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Edited Transcript of NUTRESA.BG earnings conference call or presentation 24-Feb-20 1:00pm GMT

N/A Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of Grupo Nutresa SA earnings conference call or presentation Monday, February 24, 2020 at 1:00:00pm GMT

Grupo Nutresa S. A. – CEO & President

Grupo Nutresa S. A. – IR Director

Grupo Nutresa S. A. – CFO & VP of Corporate Finance

Ultraserfinco S.A. Comisionista de Bolsa, Research Division – Director of Equity Research

Catherine Chacón Navarro, Grupo Nutresa S. A. – IR Director [1]

Good morning. Welcome to the teleconference results for the fourth quarter 2019 for Grupo Nutresa. At the table, we have Carlos Ignacio Gallego, President of Grupo Nutresa; José Domingo Penagos, Vice President of Corporate Finance; and Santiago Escobar, Director of Corporate Finance. My name is Catherine Chacón, Director of Investor Relations.

After the presentation of results for the last quarter of 2019, we’ll start the question-and-answer session. The questions that we receive through the webcast will be read verbatim. Those who have connected to the conference in English, we would appreciate it if you ask your questions using the web chat option. Everyone who’s connected to the webcast, we invite you to download the presentation in PDF. Those who ask questions, we remind you to tell your name and the organization to which you belong.

To start the presentation, I’ll give the floor to Carlos Ignacio Gallego, President of Grupo Nutresa.

Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. – CEO & President [2]

Good morning. Welcome to the teleconference. Thank you for being with us. To start with, let’s go to Slide #2, where we will share with you the main highlights for 2019.

As you can see, during 2019, we continued moving along with the achievement of the objectives of sustained growth, focused on generating value and — with our share groups, we continued with our portfolio. And we accelerated the expansion in categories and channels with high growth, taking advantages in the region and strengthening our relationships with customers, buyers and suppliers.

During 2019, we had higher outstanding sales with an increase in revenue of 10.5%, growing in the main operations in our region. In inorganic growth, we had 2 acquisitions, Cameron’s Coffee in the U.S., which are added to the platform in the group and have major opportunities for growth and higher capabilities [with these]. We created a fund to make 2 investments in innovation and new technologies. The first 1 is a company that specializes in developing high-protein content products and through new technology, and the second is focused on research and understanding of the human microbiome. With respect to our sustainability practice that we have selected, in the first — we were selected as #1 in the global Dow Jones Sustainability Index based on being our best in 9 categories in the food and materiality, tax strategy, human capital development, corporate citizenship, philanthropy, operational efficiency, packaging management, water-related risks and environmental protection. We should also remind you that we were recognized in corporate reputation and talent retainment in Colombia.

With risk management, we had a year with volatility in commodities in the valuation of — in our major markets. By purchasing and hedging in raw materials, we protected that and clear management of expenses to protect our corporate margins.

With this view of what the year was, let’s go now to Slide #3, where we will see sales for the fourth quarter. As you can see, in Colombia, we had sales for COP 1 billion during the quarter, COP 1.7223 billion with a very good business dynamic with a sales growth of 13%, and all the businesses had positive behaviors. We continued with a good trend in volumes with a growth of 10.1% during the period in which the average prices increased 2.9%, mostly due to changes in the sales mix.

It should point out that the growth in — double digit growth in the pasta, ice cream and retail food. Our organic sales excluding the acquisition of Atlantic Food Service were COP 1.6785 billion increased by 10.2%, growing at 8.2% by volume and 1.8% in prices. Outside of Colombia, international sales, we had revenue for $303.8 million during the quarter, a growth of 8.7%. In Colombian pesos, those sales are COP 1.0365 billion with a growth of 17.4%, which includes a devaluation of 7.8% vis-à-vis the same quarter in the previous year.

Our organic sales growth, excluding the acquisition of Cameron’s Coffee is 1.6% in dollars and 9.7% in Colombian pesos. By business, in the bars that you can see in the graph, we reported an increase in revenues from — for 3 months. If you look at the 3.9% in the functional currency, we included a 10.8% devaluation of the Chilean pesos vis-à-vis the dollar, this decreased 6.4% in dollars. The cookie business grew well, mainly driven by Colombian exports, which grew by 12.5% in dollars. In chocolate, we have the combined effect of a good and commercial dynamics in Central America and Peru and lower volumes in Mexico.

In the coffee business, we had organic growth of outstanding nature, 18.6%. When we include the sales of Cameron’s Coffee, the increase is of 88.4%. Without Retail Foods, we have good positive dynamics in all the platforms with an increase of 8.3% in dollars. And in the cold cuts, we had growth of 4.3% in dollars with a recovery in exports from Colombia.

Now going to Slide #4, we can see that when combined good Colombian performance and international operations, we reported consolidated sales for the quarter of COP 2.7588 billion with a growth of 14.6%, which is outstanding. When we exclude the acquisition of Cameron’s Coffee and Atlantic Food Service, our growth is equally important, 10%, the highest organic growth that we’ve had since the third quarter of 2015. So as you can see, it was a very good quarter in terms of — commercial terms for this rest of the year.

Let’s go to Slide #5. Sales in Colombia, accumulated results, we had for 2019, with a good commercial performance, both in value and in volume. In total sales, we had revenue for COP 6.2038 billion with a growth of 8.1%. And as you can see, more than 80% of our sales growth in the year in Colombia is from higher volume. Outside of Colombia, in the international platforms, our revenue amount to $1,142 million with a positive variation of 3%, expressed in Colombian pesos, this is COP 3.755 billion with a growth of 14.5%.

