Grupo Bimbo, S.A.B. de C.V. (GRBMF) Q3 2023 Earnings Conference Call Transcript

Grupo Bimbo, S.A.B. de C.V. (OTCPK:GRBMF) Q3 2023 Earnings Conference Call October 26, 2023 7:00 PM ET

Company Participants

Rafael Pamias – COO

Diego Gaxiola – CFO

Mark Bendix – EVP

Conference Call Participants

Fernando Olvera – Bank of America Merrill Lynch

Ricardo Alves – Morgan Stanley

Ben Theurer – Barclays

Felipe Ucros – Scotiabank

Alvero Garcia – BTG

Alan Alanis – Santander

Lucas Ferreira – JP Morgan

Operator

Good day, and welcome to the Grupo Bimbo’s Third Quarter 2023 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the Company’s website @www.grupobimbo.com.

Before we begin, 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 would now like to turn the conference over to Mr. Rafael Pamias, Chief Operating Officer of Grupo Bimbo. Please go ahead, sir.

Rafael Pamias

Yes, good afternoon, everyone. Thank you for joining us. Connected on the line today is our CFO, Diego Gaxiola, Mark Bendix, Executive Vice President; and several members of our finance team. Unfortunately, Daniel is unable to join us today, but I will try to communicate the message the best way I can.

Before presenting the company’s financial results, I would like to express on behalf of myself and all Grupo Bimbo’s associates our deepest solidarity with the people from the state of Guerrero, who is currently facing an extremely difficult situation after the impact of Category 5, Hurricane Otis on the Mexican pacific coast, which has severely affected the city of Acapulco and its surrounding regions.

Although the enormous damage that this phenomenon has caused is very difficult to quantify yet, we hope that families will soon be able to return to their homes and find the necessary strength to recover the daily lives and move forward. Around 500 Grupo Bimbo’s associates leaving the affected areas, we’re taking all necessary actions to ensure their well-being as well as that of the families, our consumers and customers. We will be monitoring very closely the situation to take the actions to help alleviate the impact of this event. Our hearts are with you.

I’m going to start now, in the face of a very strong Mexican peso increase that moderated inflationary pressures and the MEPPs noncash benefit registering the third quarter of 2022, which makes the comparison in some metrics tougher. Our results for the third quarter were exceptional as we reach record levels for net sales and adjusted EBITDA, of course excluding FX rate impact, and our EBITDA margin is strongly expanded 50 basis points, now stand at a robust 14.6%. Both key metrics have consistently improved, showcasing 10 years compound annual growth rates of 5% and 7% respectively.

Moreover, we successfully completed two strategic acquisitions and our CapEx investments reached record breaking levels so far. We also advanced towards our ESG goals, reaching 27 countries which are now operating with 100 renewable electricity. And we were ranked number one as the company with the Best Corporate Reputation in Mexico by Merco.

In September, we held the 2023 Bimbo Global Race, and thanks to more than 300,000 participants, including 180,000 virtual runners, more than 2.8 billion slices of bread are being donated to food banks around the world. Before I jump into the result of the quarter, I would like to share with you the three investments we made through Bimbo Ventures, our venture capital arm, Harbinger [ph] Motors, Healthy Brand and [indiscernible]. We also kick started our second edition of Bimbo Open Door, our open innovation program focused on collaborating with promising startups. In this year’s edition we’re focusing the program on the cookies and bars categories.

Looking now into the results by region for the quarter, North America deliver another quarter of strong top line growth, growing more than 6%, excluding FX effect across all categories, with notable growth rates from buns and rolls, breakfast and salty snacks. However, volumes were soft, consistent with the overall category, but more than upset but carryover pricing which was implemented in 2022. It is relevant to mention that the rate of decline is slowing sequentially. In fact, in the first weeks of October, we saw share gains on our sweet baked goods and English muffins businesses, which are critical to the overall success of achieving North America’s top and bottom line objectives.

Adjusted EBITDA margin constructed 80 basis points. This construction is primarily due to continued but moderating inflation, category and channel mix partially offset by improved productivity benefits. We remain focused on eliminating waste and investing in key areas of our business to optimize our operations and ultimately reach our full potential.

