BMBOY - Grupo Bimbo S.A.B. de C.V. (GRBMF) Q2 2023 Earnings Call Transcript
2023-07-26 09:30:21 ET
Grupo Bimbo, S.A.B. de C.V. (GRBMF)
Q2 2023 Results Conference Call
July 25, 2023 07:00 PM ET
Company Participants
Daniel Servitje - Chairman and CEO
Diego Gaxiola - CFO
Rafael Pamias - COO
Mark Bendix - EVP
Conference Call Participants
Fernando Olvera - Bank of America
Alvero Garcia - BTG
Ricardo Alves - Morgan Stanley
Louis Villard - GBM
Sergio Matsumoto - Citigroup
Antonio Fernandez - Barclays
Felipe Ucros - Scotiabank
Alejandro Fuchs - Itau
Ulises Argote - JPMorgan
Federico Galassi - TRG
Presentation
Operator
Good day, and welcome to the Grupo Bimbo Second Quarter 2023 Results Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Daniel Servitje, Chief Executive Officer. Please go ahead, sir.
Daniel Servitje
Thank you very much. Good afternoon, everyone, and thank you for joining us. Connected on the line today is our CFO, Diego Gaxiola; our COO, Rafael Pamias; Mark Bendix, Executive Vice President; and several members of our finance team. I'm very proud of the remarkable results of the quarter. Despite the FX rate effect and a highly inflationary environment, we reached record levels of sales and EBITDA growing more than 4% and nearly 8%, respectively.
Excluding FX effect, net sales grew at a double-digit rates while the adjusted EBITDA margin expanded 50 basis points. Bimbo QSR and Bimbo Brasil organizations outperformed, and we saw strong sales growth and EBITDA margin expansion in all 4 regions, even considering the continued high inflation, specifically in commodities and labor. This is a result of the strength of our brands and the hard work of our associates who have done an outstanding job at the execution at the point of sale with laser focus on baking and snacks industries.
We are committed to achieving our year-end objectives, and we'll continue to invest in our business to expand our brands globally. I would like to share with you that our venture capital arm, Bimbo Ventures continue to invest across different start-ups and venture capital funds, all of which helped strengthen our position within Food Tech, including sustained bake, [indiscernible] ALS, Stantec, Polira, Obli, cereal card company, Eranova and the Guild Lab, LatAm. Turning to ESG, we are very proud to have issued our first sustainability-linked bond in Mexico, which Diego will touch on shortly.
Also, 24 countries are now operating with 100% renewable electricity because Bimbo in China, Morocco and Kazakhstan closed the quarter reaching this important milestone. Now looking into the results by region for the quarter. North America delivered another strong quarter of growth growing nearly 12% in dollar terms, mainly due to the carryover pricing effect and favorable mix.
Our dollar share grew across premium bread and snacks and we saw improved volume trends sequentially for our branded business while private label continued to increase. Our business has remained resilient as we navigate a dynamic economic environment and an evolving consumer. Like many CPG companies, we continue to experience cost pressures across many areas of our business from rising input costs to labor.
Despite continued inflation pressure, adjusted EBITDA margin expanded 20 basis points, reflecting carryover pricing, strong execution and improved efficiencies. And finally, during July, we have completed the acquisition of National Choice bakery, a Minnesota-based, co-manufacturer of bagels or BBU, retailers and other customers.
In Mexico, net sales grew 12.6%, which was primarily attributable to favorable price/product mix. We experienced growth across all the categories and double-digit growth in the convenience and retail channels. Despite the higher commodities due to the hedges in place, our adjusted EBITDA margin expanded 20 basis points because of the strong sales performance efficiencies in the distribution network and, for example, digital solutions.
In EAA, excluding FX effect, sales increased more than 31%. This was mainly due to positive price/mix across the region, most notably Iberia, continued strong performance of Bimbo QSR following the reopening of China and the inorganic contribution of Vel Pitar in Romania and St. Pierre.