Sales — organic sales grew by 0.7% in dollars and 11.8% in Colombian pesos. During the year, we reported a positive performance in our main international operations in their functional currencies. In Chile, we had a growth in local currency of 3.2%, in spite of the fact that we considered the devaluation of the Chilean pesos in dollar, the value is negative by 5.8%. But I want to mention that due to the events of the end of the year in Chile, our team did an excellent job. We’ve managed to defend our figures and maintain sales at almost normal levels, given the changes in the — in the change of sales and the mix in the channels and some stresses and pressures in the short term, but have been managed properly and we continue believing that it is a very — a territory with major opportunities. We’re going to [carefully] — we’ve seen before in areas like Colombia, but which will certainly improve in the future. We also highlighted exports from Colombia, $254 million, with a growth of 9.9%.

In Slide #6, we can see total sales for the year. Accumulated revenue is COP 9.9 billion with a growth of 10.5%. Excluding the acquisitions for the period, sales are COP 9.8 billion with a variation of 9.0% positive. This reflects a strategy that is focused on evolving our brand portfolio, sound brands, investment and acceleration of new abilities to reach the market. I want to point out that the innovation sales represented 22.4% of total group sales. This innovation is still an important driver for the growth in Grupo Nutresa.

If we now go to Slide #7, we can see the sales by region. As you can see, Colombia is the largest in sales with 62.3%, the second region is Central America with — 9.2% is the United States and the Chile is fourth with 7.5%. I want to say that if we did a pro forma year including Cameron’s Coffee and Atlantic Food Service, the second geography would be the U.S.

We reported specifically growth — higher outstanding growth in Central America, U.S. and Dominican Republic and Peru. This geographic diversification is very important for the group and as we mentioned in previous conferences, it is not by chance, it’s the result of a plan, international — internationalization strategy, which has been giving fruit.

In the next slide, Slide #8, we want to mention you about our market exposure. We have here the results of a new method to measure in Colombia, carried out by Nielsen, which shows you an expanded market overview by including new changes such as cash and carry, discounters and direct sales. It’s very important to say that these results are not comparable to the previous measurements because they have a different methodology that includes proprietary information from Grupo Nutresa. We asked Nielsen, as we had said in — last year, we asked for a new way to measure us, including information that we provide directly, the largest breadth of the analysis allows us to better understand the brand’s dynamic, which in fact a medium which is very dynamic and allows us to act and manage monitoring the competitive environment in the most holistic manner.

I would like to mention significantly Grupo Nutresa continues to be a leader in market share in mass consumption of food in Colombia with relevant positions in all the categories where we participate and we have a consolidated share of 55.4% during 2019. This figure is not comparable from — to what we saw last year. We will continue to publish every quarter these positions and this measurement every year.

With respect to profitability, we’d like to tell you in Slide #9 some information about raw materials. On the left — the left hand side where we can see the commodity index for Grupo Nutresa. This average for 2019 is less than what is recorded for the previous year. This is result of a lower reference mark for oils, beef protein, coffee and sugar. However, the local prices for some of these commodities do not necessarily follow the trend and the rate of exchange has an impact on the final cost of imported inputs or those which are — although are — they are bought locally are indexed to the dollar.

In addition, I’d like to point out that the last quarter of 2019 was a quarter where we saw sustained footprints, mainly to raw materials such as pork, wheat, cocoa, fats and coffee and also because of the devaluation of some of the currency in the regions where Grupo Nutresa operates vis-à-vis the dollar.

With this introduction, very good in terms of commercial aspects and some regional comments about markets and raw materials, I will give the floor now to José Domingo Penagos, our CFO, who will give you more information about the company’s profits.

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. – CFO & VP of Corporate Finance [3]

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Thank you, Carlos Ignacio. Good morning, everyone. Let me present the profitability with the — using the slides with the EBITDA for the business and financial statements and the state of the cash and debt based on the quarter and in the accumulated figures and more general comments.

First, we have all the information with and without the effect of — to be able to have a comparability. And before the numbers, I’d like to tell you about the equation of profitability, and the pressure of the major raw materials, mostly because of the rate of exchange, very little transfer of that effect to prices, that will be a topic for conversation throughout the conference, a greater expense control, especially sales expenses, which are a major part of the company’s expenses. Administrative expenses, we have some high percentages, but these are single time — onetime expenses. So after that, for the entire group, let’s see individually by business, how the profits were.

First, for the EBITDA for the quarter. This is Slide #10. The EBITDA for the pro forma is in the lower part of the slide, for the quarter is COP 354,000 million, a growth of 24%, margin of 12.9%. But without it, we’re talking about COP 315 million with a margin of 11.4% and a growth of double-digit growth, a very good growth of 10.5%. In the previous year — it decreased compared to last year, margin in the same quarter last year, that is mainly due to a higher cost of some — of local raw materials. In this case, mostly in the confectionary, chocolate and TMLUC. Good growth in — good performance in other businesses, cold cuts, coffee, retail foods, pasta and ice cream is — has very good growth in general.

So let’s go by business. Starting with the cold cuts. We have a very good dynamics during the quarter. Although there are some pressures on costs, mainly because of pork due to the African pork fever, the rate of exchange, this effects imports or has little exports and a little presence in Panama, but mostly, it is a business in Colombia. And the rate of exchange, it affects the cost. That good business dynamics, especially in the cold cuts, allows us to have very good dilution of the fixed cost and expenses and it helps a lot to relieve the pressure exerted by raw materials. So cold cuts has a very good performance at the end of the year.