As we move forward into the fourth quarter, we anticipate a better volume performance. These improvements will be a direct result of the innovative and effective commercial strategies we are currently implementing in the marketplace. We remain confident in our ability to overcome these challenges and drive the growth trajectory in the right direction.

During the quarter we successfully acquired Mile Hi Bakery in Colorado U.S., known for producing buns and English muffins for the QSR channel. This strategic acquisition strengthens our geographic presence in these high growth industry and open doors to new QSR customers in the US.

In Mexico, we are thrilled to report a remarkable increase of over 8% in net sales, primarily driven by favorable price and product mix. Notably, we witnessed healthy growth in various categories, especially tortillas, cookies, buns, cakes and snacks, and double digit growth in the convenient and retail channels. Our adjusted EBITDA margin posted significant expansion surging by 140 basis points. This was a direct result of sales performance, coupled with lower cost of sales and enhanced distribution network efficiencies, including the incorporation of digital solutions. These achievements reflect our commitment to delivering quality products while ensuring cost effective operations for sustained growth in the Mexican market.

Moving to EAA, we achieved an outstanding growth of over 20% in sales, excluding the impact of FX fluctuations, this remarkable growth was primarily driven by a positive price and product mix throughout the region, with notable strengths in Iberia. Additionally, the continued robust performance of Bimbo QSR, especially in China, along with the contribution from our strategic acquisitions of Vel Pitar in Romania, and St. Pierre in UK contributed to this growth.

Adjusted EBITDA margin posted a strong 100 basis point expansion, mostly due to the strong sales performance, lower cost of sales, and the successful implementation of productivity enhancing initiatives.

During the quarter, we also completed the acquisition of the majority stake of our QSR business in Switzerland, Fortisa, leaving us with a 60% stake of the business. This allows us to integrate the facility in our footprint to further enhance our presence in the country.

Finally, moving on to Latin America, excluding FX effect, net sales increased more than 14%, with growth in local currencies in every organization, highlighting Brazil and the Latin Sur division, favorable price mix across the region and a strong volume performance in Brazil, which continues to post record breaking results.

Adjusted EBITDA margin reached a sustainable double digit record level at 10.5%, attributed to the strong sales performance, improved product mix and productivity benefits across the business, highlighting the extraordinary performance of Brazil.

I will now like to turn over the call to Diego, who will walk you through our financials. Please Diego, go ahead.

Diego Gaxiola

Thank you, Rafael. Good afternoon, all. Thank you for joining us today. Our third quarter results continue to impress, especially when we consider a soft consumer environment and a complex operating environment in some markets. We were able to reach record levels of net sales and adjusted EBITDA. Of course excluding the super peso effect.

Our sales grew above 8%, excluding FX effect. Our adjusted EBITDA margin expanded 50 basis points, reaching 14.6%. And our operating margin, excluding the MEPPs noncash benefit of the third quarter of last year improved by 30 basis points.

However, our financing costs rose by over 30%. Mainly due to increase debt, debt refinancing of our perpetual bonds completed earlier this year, and the impact from higher interest rates. As a result of the FX translation effects, the net effect and the higher financing costs our net majority income declined by 31%. Our cumulative effective tax rates close the quarter up 33.5%.

Shifting to the balance sheet, our net debt to adjusted EBITDA ratio stands at 2 times, with total debt increasing by MXN 23 billion. These primarily because of higher debt position, the perpetual bonds refinancing accounting impact and the strategic acquisitions completed in the past 12 months. Coupled with our intensive capital expenditure program, aimed at fostering our prospective expansion across diverse countries and product categories.

We have also seen a rise in short term debt, mainly due to the upcoming maturity of our 2024 bonds. We are continuously evaluating market conditions and alternatives to face such maturity. At the same time, we remain confident given the flexibility and liquidity that our committed revolving credit facility for $1.93 billion provides to us.

Our net operating working capital increased by 3.3 days over the third quarter of 2022, equivalent to around MXN 3.4 billion, mostly due to increases in inventories and clients.

Lastly, despite the FX rate conversion effect, our local currency results remain strong. And we would like to reaffirm our 2023 guidance. We continue to anticipate sales growth in a low to mid-single digit range. As for the adjusted EBITDA, we expect to have grow between the mid to high single digit range, as we feel confident that during the fourth quarter, we will have a normal quarter with a margin expansion.

