Pochteca: Earnings Call 2016-IV
Internal strategies and external positive shocks in 2017 – During Pochteca’s earnings call, it were remarked those strategies that would be implemented in 2017 to improve the financial Pochteca’s position, but also some external shocks that would bring some benefits for its results. The following were highlighted:
1. Change of the Coremal’s CEO – The purchase agreement for this subsidiary included the maintenance of key directors in the company for a determined period. The management is on the process for recruiting the new CEO.
2. Decreasing working capital days– i) In relation with the accounts payable, it was mentioned that the PEMEX restructuring was an unfavorable factor for the company, for there were some contracts with the disappeared branches (which used to offer attractive terms and discounts) that have not been renegotiated; nevertheless, the management is confident that new agreements should be signed with the new entities, which could increase the days payable outstanding. ii) Inventories reduction opportunities are still probable.
3. Free Cash Flow should raise on 2017 – There should not be new extraordinary expenses (at least not as high as those observed in 2016); the expenses restructuring would derive in major operating margins and it is expected capital expenditures lesser than MXN$50 millions.
4. Lower Brazil’s interest rates and debt refinancing – A favorable additional factor is the interest rate slope in Brazil. On February 22nd, the Central Bank of Brazil cut its target interest rate, to 12.25% (from 13%), a fact that benefit the interest payment on debt in Brazilian reals (that thanks to derivatives coverage, represent approximately 33% of total issued debt).
Regarding debt in general, certain debt covenants unfulfillment were discussed. The administration highlighted that independently of the monetary policy normalization and the debt covenants, the interest rate spread that effectively is paid increases automatically accordingly to the surpass on certain steps on financial ratios. Also, the administration highlighted that Pochteca is already on a debt restructure process. It is expected to have another year on the term and amortizations starting on the second year (2018).
For the Coremal buy, some contingent payments where agreed, which depended on the previous year flow generation. The administration pointed out that due to the low flow generation in 2016, the payment for the former Coremal investors could be zero (10% of the business was delivered without payment); however, it is expected that on the next years while the VE - Net Debt differential is positive, the acquisition payment has to be effective.
5. Increase in sale prices – Higher prices of some alimentary and oil products are expected, which could reduce the gap of the deflationary damage vs the dollar appreciation benefit.
6. Regarding the due diligence expenses and new acquisitions – In the Q416, extraordinary expenses were recognized for MXN$13 million (40% of expenses recorded in 2016), MXN$6 million came from due diligence to evaluate possible acquisitions.
The administration highlight that a Brazilian company called Quantiq was analyzed for its possible acquisition and that despite the challenging environment in Brazil, this company represented an attractive opportunity due to the significant synergies (estimated to reduce by 30% Coremal’s expenses), greater market share to be won and low purchase multiple.
Although they haven’t reached an agreement for the purchase of Quantiq, Pochteca mentioned it is constantly looking for new acquisitions, as the consolidation of companies in such a fragmented market is always beneficial to protect profitability. Besides, no new acquisition would compromise the balance.
7. Gradual recovery in Brazil - Management and analysts in general estimate that the slowdown in Brazil is already bottoming out and 2017 could be a year of slow recovery. The Q117 could come with significant declines due to the high base of comparison (Q116 was a good quarter) and the improvement in comparative terms could be better seen by the second half of 2017.