Bachoco had an atypical second quarter of 2020

Rodolfo Ramos, CEO of Bachoco, said that during second quarter of 2020 the company faced unprecedented challenges in the operations of Mexico and the United States because of the COVID-19 pandemic.

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(Bachoco)
(Bachoco)

Industrias Bachoco announced its unaudited results for the second quarter and first half of 2020, ending June 30, 2020.

The quarterly earnings call was attended by several analysts from GBM, Santander, JP Morgan, among others, interested in the evolution of Mexico's largest poultry producer, which, according to the WATTAgNet Top Companies Database, produced 622 million broilers last year and had 12.2 million laying hens in production.

Effects on the food service channel

Rodolfo Ramos, CEO of Bachoco, said that during second quarter of 2020 the company faced unprecedented challenges in the operations of Mexico and the United States because of the COVID-19 pandemic.

“Typically, the second quarter is the best of the year, but this year was the opposite. It is the worst second quarter we have had so far,” said the CEO of Bachoco. Under normal conditions, because of this seasonality, poultry companies focus on supplying farms to increase supply. With the pandemic in which most hotels and restaurants were closed, “we had an extremely low demand.”

“The conditions of the perfect storm were formed with low demand and a lot of supply, which, together with devaluation of the Mexican peso, increased our sales costs.” This combination of factors shaped the quarter.

Excess supply pushed up prices of the main lines of business, so that the second quarter showed atypical behavior. Another impact was the depreciation of the Mexican peso against the U.S. dollar of more than 20% quarter-by-quarter. “It had a negative impact on our sales costs, despite the good cost levels of our major commodities, in dollar terms,” said Ramos.

Bachoco has grown and captured market share in difficult situations because of its strong position, where “no one else has a greater advantage than Bachoco,” Ramos said. Its strategy is the strength of the brand and its extensive distribution network.

Financial aspects

With the difficult conditions of the quarter, Bachoco ended with a net cash position of MXN15.2 billion (US$690.9 million), and the company's fundamentals remain in place.

The company's total sales were MXN16.4 billion. This represents 2.7% less ($452.2 million pesos) than the MXN16.8 billion reported in the same period of 2019. This decrease is the result of lower prices in the poultry sector.

In the second quarter of the year, sales of the U.S. operation accounted for 31% of the company's total sales, compared to 25.7% in the same period in 2019.

EBITDA margin was 2.7% for the second quarter and 4.3% for the first half, while sales and administration expenses were 9.5% and 9.8% for the second quarter and first half, respectively.

Prospects for the third quarter

By the end of the second quarter, “we have seen a recovery in prices,” which means a better balance of supply and demand. This trend was seen in July and although prices are lower than last year, “there is a better balance that we hope will continue for the rest of the year.”

But Daniel Salazar, CFO of Bachoco, said: “Despite the best balance observed, it is difficult to predict how fast and how much demand will recover. However, we do know that we are going to maintain the same level of profitability in the year, around mid-single digits.”

Both Ramos and Salazar were emphatic in saying that it is difficult to predict what will happen in the rest of the year. “It is essential to stay close to markets to adapt to demand as quickly as possible.”

“We will focus on the things we can control, so as to be in good shape in the face of the challenges that arise,” Ramos added.

Other investments

Bachoco reported that Mexican authorities gave approval to go forward in the agreement with Sonora Agropecuaria (SASA), a swine processor and distributor, at the end of the second quarter. Bachoco will focus on this integration with SASA, to capture synergies.

The investment is for live production, so that the two processing plants located in Sonora and Jalisco work at 100% capacity. In addition to producing, Bachoco buys on the market or from contract producers.

“The idea is to expand our live production operations,” said Mr. Ramos, adding that “most of the products are for exports to Japan, the United States and China.” The remainder is intended for the domestic market.

On the other hand, Bachoco remains a major producer of live chicken, unlike companies in Brazil and the U.S. that capture larger margins with value-added products. Regarding this segment, Ramos said they continue to invest in giving added value to products, such as frozen and fully cooked products, among others. “Our plants for these products are not working at 100% capacity in order to be able to respond to demand,” he said.

In this aspect, another very important channel is Mexican-style fast food. Today, “some of our customers in the segment sell more than before the pandemic.”

View our continuing coverage of the coronavirus/COVID-19 pandemic.

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