On CapEx, we continue to expect to be within the range we previously provided with investments between $1.7 to $2 billion. We have weathered the worst of the impact from commodities inflation. And as we move into the fourth quarter and beyond, we will start to see some payments. These combined with operating leverage from sales growth and productivity gains from past embedment in CapEx and OpEx. As well as the positive effects of our FX rate hedges will help us to reach our profitability targets for the year.

In completion, we remain committed to our long term goals. I look forward to continuing our journey of growth and profitability. Thank you for your attention and ongoing support. We can now proceed with the Q&A session please.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question will come from Fernando Olvera with Bank of America. Please go ahead, sir.

Fernando Olvera

Hi, good afternoon, and thanks for taking my question. The first one is related to North America. How do you expect mix and categories to behave in the fourth quarter and 2024, given the softness and overall mix that you observed this quarter? And my second question is related to Mexico, if you can explain the lower administrative expenses, and how should we think about this line going forward? Thank you.

Rafael Pamias

Mark, do you want to take the first question on North America?

Mark Bendix

Sure. Great. Good afternoon, all. Let me talk to you a little bit about what we see in North America. First off, I need to share with you how proud I am of our frontline associates, how they continue to rise any challenges presented to us and we know we’re seeing a dynamic environment. So as we as we navigate through this dynamic environment in which we compete, we remain focused on controlling what we can control right. So we’re going to continue to leverage our frontline capabilities to drive top line growth across our categories, so that relies on new innovation, alternate channels, sweet baked goods, and snacks.

We continue our discipline pricing execution in the face of ongoing inflation. We’re actively monitoring the demand elasticity trends, and our channel mix so that we can adjust to meet the evolving needs of our customers and consumers and drive the improvement — margin improvement that we expect. What we’re seeing now is we’re seeing that inflation is beginning to moderate. And we expect that rate of inflation starting to improve in Q4, which is welcomed.

Our supply chain continues to improve as well. And we made meaningful progress on our cost savings and productivity initiatives, which are in turn led to vast improvement in our service levels. So all in all, we’re looking at many facets in this dynamic environment. And we are cautiously optimistic for the fourth quarter.

Diego Gaxiola

Great. Rafael, if you want I can take the question regarding the administrative expenses in Mexico. Say that, Fernando, this is based on different airports. One, of course is having a very tight control of expenses. We have continued to push aggressively internally, the zero rate methodology and been very cautious on every dollar that we impact the expense, in all the different geographies of the company. We have also been able to use and leverage more of the use of technology, which is also helping. And finally, I would say we have a partnership tailwind effect by having a stronger peso exchange rate as all the expenses that we have outside of Mexico represent less pesos because of these strength of the Mexican peso.

Fernando Olvera

Great. Thank you so much.

Operator

The next question will come from Ricardo Alves with Morgan Stanley. Please go ahead.

Ricardo Alves

Hi, everyone, thanks for the call. I wanted to insist a little bit more in North America, specifically on sweet snacks, it’s roughly the same question that I asked in the previous call. But I noticed in your preliminary remarks that it seems that sweet snacks, or at least if I understood correctly, sweet snacks are improving. And I find that very interesting. We’d noticed that competition within the sweet snack category specifically, has been tougher in 2023, so I just wanted to see if you can expand specifically on this category. Is it anything specific that you’re doing? We’ve discussed many times, perhaps being what tacking the C-Store channel more effectively, if maybe that could be a possibility. So just wanted to expand a little bit more in that category specifically?

And then the second question, which is also in the U.S., but a little bit related to the other stuff. I just wanted to get the latest on your private label exposure and the evolution of the mix because I noticed you mentioned a couple of times unfavorable mix in the U.S. as well. So I just wanted to get a sense on private label. And then just a very quick question if you know how management, how you guys are thinking or assessing the risk of potential demand impacts associated with you know, GLP-1 drugs and overall the obesity drugs discussion that is picking up in the U.S. Appreciate the time, thank you.

