilities over the last several years position us well to support future growth while enhancing productivity. As every year, we will provide formal guidance on our fourth quarter conference quarter. On CapEX for 2026, our guidance remains in the range of $1 billion to $1.2 billion. As we mentioned on prior calls, we made a decision to push certain projects into 2027. And as a result, we now expect CapEx next year to come in somewhat above the level we will see in 2026. As we look to the future, we remain focused on the same priorities that have served us well, driving profitable growth, expanding margins, generating strong cash flow and creating long-term value for our shareholders. We appreciate your continued interest in Grupo Bimbo and look forward to updating you on our progress in the coming quarters. Thank you for your time. Operator, please open the line for questions.

We have our first raised hand from Fernando Olvera.

Fernando Olvera of Bank of America. My first one is related to North America. As you highlighted in your initial remarks, top line has been positive for the third quarter in just lower terms. So wondering if you can elaborate where is your outlook for consumption now in the next quarter in 2027, considering that U.S. inflation is likely to continue rising amid raw material price volatility? That's the first question.

Thanks for the question, Fernando. I appreciate it. I would say the consumer environment in the United States continues to be mixed. Certainly, we see a consumer that is value conscious, especially in lower and middle income households. But categories remain resilient. Breads are staple. People are still buying brands that deliver clear value. There's a bifurcation of course, between the value-conscious consumer and the premium consumer. Both the value-conscious consumer and the premium consumer are continuing to gain traction within the market. Our portfolio bifurcates into value mainstream and premium. We make sure that we have the right products at the right price points for each of them. So while the total environment may be mixed, we also believe that we're well positioned to activate with the various consumer segments not only for the balance of this year, but going into next year.

Okay. And my second question is related to Mexico. If you can comment how much of the gross margin expansion came from efficiencies versus lower costs? And how should we think about gross margin in 4Q in 2027? Any color would be great.

Yes, Fernando. You know that we do not provide the specifics. What I can tell you is that thanks to the hedges that we have on commodities, we still haven't faced a significant inflation on our cost of sales on the most important raw materials. On the other hand, the exchange rate helped -- you know that we have a big exposure to the U.S. dollar. The peso has been strong. We also have a hedging strategy in place. But even if you see the exchange rate that was, let's say, 6 months ago, which is more or less as a rule of top what you can contemplate in our current P&L for the quarter, we have a positive effect versus the same quarter of last year. So that is healthy. And of course, a lot of efficiencies that have been implemented in the manufacturing process in the different plants that help also to expand together with the increase in volumes that because of the operating leverage also has a positive impact on our gross margins. So all this together gave us the expansion that we reported. Now it's still early to provide a specific guidance for 2027, even more for a segment, either Mexico or any other of the segments. What I can tell you in advance is that 2027, we're going to face headwinds in terms of the cost of sales because of the cost of the raw materials. We have continued with our disciplined hedging strategy, but considering the cost that we have had for 2026, 2027, it's going to be a challenge. Now just to be clear, we're not providing any guidance that we're expecting a decline in margins. I'm just mentioning that it can be a negative effect and particularly for Mexico. My guess is that we will have some pressure from the exchange rate as it was a very strong peso. And as everybody knows, it has started to evaluate a little bit. But again, early to tell and early to give specific guidance.

Our next raised hand is Antonio Hernandez.

This is Antonio Hernandez from Actinver. Congrats on your results. Well, my question is regarding margin performance in the U.S., I mean, it's been quite strong expanding and our estimates. But overall, you also mentioned that the work is not done until volumes improve and get positive, right? So I wanted to add a sense on your expectations. I know you don't provide guidance per se, at least right now for next year, but overall expectations on volumes and maybe how far away are we from seeing North American operations in maybe the optimal target margin that you see?

Yes. Thank you, Antonio. I appreciate the question. First of all, let me thank the team. The progress that we've made over the last number of quarters is largely due to the incredible work that they've done. We've talked about in previous calls all the work that we've done from a cost perspective, along procurement, supply chain, our manufacturing operations to name a few. We've made changes that, as Alejandro mentioned, we believe are structural in nature. And so we feel good about the progress and the sustainability going forward. We will continue to push all productivity levers to make sure that we're turning over every rock to ensure that we're delivering product at the most efficient way that we can for consumers. And as it relates to growth going forward, we have many opportunities that we're working on with customers. And as Alejandro said, we're not going to be satisfied until we create consistent volume growth within the U.S. And so that's what we continue to strive for with all of our customers.

Our next raised hand is from Felipe Ucros Nunez.