And biscuits, I always mentioned it in the balance between their position in Colombia and their international position allows us to have very good coverage. Very good hedge. The hedged raw material pressure is not much, and the wheat product, the effect of the dollar on the wheat, but it’s about 50% of the total of this business, we have to manage very well. This profit equation is in addition to the business performance, was very significant both in Colombia and in international markets. So it’s a good balance with respect to the biscuit business.

In the chocolate business, it’s relatively similar to the biscuits and very good sales, and we have eased a part of the pressure on raw materials. But you can see that on screen, the commodities on cocoa, there’s speculation and it’s very solid, basically, but there is an increase in the price of cocoa. We have good hedging coverage levels, but this is the challenge we have to do a little link with the current year. This will persist during the early part of 2020, and the rate of exchange is also affecting us.

We have that TMLUC business. Let me mention the numbers, we have a margin of 10%. Carlos mentioned, a good business performance. We had managed to preserve those revenue levels, probably had to invest in addition to the cost of raw materials we had to invest. So those — we have those sales in the market have been protected and that affects our profits. We’ll see the average for the year. We defended that in the quarter, especially, we had some of those pressures.

In the coffee business, we have good business dynamics, both locally and internationally. We also have here the provision of Cameron’s. We have — all these effects contributed to a growth of 85% of the EBITDA. But without that, we grow at about 80%, good margin. So this is doing very well, according to our expectations both in revenue and in profit levels. But we also have very good performance, improved gradually throughout the year. And we maintained good results for the period, especially the last quarter.

Our retail foods, we have to do not only that because of the numbers, but because of the consistency of them we have to place emphasis, very good trend, very positive trend in EBITDA. This is a 25% EBITDA or 17.7%. It grows at 7.16% during the quarter. It’s the — and for the accumulated, this is very interesting growth rates. And this is the result of all the prices that we’ve been sharing throughout the previous conferences, not only in Colombia, but also in the various platforms. This is with good international measures. We have presence in Dominican Republic and Costa Rica. And lastly, in Colombia, we have part of the — part of the profits and revenue. We had also very good results — strategy results in each of these categories where we have a presence to this business unit.

We have very good productivity plans, a strict control of the expenses. It’s a very well balanced situation. We have some plants that we installed [30] years ago, that we begin to see the results now for the quarter and for the accumulated figures.

Ice cream also has good margin, 13%, good revenue levels. We mentioned also here we have reached breakeven. We have a very good dilution of the expenses. Good business dynamics, which is seen in the middle part of the P&L.

We have a good part of 14%, very good dynamics in Colombia, very sustained, and this helps a lot with sales. It eased the rate of exchange on the raw materials, which is (inaudible).

This is the general overview for each business for the quarter. A little more details in the Fx because in general, it effects the accumulated figures, which we have the results here in Slide 11. EBITDA for the entire year of COP 1.347 billion, good growth, 19% and with a margin of 13.5% or without the effects of the new events, new standards, 6.2% and 12% in margin.

I will not go into details here, but the topics are the same, but I’d like to highlight the good growth business of retail food, pastas, coffee, ice cream and biscuits. We have good — very good — performance is very good — very high, outstanding results.

Now let’s go to the statement of results for the quarter, which is on Slide 12. With and without the new international financial information standards. After 2020, we’ll continue having in the presentations with and without the new standards, but we will be making — placing more emphasis on the results with this [new financial] standards, the ones that we’re going by. It’s a permanent rule. For the entire group, the EBITDA for at least a difference between — is of 150 basis points and for a consumer for which leases are part of the cost as close to 10 points, but we’re going to migrate without losing comparability to focus more on the international financial information systems — standards.

This is a period during which due to the accounting closing, we’re just — some adjustments in accounts, which like taxes, which creates some nontypical results. We’ll go account by account. The important here is through this [standard accounting] not only comparability, but also to explain now these figures why some of these changes take place. So operational block which is operating and post operating. In the operating block, we have the growth in revenue. Yes, we’ve already detailed that in the commercial part, 14.6%, good performance. And the impact on cost, you see that grow 17% with the effect of devaluation here. The devaluation — the average devaluation for the quarter compared to the — in 2018 is 7.8%. We ended with an average rate of exchange was [COP 8,111] per dollar compared to COP 3,164 from the previous year. And if we remember, that close to 60%, that’s a statistic, 60% of our cost are indexed to the dollar. So 60% of that item is close to 8% only because of the effect of rate of exchange that decreases our gross margin of 120 basis points is not the same calculation for the entire year. I would say that’s why I introduced (inaudible) quarter.

This organization is an organization, which the last quarter gives an idea of what the next year is going to be. But in this case, we have some pressure. Our response is to handle average coverage of raw materials during our commodities, committees and positions. This is the variable that most affects our profits.

Expenses are very well controlled. In administrative expenses, there was a high percentage, 33.6%, but that was like building blocks because we have 2 or 3 groups of blocks, which are single onetime expenses. The first is the acquisitions. You remember, we had 2 acquisitions during the period, mostly which affected the expenses for the end of the year. That 33.6% without those expenses would be about 21%. And if we subtract also some onetime expenses because of the launch of some technology platforms, the implementation of SAP and new geography, fees for consultants for some negotiations we had during the year, which affected the expenses at the end of the year, it will be 9.9%. That is the pro forma for the administrative expenses grew by 10%, structurally. And all these expenses lead to a 33% — more details so that you can have the idea with the pro forma and not with a single time expenses.