Mark Bendix

Okay, let me talk a little bit about sweet bakers and how we’re viewing that. Thanks for the question. So obviously, volumes have been soft, but they’re also trending along with the total edibles category, which is down 2.1%. Total breads are down 2.3% in units and total sweet baker’s 2.7%. And we know that the consumers are stressed in seeking value for sure. And from a share perspective, private label and value brands have gained unit and dollar share. So we continue to invest in our marketing, delivering enhanced programs and trying to deliver excitement in our brands.

We recognize that sales growth of across all categories driven by prior year and pricing actions for the most part. And so if you look across many of our categories our share performance was soft and mainstream breakfast and sweet baked goods, while premium and buns and rolls are growing along with snacks. But like many CPG companies, we continue to experience those cost pressures across many of those areas in our business. From elevators, input costs, transportation, real estate, labor, and offset by carryover pricing and strong execution.

We were excited about our sweet baker’s because we continue to invest in portability. And just the question suggested expanding the channels were those sweet baked goods will become relevant, like C-store. So we see great opportunity in that expansion.

In terms of, I’ll hit the second question, which was, I think private label is what you mentioned. And so let me give you a little bit of feeling about what we’re seeing in North America. So category volume is soft, including private label, however, private label is gaining, share both dollar and units. As consumers are now seeking volume that we’re seeing that there’s been a challenge consumer and certainly a dynamic environment for sure.

Our mainstream premium buns and rolls and breakfasts and sweet baked goods were challenged, as consumers traded down the private label and value based retailers. Consumers are largely gravitating towards value and channel in the club and mass, as well as private label. Also, some premium buyers are also trading down to mainstream. So while we focus our efforts on branded business, we do have a significant private label business and our private label and food service business play an important role in our portfolio. So we’re focusing heavily on that.

We look from asset utilization, to building partnerships for our customers. And our goal is to ensure that we’re continuing to improve the profitability and efficiency of our non-branded business. And just as a bit of perspective, during the pandemic, many of the manufacturers narrowed their SKU assortment, as a necessity to mostly branded items. As we were all challenged and had a smaller workforce. And now that the pandemic is over, and our job is not solely feeding America, it’s the SKU assortment has expanded again in the availability of fully skewed assortment, and branded label expansion.

So just for perspective, the gains that we made and share in dollars we’ve largely kept from during COVID. Now the last quarter has been challenging, but we remain optimistic that our initiatives on promotion, productivity and innovation will continue to add momentum for us.

Rafael Pamias

I will take your second question. We’re looking in and studying it seriously. Like any upcoming trend or, or changing consumer habits, we do believe at this point that it is too early to tell the effects, also the side effects and potentially scalability. What we can also tell you is that when we take a look at our categories, our overall sentiment is positive. Our balance is positive, because we’re seeing a continuous and strong shift to branded and packaged, because consumers are keep looking for safety, convenience and innovation.

Take a look at our expanding geographical footprint. The fact that we are making our recipes also more natural and simple. And last but not least, we are laser focused on grain based solutions, which is one of the key points of the upcoming planetary diets. So nutrition is not only about eating less, but in our case and in the case of grains, all the recommendations is about to eat more. So in overall I would say we are cautious we are serious about assessing it but we are confident and busy to keep growing our categories

Ricardo Alves

Very helpful. Thanks everybody.

Operator

The next question will come from Ben Theurer with Barclays. Please go ahead.

Ben Theurer

Yes, good evening. And thank you very much for taking my question. Congrats on the results. Just wanted to follow up on two things that you’ve flagged in your report and wanted to maybe get a little more color as it relates to just the volume performance across different regions. So you clearly put on a little more of an optimistic toma. Wanted to understand what you’re seeing in like volume dynamics, North America, Mexico in particular, but also EAA and Latam, consumer behavior down trading, back trading, private label versus brand. Where do you think this is going to shake out in the next whatever, two to three quarters or so?

Rafael Pamias

You want to start Mark with the U.S., including the follow-up.

Mark Bendix

Sure. Thank you. As I put the details in the last question, we remain optimistic that the challenge consumer will start migrating back. It’s been definitely a challenge consumer in the last quarter. It’s like no dynamic that we’ve seen recently, with post COVID environment. We’ve got people that are being welcomed back to work. So sweet baked goods and breakfasts have been a bit challenged.