This is Felipe Ucros from Scotia. Quick question on U.S. margins. You're almost back to 2019 levels. But it seems to me that after the volume contractions that we have over the last 2 to 3 years, you probably have some spare capacity in there, so there is some operating leverage. And also, it seems that you've had the margin bounce back largely on lower restructuring costs. But I imagine there's a payback on margins from these projects that you've embarked on the last couple of years. So just looking at it from here, it seems like there's a lot of upside to the U.S. from this point, which was a high point before Covid. Correct me if I'm wrong here and give us some idea of where things can go. I know you can't give us exact numbers, but directionally, do you also feel like there's a lot of upside. And then the second one on leverage. Pretty powerful effect on the lower interest costs below the lag as you continue to deleverage. I think pretax was up something like 18%. But you're already at 2.4 in previous cycles, the previous few cycles where you've levered above 3x and then come back down something around 2 to 2.5 seems to be the bottom. So are you ready to start relevering again? Or do you want to see a little more deleveraging on the balance sheet before you start looking to reaccelerate M&A?

Thank you, Felipe, for the question. So you're spot on. We believe the opportunity in the U.S., it's ready for us to take on. Most of it has come from productivity and some price mix. The reality is we have installed capacity. We are developing differentiated products according to the new trends. We are creating new offerings as we have said, we need to go out service and conquer that volume. So we do have capacity, and we're working on it, and that is our main focus, to regain volume to continue to take advantage of our capabilities. You mentioned leverage, and we're continuously evaluating opportunities, and we will continue to do that. And when the time comes, if we find the right fit, whether it's a tuck-on or whether it's something strategic that we decide to go on, we will take advantage of that leverage.

Yes. And let me probably here complement a little bit Alejandro. I mean, we have a strong pipeline of projects, and we have been working very hard on many different targets. But we have a very disciplined strategy on the M&A front. So we have to make sure that whatever we close becomes a successful acquisition. So we don't -- I know that in the history of the company, if you look back probably in the last 20 years, you will see this cycle of getting to 2.5 or even slightly below 2.5 and then taking more debt and doing more acquisitions. But that's not really the way we're managing the capital structure of the company. I would say -- and we have mentioned this several at several times in the past. Where we feel comfortable is having a leverage of 2.0x to 2.5x. That doesn't necessarily mean that the costs were below 2.5x or slightly below today we're going to become more aggressive or start to do bigger acquisitions. I think we have the space. Also, it's important to keep in mind that today, just to put the example to quantify the impact of the leverage ratio because of the size of the company and the EBITDA generation that we have to go back to about 3x, we will have to do like $2 billion of acquisitions, which we have never done. So my point is, is don't -- don't necessarily expect that because we have been able to deleverage the company, we are going to go in a shopping spree and see what we can buy. We're going to continue to be very disciplined and make sure that any acquisition that we make has a strategic component, has the right value. And also, we do a very total due diligence process just to make sure that we capture the synergies, the risks and everything that has to be [indiscernible] acquisition.

Fantastic...

[indiscernible] meaning of your question, Felipe. Sorry?

No, I was saying fantastic color. Thanks so much. .

Our next raised hand is from Henrique Morello.

This is Henrique Morello from Morgan Stanley. Congratulations on the results. I have just a follow-up on the U.S. margin dynamics. Maybe similar to Mexico, I guess, you're not cycling still significant inflation in raw materials, given your hedges. But we are curious to hear if you -- this quarter are already cycling maybe some higher energy fuel distribution logistics costs or other unhedged parts of your cost structure? And how does that inflation so far compares to what you can read in terms of benefits from the restructuring that you guys have been doing in the U.S.? And thinking about the restructuring as well, if you could provide some examples or where are your -- most of your efforts right now in terms of low-hanging fruits for offsetting such [indiscernible] pressures in the next couple of quarters, that would be very helpful as well.

Yes. So Henrique, thank you for the question. Let me give you some color in the cost of sales of North America. Yes, we also have the same hedging strategy as we do for most of the markets. So still -- we're not seeing still the spot that you see on the different commodities that have gone up. So in terms of other components of inflation, we have had an impact, which is probably not fully reflected because of other efficiencies that we have been able to achieve on the manufacturing process in our operations in North America. I would say we're seeing a bigger impact on the increase of fuel has been in distribution. The cost of transportation has gone up. This also has an impact on the cost of sales because one thing is that we hedge the commodity. The other is the embedded costs that we faced on having the transportation of the ingredients to our different production points. So it is impacting the whole strategies and initiatives that we have implemented are offsetting most of this negative impact.