We should point out the savings in sales expenses. This is the major block of expenses, and we would be implementing some productivity plans. We have the results here. We have significant time — savings in sales expenses and they’re growing at 10.9% now, they’re 28% now. It’s a good news. We have major part where we have the productivity plans in place, which are going to show the results.

In the rate of exchange difference, we have movement in revenue for COP 20,300 million which, although for the size of the group, they’re not big and have a change in classifications compared to the rate we reported in the previous period. So as of now, as of this quarter into the future, we’re going to reflect the effect of our foreign exchange positions, which affect our operations, our hedging positions changing. We see this as an example. When we put in here, they are more visible and we will show when they have some profits and when they don’t show profits. We also have operating expenses of around COP 4,000 million, but those are compensations and sponsorships mainly.

All of this has the effect of operating profits of COP 42,000 million, double-digit growth 12.6% and also EBITDA is also 10.6%. In the post operating section, we have a few changes, but we also have some issues that happened with acquisitions and the rate of exchanges that I’m going to mention. First, the financial revenue. Good growth as a result of the field position itself. Cash position. It’s a very good cash position during the year. Our business is not financial. The result of the operations improved our financial revenue — financial expenses. We had slight growth, but we had a new debt as a result of the purchases that we have mentioned, but with a very competitive cost, which is 5.93%. I’ll tell you a little bit more about the debt structure. But anything below 6% is good news.

We also have differences in nonoperating expenses, COP 11,500 million that reflects the exchange rate effect on some foreign operations. It’s a very small amount, but we don’t usually give much detail. When we have the results of our associated companies and have a couple of associates, of which we are helping growth, and that is where we have a loss of COP 600 million.

And lastly, the current income tax, we have a measure of about 114%. The first thing is to tell you the current and the deferred income statement — taxes. When we separate that, we have growth in the current taxes and decrease in the deferred taxes. We have to keep (inaudible) 2018 compared to the current taxes, we had several deduction, which took place 1 time. So they have an impact on the basis because of the amortization of some rent. Therefore the tax is going to go down. And also this year, we have fewer deductions and some deductions that we traded at discounts. The tax reform has a decrease in the (inaudible) basis with the income (inaudible) compared to the deductions. And this has our rate and integrated tax rate.

In discontinued operations, we have those operations we mentioned, 1 in the North Coast of Colombia and another 1 in the U.S., which has some part of our productivity plans. We ended the semester with COP 100 million. The structure of accounts, which are applicable to the year.

Slide #13. Our initial reference to the revenue of close to COP 10 billion, double-digit growth. Gross margin, as I said earlier, the total effect for the year, being offset by rate of exchange and hedging, are due to a degree of 80 basis points. But in administration expenses, 11.6%, very similar to the level of growth of the revenue and in expenses we have productivity, 70 basis points throughout the year to that EBITDA of COP 196 million. In operating expense, we have the same, both revenue and financial positions.

The financial expenses have been tightly controlled and taxes also we have to reinforce those accounts that I mentioned earlier. If you look at the net growth of taxes, both current and deferred, it’s 8%, very much in line with the growth of operating profit. So there are no effects throughout the year and the net profit of the year of COP 106,000 million with a growth of 0.2%.

I’ll finish this section with the information that we have on Slide 14. We could call it a cash and return situation for the group. First, in net debt, COP 2.7 billion, mostly in local currencies, very, very low, almost 0 exposure to the dollar because why we have in dollars is because they are operations in dollars, so there’s no exposure. It’s a debt which is mainly variable. Average rate is 5.92%. We had 6.3%, has been going down. We also had a decrease in duration, previously it was 4 years with some tranches and some cases like in Cameron, and with a production of free cash flow of COP 600,000 million, this is a cash that is 1.2x the profits, very good cash situation return. The ROI was 9.2% for the end of the period. And all of this, even with the acquisition of Cameron and the indicator I mentioned earlier is 2.28% of the net debt to EBITDA, applying our cash and for the year is going to be 2.2x.

The messages that we’ve given to acquisitions, for COP 160,000 million we’re at the same debt level and practically we finance with internal funds.

And lastly, the CapEx. I usually tell you about the CapEx budget for the year. We’re starting COP 346,000 million for the CapEx for the entire group with a combination between maintenance and growth. We’re growing mostly by volume. We have some important ways that we want to fund, and that is why we are naming CapEx of that size for this year, both for the Colombian and for overseas.

So this is the end of the financial summary. I’ll give the floor to Carlos Ignacio, who will talk to us about the outlook for the rest of the year and then the Q&A.

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. – CEO & President [4]

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Thank you, José Domingo. I’ll be glad to share with you how we look or how we see the commercial progress and the balance for the next few months in the group. First, commercially, in Colombia, when you look at the reports issued by organizations that analyze expenses, consumption, we found that although confidence indicators have not increased, such as the, for example, the (inaudible) who analyze the expense, the consumption — household consumption do have a positive trend. Specifically, we read a short time ago the report from Fenalco where they said that consumption in businesses in January is one of the best in the last several years in Colombia. And [Fenalco] which is an entity that measures actual household expenses also shows us the figures.

We believe that we will continue to have good dynamics. When you look at the sources of growth in Colombia, in the previous year, we have things like increase in the real salary happened last year. This year, again, we see an increase in the remittances with this rate of exchange. This is an additional factor that drives consumption and topics that depend on the companies like channel development, innovation that I mentioned earlier in my presentation, the brand strength, and I would summarize that as good marketing.