We think that evens out as we go forward and the work environment begins to even out and we continue to invest in our promotional and our innovation strategies. That’s what we’ve seen with our promotional strategies. The elasticity is not the same that we’ve seen in previous years. So we know it’s a dynamic environment. But we know we’re making investments in innovation in alternate channels that we see significant growth for the U.S. so we remain optimistic. Rafael, if you want to handle the rest of the world.

Rafael Pamias

Yes, I will start with Mexico, being Mexico important for us. Like many other companies, the volume has been soft, following very acute price increases. However, it is evolving positively quarter after quarter. So we expect soon to be growing again. Okay. Modern trade is already growing robustly. And we have identified clearly what are those cells, where we should be focusing, which is around some categories on the traditional channel, and in the center of the country. And in those areas, this is where we are over indexing our promotional programs and price pack architecture changes.

In overall, we’re seeing two things. One is a good trend recuperating. In part, because the fact that the last price increases made last year, one could claim that we were pushing the envelope a little bit much. So we’re going to have a positive comparison. On the other side, we’re also experiencing some down trading to cheaper options inside our portfolio or with the competition and also private label.

And we have recognized that in the last months, and we have started a three legged program, the first one being to deliver superior quality, and we are obsessed with making sure that a high percentage of our net sales are done with clearly superior products. So this is something that is an internal dynamic that is getting a lot of traction.

Number two, we’re going into a increasing significantly the level of our innovation. And we have programs where we have ready replicas to rollout. And last but not least, we are pushing hard to become a lower cost producer, and in this sense, having a more neutral effect, regardless where our volume is going.

Ben Theurer

Okay, perfect. And then I have one just quick follow up, I guess for Diego. Looking at the comprehensive financial cost during the quarter that went up by a little over 31% to MXN 3.1 billion. If I look at it on a year to date basis, it’s also up like 40% versus the same nine-month period last year. So going forward, how should we think about it? I mean, explain some of the debt itself and the higher position and some of the higher rates on that. But is that a level we should now assume for a quarterly basis? Or is there something we need to consider, that’s going to bring that cost down on a quarterly basis from that free-ish billion level we’ve seen more recently?

Diego Gaxiola

Yes, Ben. The effect that we have been facing in the third quarter and the previous quarters of 2023, basically, in one hand, because of the increase in debt, as I mentioned, we have been in new low, we have been quite aggressive in our capital expenditure program. We’re expanding our production this year with new factories, new lines, licensed expansions, and investments are all over the place. And the second one, we have also been successful on knowing some strategic bolt-on acquisitions that have continually demanded additional resources. So these main two factors have taken the company to an increase on the leverage.

The second, I would say is the accounting effects from the refinancing of the perpetual bonds. Simply quarter one, we recognize the amount of the perpetual bonds as debt, but also the interest expenses related to these bonds were previously recognized on the equity line. And that they have been hitting the P&L of the company, and of course, this effect will remain going forward, as we already did the refinancing strategy of these $500 million, mainly through the issuance of the local bonds in Mexico, through Certificados Bursátiles for MXN 15 billion.

Also, considering these, I think that this year in particular we have seen an extraordinary increase because of these two factors of increased leverage, plus the accounting effect of the perpetual bonds. And lastly, the effect from higher interest rates.

Now the good news is that we have more than 70% of our debt with the fix rate. As you know, we have a very conservative and a strong debt profile, we have a lot of bonds that were issued for 30 years, we have been moving a little bit closer to the buyer one side, as we did with the issuance of the local bond that MXN 3 billion are variable TA [ph] plus 10 basis.

We have some short term financing, also that are variable and revolving credit facility as well what we have access. So this is also putting a little bit more of pressure. But again, the main two components are leverage and the accounting effect. Now the accounting effect, we will not have that difference for next year. And I mean fact to tell on still early to give an indication on our expectations for 2024, but definitely this year has been a little bit more intensive as any other year in terms of the demand of cash because of the combination of CapEx and acquisitions.

Ben Theurer

Perfect, very clear. Thank you very much.

Operator

The next question will come from Felipe Ucros, with Scotiabank. Please go ahead.