Yes. And as it relates to some examples from the productivity savings that we've been able to earn over time, we've talked about the main categories in which we've achieved them. I'll give you just a flavor of some of them. We've talked about our supply chain in the past for our supply chain. It really is about taking a close look at our footprint, the way that products are flowing from bakeries through our sales centers to stores. We're looking at all of our transportation lanes from a bakery operations perspective, it's literally a bakery by bakery look at all of the opportunities that we have to become more efficient at producing the products that we produce. From a procurement perspective, you can imagine that we're -- we've taken a hard look at all of our purchasing categories and worked collaboratively with our vendor partners to ensure that we're getting not only the highest quality products, but certainly those at the right cost. Another -- a couple of other key components of this, and we've talked about this before, our sales disciplines, ensuring that we are providing the right product in the right amounts for every single customer and store in which we serve. And finally, part of our transformation has been reinvigorating our leadership team in Dallas. That was a move that we made at the beginning of the year. And so we have, as a leadership team, come together to be able to work more collaboratively and cross-functionally than we have previously. So that's been part of it. So hopefully, Henrique, that provides a little bit of color into the transformation.

Yes. And Henrique, also, let me add, probably forgot to mention -- in terms of another impact that we're facing in the U.S. operations as opposed to Mexico, a strong exchange rate has a negative impact in our U.S. operations. So just to give you an example, we, of course, comply with the transfer pricing regulation. So we have manufacturing in Mexico. We have a fixed markup, let's say that the cost is more or less the same, then we have to apply the markup, but the receiving product in the U.S. operations has a substantial increase in the costs seen in U.S. dollars. Now this doesn't mean that our operations are going to be able to transfer this through increases in the market. So at the end, we have to absorb and we have a negative impact in our North American operations because of these internal trade operations that are becoming more relevant quarter-by-quarter.

Our next raised hand is from Reid Monahan. We'll move to next raise-hand. Our next raised hand is from Alejandro Fuchs.

Alejandro Fuchs from Itau BBA. Congratulations on very impressive results. I have 2 quick ones, if I may. The first one, maybe for Greg. I want to see if you could elaborate a little bit into how much of this more cautious consumer in the U.S. and these new trends evolving in the market in terms of consumption dynamics? how much of that do you think is structural? And how much do you think maybe this is people having a tough time with purchasing power and inflation? So do we go back to how things were in the past? Or has the market changed going forward? That will be the first one. And the second one, maybe for Diego. We just wanted to understand a little bit the interest payment line, right? When we see on a sequential basis, there was a big decrease year-over-year. Is this the new level that we should expect going forward? Or was there any type of hedging that may make this quarter a little bit... [indiscernible] The interest expense line it decreased a lot sequentially. So we do see if maybe there was any hedge in place there? Or is this the new level that we should expect?

Yes. Thank you very much, Alejandro. Appreciate the question. As it relates to the consumer in the U.S., I would say it would probably be over representing my understanding is to predict how sustainable these changes are. What I would say, however, is that clearly, the consumer has been moving over the last number of months and years. There's no doubt about that. And some of the things that consumers are asking for is they're asking for value, they're asking for quality. They're asking for let's say, renovation and innovation of portfolio. And so we've really grabbed on to that. As we've talked about before in terms of having the right propositions for all of the consumer cohorts in the market, whether that be value-based or more mainstream and more premium. It's important for us that we are -- we have a portfolio of solutions across various consumer cohorts. That's certainly one element. The other element, as we've asked and we've stated publicly before, is we've been doing a pretty significant renovation within our portfolio. It's been work that we've done previously in terms of things like taking Red 3 out of products before it actually is required by the end of this year, all artificial colors are going to be removed from every single product and the vast majority, that's already true. And we are continuing to evolve our portfolio across our key brands, continuing to change the recipes that we have to continue to move towards where the consumer is going. So we feel very excited about the moves, even though the consumer is changing and their expectations have evolved over the last couple of years. We also believe that we're well positioned to be able to stay in front of those consumers and where they're going.

Yes. Alejandro. Well, you know that the net financing cost is made up of several components. In terms of the interest expense that we have, it has probably 3 components. The amount of debt which is lower, that is helping; the exchange rate exposure that we have on the interest that we pay, that it also helped during the third quarter, which is not necessarily going to be the case. In fact, my belief is that we will see some pressure in this effect in 2027 as we are a little bit more cautious on the exchange rate expectation for 2027. And there are some other items. And you probably remember that I explained the [indiscernible], which is a virtual purchasing agreement that we have for energy in some of our operations that is quite volatile as we have to recognize the difference in the mark-to-market in the cost of financing, and that also creates some volatility. So probably, and to be clear, we don't necessarily expect this level of interest expenses to continue to be either to continue to decline or even to maintain the reported leverage.

Super clear, and congratulations again.