So these factors that we have there are still at play so that we can have good business dynamics in Colombia. Outside of Colombia, we see that we have good business dynamics, although in Chile, we’re doing a change in the sales mix, we call the foods and few (inaudible) we still sell them, but we are perhaps selling them less. And there’s a clear differentiation between them in the channel mix. So we must say also that we hope that rates of exchange will continue to be volatile.

I would summarize by our commercial outlook as good dynamics. With respect to profits, I would say that since the last quarter of 2019, we’ve seen pressures in terms of input costs, there will be continued volatility in the rate of exchange. And we’re going to have no doubt, higher activities [in projects] increases. We have announced that. We started to do that. It’s a year where we are going to have more price activity without losing sight of the fact that one of the major strength in Grupo Nutresa is by knowing the local strength and be careful and make sure that the products are where they should be, have a chance to go there, since you get there as frequently as they should, and that they can have everything the consumers reach, make them affordable. We’re going to be changing prices, but without forgetting those important factors. That combination of steps will allow us to have a return higher than the cost of capital.

That is the report that I would have for the outlook for the rest of the year, and I’ll give the floor to Catherine so that we can go to our Q&A.

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Catherine Chacón Navarro, Grupo Nutresa S. A. – IR Director [5]

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Thank you, Carlos Ignacio. We will now start the question-and-answer session. Let us remind you that those who are through the English audio, you can ask your questions through the web chat. Now we don’t have any questions through the webcast. [Hilda] has the floor, so we can start with the Q&A from our Spanish line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have (inaudible) from Bancolombia.

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Unidentified Analyst, [2]

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I have 2 questions about financial results. First, can you tell us how this 2020 started with the coronavirus the impact on raw materials? How do you see that behavior in the company’s coverage? How you see the performance of that variable on the results of the company for this start of the year? And the second question is about the expected profitability to the IFRS 16. You’ve shown that without the IFRS and with it. So do you have any new metrics for the EBITDA margin between 12% and 14% that you had before, but now based on the new application of the IFRS 16, do you think that you will change that EBITDA margin to give us some more information?

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Carlos Ignacio Gallego Palacio, Grupo Nutresa S. A. – CEO & President [3]

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Thank you for being with us. And I will be glad to talk to you about the first question, and José Domingo will answer the second one. The first is the coronavirus. The actual problem we’re dealing with is the mankind. It’s a disease that affects especially the airways, and this is especially acute in people who have some prior condition or the elderly. This is why one of the steps why we developed and tested some sort of vaccine is quarantine. And the first effect this has had has been businesses that have a lot to do with the — a lot to do with direct personal contact, have a high content of traveling and physical presence businesses. Major events have been canceled around the world because there is some limitations to the flows of people between countries.

In practice, Grupo Nutresa’s raw materials — on average, the raw materials that we use are locally sourced. Although we do source from — things from China, I would say that it’s very little. It’s not significant that within the mix of inputs for Grupo Nutresa. We have been affected to the extent that we have to take the precautions for people who received, who provide technical assistance or who provide some sort of machinery or input, but immediate effects and directly, it’s very little. What do we have? The volatility of those markets and when will affect the — I think the raw materials or rate of exchange. Things like cocoa, which has been very, very volatile, have not to do with coronavirus. It’s more related in the case of the cocoa to a decision from Ivory Coast and Ghana of wanting to receive an additional premium to the cost to the producer, which has had a reaction in the market growing almost $500 increase in the last 4, 5 months.

There are other areas where we do have some reactions, I would say, top experts say what’s happening with the price of pork. We are having 2 effects. The effect of the disease in China was one of the major consumers of pork, but the strategy that we have of combining our hedge for future operations with physical inventories when it’s convenient, it becomes even more current. And what we’re trying to do is double the efforts to manage this risk. We haven’t had so far any commercial effects like that when we’ve had decreased sales because of coronavirus. We simply we’ve rescheduled some business trips, but we’ve worked virtually and we’ve rescheduled the visits from some technicians who come from Asia to some of the issues we have production operations, but without significantly affecting the operations.

I’d say that this introduces volatility, but since we mostly sourced locally in each country, this effect is manageable. Obviously, every day, we could follow the evolution of this coronavirus. And should there be any topics that we need different actions, we will act differently. But the second question, José Domingo will answer.

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José Domingo Penagos Vásquez, Grupo Nutresa S. A. – CFO & VP of Corporate Finance [4]

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Although, it is true, this is very simple. I said something about the effect on the group is 1.5% in the consumer foods. I think you could have very simple accounts about a new minimum. The effect of these accounting standards, the quantities weren’t changed, the basics were not changed. It’s a matter of classification that you can handle administrative vision. You can have a some small changes in the EBITDA. But I’d like to emphasize this. We’ve been migrating towards the manage of returns and cash flow. So you report the way you manage. This is a new management system for the group, and the emphasis is in the return on invested capital and on the cash flow that we produce for shareholders and paying the debt. This is a simple procedure, but they are always reflected in some returns and lower cost of capital and better cash flows.

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Operator [5]

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We have Katherine Ortiz from Corredores Davivienda.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division – Equity Research Leader [6]

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I have several questions. The first one is the operation of TMLUC. Do you expect to — because of the impact of the outlook for growth, is your expectation to have a much similar to what happened in the fourth quarter of 2019, and can we have a recovery in this line of business? And with respect to the previous behaviors, the second question has to do with the CapEx that what do you have for 2020, and I’d like to understand a bit whether in retail foods, we should continue to look at the relevant investments like the ones that you have made to drive that business line?