Felipe Ucros

Great. Thanks, operator. Good evening, Rafael, Mark, thanks for the space. My first question is on North America decoupling. You’ve had a string of very good results over the last few years. But it seems that the U.S. is decoupling a little bit from the other markets. Excellent quarter outside of the U.S. double digit EBITDA growth rates in FX neutral terms, but obviously less strong in the U.S., very often other markets tend to follow the U.S. and the cycles.

So I guess my question is, are you expecting some kind of deceleration in the other markets? Are you seeing any signs that the consumer is reaching a similar exhaustion point that we’re seeing in the U.S. or is it really a tale of two markets as far as you can see in consumption trends?

Mark Bendix

Well Rafael, do you want to address the link to other markets from U.S.?

Rafael Pamias

Yes, and your start with the U.S. and I will ask Felipe to rephrase again, I had a problem with my connection. Apologies. But you can, Mark. We will answer you, Felipe.

Mark Bendix

Felipe, obviously, what we’re seeing in the U.S. is about consumer trends, we’re seeing consumer confidence up a little bit, but it’s still at historically low levels. And however, the consumers are trading down for this period of time seeking value and choosing private label and more economic items. But that we continue to invest in our premium products. As Rafael said, we’re investing in absolute superior quality in the U.S. as a main dynamic.

And so we’re hoping that the consumers come back, we’re beginning as Rafael mentioned earlier, we’re seeing some buoyancy in our breakfast items. And that gives us hope that this dynamic in the U.S. are starting to alleviate both, obviously, we’ve got to continue to watch it very dynamically. And in terms of the link to other parts of the world and U.S. being a trend, I’ll let Rafael to address that.

Rafael Pamias

Yes. What I would say is that what we see in most geographies is a temporary effect on consumers being more pricing, and therefore choosing more value for money propositions. And at the same time, we see an accelerated effect that’s not in every geography, and not with the same intensity and characteristics of let’s say, the hardest count evolution, right. And — so we are attacking both effects in a different way.

As we mentioned before, on the temporary downgrading, we are working on price pack architecture. What we see and Diego was mentioning at the beginning of the meeting, what we’re going to be starting to see some relief of the pressure of the raw materials. And it is now our intention to put money back in the market in order to make our products more temporary, attractive.

On the other side on this accelerated effect that I claim again, it’s not everywhere and not with the same intensity and characteristics. We are recognizing the evolution of these discounters or private label push in some geographies. And our intention is to reach every consumer in the end building portfolio solutions for everybody. And this is where and I reiterate that one of our main concerns or occupations that, is to become a low cost producer. So that making sure that it’s going to be a neutral effect, regardless where our volume is going. So a lot of activity internally in the company to take advantage and to be more I would say attractive, both in the temporary issues and in the more permanent ones.

Felipe Ucros

No, that’s very clear. Thanks, guys for those comments. Maybe just a follow up, it’s another quarter a very strong C-store and retail growth in Mexico in those two channels. So just wondering if there’s any particular micro drivers behind that? Is the same macro to consider in Mexico doing well?

Rafael Pamias

I would say I would say that we’re sales people are doing an excellent job in nurturing and developing the channel, both in making amendments, positive amendments in our go-to market making it more easy and more profitable for both us and the customer. And also, we are pushing certain categories that convenience stores are very eager to invest on. So it is a combination of sales serving, go-to market adjustments and picking up the right categories to push. But yes, we are very happy with the job done by our sales associates in this channel. We are over in saying I would, at least in this period of time that we are referring, we’re doing it slightly better, I would say.

Felipe Ucros

Great. That’s exactly what I was looking for. Thanks a lot for your comments, guys.

Operator

The next question will come from Alvero Garcia with BTG. Please go ahead Mr. Garcia, possibly your audio is muted.

Alvero Garcia

Sorry about that. I was muted. Good evening, gentlemen. Thanks for taking my questions. Two questions, what the first one for Mark and second, on the penetration in the U.S., you know, where are we sort of in the story of increased penetration across channels. I feel like there’s a lot of room to be had there. And I’d love to hear your latest thoughts on that.

And then another one very similar to what Felipe just asked on sort of your channel mix in Mexico. But sort of focusing on the traditional channel, you mentioned, it’s an area of opportunity, particularly in the center of the country. And we noticed that’s even numbers were quite weak as well, mid-single digit volume declines. Is there something going on in the traditional channel? Why do you think we’ve seen a little bit more of a lag in the traditional channels, Rafael relative to modern trade? Thank you very much.

Mark Bendix

Alvero, you cut out a little bit on your first question, was the question regarding tackies [ph] in the U.S.?

Alvero Garcia

It was about sort of where we are in the evolution of greater penetration across specific channels?

Mark Bendix

Yes, so you’re exactly right. We continue to make investments in alternative channels. And we believe that the expansion of our portfolio plays well, in the C-store environment and in the all channel. So we are actively investing in, you’ll continue to see us in automation in price pack architecture, so that we can penetrate those channels more completely and have a much higher penetration rate. So your question is actually right on target and definitely an area of focus for us.

And regarding Mexico, softer evolution of volume in those sales that I was referring mainly more on the center of the U.S., either U.S. — the Mexican excuse me, the traditional channel and we would a, the reaction is typically lower when you want to revamp volume in traditional, your other tools in order to ignite excitement in modern trade. That is one of the reasons.

We’re seeing a better evolution on those sales lately. The weather didn’t help either. So it was an unseasonable rainy season that affected sweet bake goods immediate consumption. And sweet baked goods in median consumption is done in the traditional channel, all over Mexico, but also in the Central. So — and we have noticed that there was less money in the market, especially in the center. Okay. But we are addressing those issues were trending better. We are developing price pack architecture in sweet baked goods. The weather has been better now for our sales purposes. So I would say that it is a temporary effect. Okay.

Alvero Garcia

Okay, great. Yes.

Rafael Pamias

I think there’s also macroeconomic effects that we’re seeing, as with the abbreviation of the Mexican peso and euro does better than the — on these remittances, which is a very important driver for consumption in [multiple speakers].

Alvero Garcia

Absolutely.

Rafael Pamias

It’s been less Mexican pesos, although it has continued to grow, I mean, every month and every quarter. In peso terms, it has had a negative effect. And I think that this is also putting some additional pressure at that level of the socio economic level. That is more dependence on remittances.

Alvero Garcia

Yes, it’s a good point. Thank you very much.

Mark Bendix

Good point. Definitely.

Operator

The next question will come from Alan Alanis with Santander. Please go ahead.

Alan Alanis

Thank you and thanks for taking my question. Couple of questions. One, regarding costs and the other regarding going back to salty snacks and Takis. Regarding cost, we’re seeing the sugar prices at a 10 year high. I mean, it’s over 40%, higher year-to-date, sugar prices. What’s the bike that we should expect that this I know that other commodity prices are not seeing as much increases. But what’s the impact that we should see in the United States and North America from the surge in sugar prices? That would be the first question.

And then the question regarding salty snacks. The way I want to frame it is, you’ve been extremely successful with Takis. How big is Takis? And what are the chances that you can develop other brands and other salty snacks like you have in Mexico, in the United States of that magnitude and of that success? Thank you.

Diego Gaxiola

Yes. Rafael you can prepare, I can take the first one regarding costs of the impact sugar. You’re right. As you mentioned that we’re seeing record high prices for sugar. In the last 12 months, we have seen an increase of over 50% of sugar. Now, at first I can tell you overall within positive, as I mentioned, in terms of the commodity costs that we will face not only in the fourth quarter, but in the commodities, as we will start to see the decline or many of the commodities, in the with the most relevant one in our portfolio.

We’re finally starting to see these declining prices because of the hedging strategy that we have in place that is fully secure. And that what I mentioned that we feel very optimistic about the margin expansion in the fourth quarter, we’re finally going to start to see some deflation.

Even not everything is positive yet sugar has been increasing, we will have an impact directly in sugar next year. Unfortunately, will not disclose the specifics by every commodity or raw material. What I can tell you to give you the right perspective, is that sugar is less than 3% of our total cost of sales. So very small, what is not as big as some other commodities, as in the case of rate of course, that when we hope to see the same effect a year and a half ago, then which offer and we have to whether these many quarters have very high impact inflation effect on our P&L.

Alan Alanis

Got it. That’s very clear. Now that’s very, very clear in the reiteration of margin in the coming quarters as very useful. Okay, thank you. Thank you, Diego.