And also about the growth for last year in this business line, I’d like to understand better whether you can give us some data of our organic growth or consumer mix or at least the number of the stores that we increased compared to previous year. And lastly, about the repurchase of shares, can you tell us a bit about that? Do we have any plans to at least a preliminary plan to repurchase shares? And how would you do that? And from the company’s point of view, is the decision about adding value, how did you get to that number of COP 300,000 million? Because if you look at the company’s leverage, we have very broad level from COP 200,000 million? So do we have — do we have those plans for organic and inorganic expansion? Do you think it’s more difficult to do it inorganically, and that’s where we could see some additional plans to those that we are advancing? Those are my questions.

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Unidentified Company Representative, [7]

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Thank you, Thank you, Katherine, for being with us. Let’s go at this together. First, I’d like to refer to the topic of (inaudible) look at in Chile. Let me remind you that the reporting year is in the midst of this protest that we had and some things that I wouldn’t call them protest but rather vandalism because there was that too. None of the company’s facilities was affected, fortunately. Obviously, everybody’s life in Chile have difficulties. But from the point of view of the company’s equity, the company’s assets, we didn’t have any direct effect. What we did have in Chile with respect to mass consumption was a larger number of situations effectively the modern channel in the supermarkets. And when we were used to talking about large services, major supermarkets that we sold more than 70% mass consumption sales, that share by channels has changed a lot now. It could be around 50%, close to 50%, depending on the category. So what’s happened is that the smaller stores, the supermarkets or small self-service, which are not the change and even the participation between them was varied and the cost of serving them is different.

The other thing that’s happened is that since the — I mentioned earlier, sales of basic food sales have increased and logistics may come more challenged because the number of routes that we have to serve, the speed to which we have to supply them because some of our retailers had to change their times to open the stores and receive their goods. So it’s a different environment. But these companies, and we — this is a company headquartered in Colombia, have developed some abilities for those in more turbulent environments. And thanks to that, our sales figures, I would say, have been defending very well with a short-term effect on profits. We think it’s going to be a year with the increased growth in Chile. We’re not going to go to negative figures over there. We don’t give you a guideline, but we do think there is going to be growth for the country that — so everybody that Chile didn’t wind up in a recession. There’s a lot of challenges, and it’s a very special year for the future in Chile, but it’s also true that there are people working and trying to be ingenious about that situation and trying solutions. What we believe is that it’s going to be a year, positive commercial results more challenging in terms of profits, but that’s why when we spoke about imports I think regional portfolio.

We have a different presence, and it will allow us to have companies like Grupo Total will have a year with returns higher than the cost of capital. Changing the sales mix, changing the channels, logistics challenges, but we see that in the positive sense. We do not think we’re going to go into the negative figures, and we’re working on that. And I’d like to mention that in the midst of all these difficulties one of the most important factors has been the team’s commitment, people, the quality of the people and the fact that every one of them is aware of what they have to do to have this company in their country be successful.

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Unidentified Company Representative, [8]

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Katherine, to give you a little more context, so COP 346,000 million for the group, I’d like to have a combination of maintenance and growth. Especially in growth, we invested in new production capabilities. We know that we have very sound processes. We have innovations that require that we adapt those plants. And in the channels, new channels, we have consistently invested over the past few years. That is not anything new for this year. We have a significant part of that this year to strengthen our new channels, which are changing our growth. So you wanted to — a little bit more color about that. The combination is not only opening, but also remodelation — remodeling, remodeling [self]. When we open, we have 2 stores, both in Colombia, and the reason that I mentioned earlier about 842 stores that we have in total. That’s probably to my knowledge in these 842 stores, [we have done very little].

We do have important improvements as the number of transactions as the same stores. Remodelings operate very well in growth. We will not tell you the percentage, but it’s a single-digit growth, but renewing store is like opening — it’s like opening a store with much less CapEx.

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Unidentified Company Representative, [9]

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That is a good comment. With respect to the repurchase of shares when we invited — invite you the next assembly, there’s a plan which is a project to repurchase shares. First of all, this is a legal fact of the corporate law in which a company, which is traded in the stock exchange can vote against its own shares. This is much common legislation in Colombia has included that. This is one of the mechanisms that you have to return capital to the shareholders because when we repurchase, these shares lose — when they’re in the hands of the company, it lose their right to vote and economic rights. This doesn’t affect because the shares that are left remaining are the ones that represent the company ownership.

About the effects that, that could have on the price of the shares, we don’t say about that because that is defined by the market. There’s a logic, but we don’t speak, and the market determines that. And the specific question of where did that number come from, actually, what we did was something that is pretty responsible, in our case. Grupo Nutresa has profits, has a very good cash flow. The proposal would represent 1/6 of the free cash flow available. So this price does not imply other sacrificing other alternatives, such as dividend distribution, we wanted to be good and growing. It doesn’t affect our CapEx. It doesn’t affect any possible acquisitions.

So the fact that this is limitation, we don’t see that. If it turned out to be very, very good and we have a possibility in other assemblies to show you new projects and if we — shareholders would be — deem convenient, I — we don’t think that there’s going to be any problem. And one more thing. If the assembly approves this project for repurchasing shares, the company is not obligated to buy them. They have the possibility of doing it, if the conditions — favorable conditions occur. It’s just simply an idea that adds some capabilities and additional tools to Nutresa to be able to continue producing value for our shareholders. That’s what I could tell you now for the moment. This is — I think this is a very good alternative to complement all those that the company already has. So I think that give you answers for this amount — this CapEx and repurchasing shares.