Rafael Pamias

And maybe I can take the other one. The salty snacks, definitely is one of our categories that is doing positive over the years. Very small player though, and definitely in some of the, let’s say, mature, salty snack markets for us, such as Latin Central, for example, we have already started to complete the portfolio, taking advantage of the Mexican portfolio that could resonate more with the local consumers. Yes, definitely we are doing that.

Alan Alanis

Got it. But what’s the relevance, I mean, any order of magnitude or any scale of Takis in the United States or any quantification of how much contributes to the U.S. business growth? Is it materials not material?

Diego Gaxiola

Alan, unfortunately, we do not disclose any specific information.

Alan Alanis

Okay, no worries. Thank you so much. Congrats on the results.

Operator

The next question will come from Lucas Ferreira with JP Morgan. Please go ahead.

Lucas Ferreira

Hello, everyone. I asked the follow up to the first one on the comments you made about the growth of private label of consumer’s down trading and also this view on the commodity prices going forward. The question is if you see risks of promotional activity picking up and eventually some maybe price rollbacks and I know it’s not common, especially in the U.S., but if in any specific category, you see a bigger risk of that happening, and also in Mexico and other regions if you see something similar?

And the other follow up is about your capital allocation, so that you guys would be very active in especially buyback, so if the debt appetite remains in place, with the shares level they are and considering your priorities for capital allocation? Thank you.

Diego Gaxiola

Rafael, if you want to take, can take the first one. Let me go back a little bit to 2022. Because we need to have the right context of where we’re standing. As you remember, 2022 was a very strong year in terms of top line growth, both in volumes, and even more because of price increase. So we needed to increase prices as we were facing a huge inflation effect from main raw materials. And as I mentioned a minute ago, some minutes ago, particularly from wheat.

Now, if you see the numbers of 2022, it’s hard to understand that having the price increases that we have, the volume increases, the productivity initiatives. And we lost 60 basis points on our EBITDA margin of 2022. So that can tell you a lot in the magnitude of the inflation impact that we had during that year.

Now, during 2023, for the first quarters of the year, we still have a have huge effects from the previous price increases, as every quarter has been passing through the carryover effect, it’s lower. So we’re cycling these price increases, you’ll see an example in North America, the last round of price increases happened in October of 2022. So we’re going to still have some positive impact from these last year, particularly but only in the last round.

For this year, what because of what we did on the brightening architecture along the planning of 2022, we’ve even saw the need to continue to increase price. Because of the hedges that we have in place as we provide the stability to the operations of the company through this strategy, we knew that we were going to start to have some tailwind effect till the fourth quarter. If you remember when I provided the guidance for the full year 2023, I did mention that the second half of the year and particularly the fourth quarter, we will start to see some deflation effects.

Now, what I want to tell you overall is that even though we’re starting to see commodities at a lower cost these doesn’t mean that we have lower costs then previously to 2022. So 2023 is going to be a year in which we do not recover 100% of what we lost on margins in ’22, we’re going to be very close to recover this.

Now, again, we are aware that an important component of this margin increase has a CapEx behind. There are a lot of productivity efforts that we’ll put in capitals, in order to achieve that additional profitability. We need to see the payback for that. So what I want to tell you is that even though we’re positive in terms of commodities is not that we have a space to think on being aggressive on promotions or even thinking of lowering our price.

Mark Bendix

Yes, and I can complement on that. I would say that we are ready to be more attractive and more visible and more accessible. But this is done through price pack architecture, putting back money into the market, promoting more innovations, replicating what we have in in the market and other markets, I mean, and basically being more active in trade spend but more on permanent exhibitions rather than high end loss. So it’s, again, more attractive, more visible more accessible. Okay.

Lucas Ferreira

Excellent. Thank you very much.

Operator

This concludes our question and answer session. At this time, I would like to turn the floor back over to Mr. Diego Gaxiola, for any closing remarks. Please go ahead, sir.

Diego Gaxiola

Yes. Thank youall for your time today. Please do not hesitate to contact us with any further comments or questions that you might have. Thank you.

Operator

Thank you. This concludes today’s presentation. You may now disconnect your line at this time and have a good day.