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Operator [10]

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Carlos Rodríguez from Ultraserfinco.

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Carlos Enrique Rodríguez, Ultraserfinco S.A. Comisionista de Bolsa, Research Division – Director of Equity Research [11]

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Three questions. One is a follow-up of what Katherine was asking about, repurchasing shares. Do you have any estimates of how that could affect the ROI in the medium term? And is that going to be current with the debt? Or that could be a mix with the cash flow from current operations? The second question would be, what do you see the consolidated profit for Nutresa during 2020? I will refer to the EBITDA margin outside of the — this stage which is very likely that we can see margins in the middle or higher middle range for that 2020? And my third question is about a news came out at Expo 1. Can you tell us the expectations what do you have for that issue in the Emirates?

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Unidentified Company Representative, [12]

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About repurchasing shares, we mentioned that already. It’s a project that we would be using the company’s cash prudently, and it doesn’t have any major impact on the recurrence as results of the operation. The invested capital in the company can be — will probably remain the same, would be more impactful on other markets, Asia, but not necessarily on the quantification of return of capital invested. With respect to margins, our commitment is to the returns. And obviously, the returns mean better margins. We have all included some productivity plans, which are going to improve. As an improved margin, we’ll continue with these productivity plans throughout 2020. The variable that you mentioned, we already are seeing, increasing vis-à-vis the prices. We have those raw material prices, which might be a little unbalanced. And we will try to have with or without this that are appropriate to create better returns on invested capital. And that’s been an idea of the company all these years and has been improving year-to-year.

Carlos, I’d like to tell you a bit about the why issue. It’s one of the most important ones in the world. In our case with Grupo Nutresa, it was an alliance with PROCOLOMBIA. PROCOLOMBIA is the country’s export promotion agency. You can say that one of the most necessary things for a country to grow is to export more, especially exports that are nontraditional. We, in the past, have done some business with the Arab Emirates, especially in the area of coffee and more recently in cold cuts, where we’re trying to grow with the cold cuts with some added value. What we think specifically is that there are very good opportunities, biscuits, coffee, cold cuts, and then as — we don’t look at it as purely local.

This is a point that connects tourists because in the middle of Asia and Africa. And there’s a lot of visitors — this is a country which is not very large in terms of population but has an extremely high per capita income. And they are important investment funds. They are shareholders in many companies in Colombia, including Grupo Nutresa. I think this is an important activity for Grupo Nutresa and will help us continue to grow.

I want to point to something that we didn’t say that in the presentation. In 2019, the exports of Grupo Nutresa from Colombia grew at 9.9% in terms of dollars. I think this is very important to — within that, the ones that went to the states grew 19.9% in dollars. We hadn’t had much better if we hadn’t had that open market season that we had. So there’s an opportunity to do much more in terms of exports from Colombia, and this year is part of that package of what we do, which what I call is, well, good marketing. We have to know how to produce, how to open markets development, then establish contacts and get to other geographies where we have a lot of opportunities. Thank you for being with us.

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Operator [13]

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(inaudible)

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Unidentified Analyst, [14]

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I have 3 questions. And the first one has to do with CapEx. And do you think you’re going to be making any acquisitions? Or would you finance it through debt or due to the company’s leveraging the low cost of money? Or would you rather focus in Colombia or look for other markets? I’d like to know a little bit about the financial instruments that you have used in Nutresa to manage and cover your cash flow vis-à-vis the dollar and your coverage in commodities. My last question is do you have a legal stability agreement?

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Unidentified Company Representative, [15]

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About CapEx projects for COP 6,000 million, that money doesn’t take into consideration M&A activities. The numbers is very difficult to predict. It doesn’t mean that we were not going to have any mergers and acquisitions. We’re constantly looking for inorganic operations. When we, I think, has pulled one, has something firm, we’ll let the market know. But this is an ongoing activity by this group to grow. We don’t basically grow the mostly on the organic, but we’re doing it. Initially with COP 346,000 million in cash because we have the inventories and then you can have. Any activities of significance, we will report it to you.

We have an important item in commodities and we have growth for commodities and hedges in-store in the group. We have a very important natural recovery or hedge. And with that we have both in cash in one by one, but in the rate of exchange, the natural coverage or hedging for our rate exchange. Both in the financial markets, and we have physical coverage, physical protection, those when we have opportunities — we’ve covered with physical inventories. And we have — when the market has other opportunities, we will have more financial recoveries also looking for the same profitability.

And yes, we have a stability contracts or agreements. We’ve been commenting that over the past few years. We have that. Right now companies like [Nurel], (inaudible) have long duration to 2029. So some agreements will run out, and we have the effect of a couple of contracts that ended last year, but we still have very good contracts that also have stability in the effective rate of taxes in the long term.

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Operator [16]

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We have Johanna Castro from Itaú.

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Johanna Castro Castro, Itaú Corretora de Valores S.A., Research Division – Research Analyst [17]

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I have one question that has to do with the buyback program because you’re sitting in the Board of Grupo Sura and vise versa and because 2 announcements were almost simultaneous, I want to understand why was that timing. Does that have anything to do with the reason why those Boards have taken the same decision with the same amount at the same time?

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Unidentified Company Representative, [18]

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Yes. I’ll be very glad to. First of all, although we — as you say, we are setting the Chairman of Grupo Sura and member of the Grupo Nutresa, and Suramericana the discussion are in-depth and they’re completely separate and independent. And although there is — it’s a coincidence that the figure will be the same, it represents different percentages of the total number of shares in each company. And I would say that simply, it’s just there are fees that we see them at the same time, but the Board is independent and the approval or their discussion in the assembly is going to be totally independent as well. It is true that there are market conditions, the share market conditions, that are weighed by different actors. But it doesn’t have to be the same figure or we’re not going to be doing that necessarily in specific sequences.

In fact, the trend in shares in Colombia is very different. It is very different and the type of shares that each company has is different. What will happen by that — happen in the meeting of the Board of Directors was discussion of the conditions of a legal framework, of whether it was convenient or not, whether it is possible to do it or not with the resources that we have in the company. And the Board of Directors decided to include that in the agenda and have that for discussion and approval or not by the shareholders. But the fact that the figure is the same is mere coincidence. Thank you for being with us.

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Operator [19]

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We have Daniel Guardiola from…

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division – Director of Equity Research [20]

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I also have a question and a follow-up about the buyback program and about the reasoning behind that buyback and why did you go through the buyback instead of distributing dividends? Did you have in mind the impact of these dividends on the liquidity of Nutresa? And do you think that — of course, you do that — the buyback, whether those conditions — we believe those conditions are favorable. What will be those favorable conditions, what price or whatever?

And my second question is about the cost structure. We have several quarters saying that this cost structure, especially sales expenses are growing below the growth of sales, organic growth. And I’d like to understand a bit about how sensitive or how fast can you decrease the costs as long as we see growth in volume? How is it, too dilute or fixed expenses?

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Unidentified Company Representative, [21]

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Thank you, Daniel. First of all, thank you for being with us. And let me go to your question about the buyback plan — project. Grupo Nutresa, the assembly of shareholders historically has decided that a significant part of the profits from each period has been between 30% and 50% historically should be used to reserves for future investment and the rest for sharing dividends, which usually grow above the IPC (sic) [CPI], the Consumer Price Index every year. And that has allowed the company to have positive evolution in the finances. And the company has been able to finance the organic and inorganic growth with very good results.

As I said earlier, the figure of COP 300,000 million every year, it’s COP 100 million a year, it’s about 1/6 of the free cash flow, it’s something moderate. So if you figure those COP 300,000, what percentage of the shares of Grupo Nutresa that represents is between 2% and 3%. If you take today’s savings program, it’s an interesting program, as I said earlier. It’s an additional tool to manage Grupo Nutresa. And the reason by the Board is the fact that if we have market conditions, the shareholders can buy them. That’s one. The other thing is about the effect on liquidity, it’s also very clear to everybody. You should remember that when a company buys back shares, I was saying that those shares go to the company’s treasury and are there to be able to use them. Nobody say that you do buy back to cancel them all, no. The company could prefer to use that for the various areas like the (inaudible). We sell them, use them as part of payment, for example. In an acquisition, they can keep them some time and release them gradually. And in that respect, that liquidity area has been highly studied, and that is why the amount is what it is because we’re not going for 20 or 30. This is — allows so that when we have those conditions, the Board of Directors can approve because this is — these projects are not autonomous for the acquisition. Those acquisitions must be approved by the Board of Directors. So I think there is a tool that, as I said earlier, is a lot — is in a lot of markets around the world, less frequently in the Colombian market, but I think it’s one of those tools that allows us together with others, help dynamize the things so that shareholders can benefit.

The second question is, well, about the dilution of the volumes. The volumes try to — or attempt to decrease — dilute the fixed costs as long as the other variables have a good performance. And it’s the volume by themselves are not dilution factors. Like last year, for example, with very good volumes, the effect on prices remained almost stable. The only difference with this exchange, we didn’t transfer that effect of FX on to the market, and that has a very big impact, which has improved margin. We have much — very good gross margin enough to work more with the sales expansion like — we only keep the profitability equation stable throughout the returns.

So although they do not dilute by themselves and didn’t happen last year because of the effect of the rate of exchange. And today, we can — we’re more and more active in the pricing activity, and that will probably help us with our expenses, and we’ll still recover the operating and the gross margins.

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division – Director of Equity Research [22]

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Can I ask one more question? You said, when you spoke about 2020, you expect profits for the company to be above the cost of capital. Yes, well, the ROI and ROIC, I don’t know, but how much do you expect profits to increase in 2020? How do you see those — the split between profitability and cost of capital?

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Unidentified Company Representative, [23]

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Our objective initially was to recover cost of capital. This year, we achieved that. If you look at the analysis when it goes up or when it goes down like we really got that first, in fact, going back to 2019 when we had the same productivity plans, control of price was very good, judicious working capital management. But we have a very general idea because we don’t give specific guidance, but we evaluate the abilities that we have based on the returns that we drive. We’re very committed, so that we can — although these can improve the cost of capital, and not to reduce a few basis points.

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Operator [24]

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I will give the floor to Catherine Chacón for final comments.

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Catherine Chacón Navarro, Grupo Nutresa S. A. – IR Director [25]

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I think that this is the end of our teleconference of results for the fourth quarter of the year. Thank you, everyone, for your participation. And I would like to remind you that the contact line with the Investor Relations department is going to be available for your questions and other comments. Good day to all. Happy week.

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Operator [26]

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Thank you for your participation in this event. You can now disconnect.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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