Despite continued high inflation and a challenging consumer environment in Iberia, adjusted EBITDA margin posted a 20 basis point expansion, mostly due to the strong sales performance and productivity initiatives. And finally, moving on to Latin America and excluding FX effect, net sales increased about 17%, reflecting growth in local currencies in every organization, highlighting Brazil, Chile, Argentina and Central America.
Favorable price/mix across the region, strong volume performance in Brazil, which continues on a positive trend and higher saturation.
Adjusted EBITDA margin reached a sustainable record level at almost 10%, given the strong sales performance, improved product mix, and productivity benefits across the business. Margin expansion across the 3 organizations, highlighting Latin Sur and a historical quarter for Brazil. I would now like to turn over the call to Diego, who will walk you through our financials. Please, Diego, go ahead.
Diego Gaxiola
Thank you, Daniel. Good afternoon, everyone, and thank you for joining us today. Our results of the second quarter continued to be very strong, especially when we consider a high inflationary environment, still higher commodities when compared to last year, because of the hedges we implemented during the back half of 2022, a complex operating environment in some markets, and a strong negative conversion effect from the Mexican peso exchange rate.
Moreover, we strengthened our financial profile with the issuance of the local bond while maintaining a conservative and efficient debt profile, well spread over time with a responsible approach towards leverage, duration and currency mix management. Our sales reached historic levels for the second quarter.
Our EBITDA margin closed at 14%. We posted mid- to high single-digit 10-year compounded annual growth rate for sales and adjusted EBITDA. And our operating margin excluding the MEPPs noncash benefit that we had during the second quarter of 2022, strongly improved by 50 basis points. This happened in a quarter where the FX rates play an important role because on one side, we have the strong negative translation effect on our financials while on the other, we haven't seen yet the benefit from a strong peso in our cost of sales due to the hedging strategy in countries like Mexico.
And as a result, during the second quarter in pesos, we see lower top line and EBITDA growth, and we still have the pressure on our gross margins. Financing costs more than doubled, mainly because of the FX effect and higher interest expenses. The effective tax rate stood at 34%.
As a result, our net majority income declined by more than 35%, mainly because of the second quarter and 2022 net effect. But excluding this effect, it declined by 11%. As we previously announced, Canada Bread, our Canadian subsidiary resolved allegations made against it as part of an investigation by the Competition Bureau into packaged bread.
We paid a CAD 50 million fine equivalent to USD 38 million, concerning 2 price increases implemented more than a decade ago when Canada Bread was owned by Maple Leaf Foods, not by Grupo Bimbo. In 2022, we recognized a provision in the North America segment because there was a high probability to reach an agreement with the authority.
We did not make this provision public because it could potentially have a negative implication on being able to reach this agreement. Having said that, during the second quarter, we did not have an impact from the fine.
Turning to the balance sheet. Net debt to adjusted EBITDA ratio closed at 1.8x, and our total debt increased by MXN 16.4 billion primarily because we temporarily finance our hybrid bonds with our committed revolving facility.
And finally, through the successful issuance in the Mexican market of our first sustainability-linked bonds or Certificados Bursatiles for MXN 15 billion. In fact, it represented the largest corporate SLB in the history of the Mexican market, the fifth SLB for Scope 3 globally and the first in Latin America in line with our ambitious global long-term sustainability strategy.
I am proud of the hard work of our teams as this transaction strengthens our financial position while reaffirming our sustainability targets, especially our commitment to become a net-zero carbon emission company by 2050. As a result of this issuance, the currency mix of our debt changed substantially. Now 57% is denominated in Mexican pesos, 33% in U.S. dollars, 6% in euros and 4% in Canadian dollars. Our net operating capital which mainly considers accounts receivables and payable as well as inventories and suppliers, increased significantly by 2.4 days over the second quarter of 2022, which is the equivalent of close to MXN 2.5 billion, and this was mostly due to increases in inventories.
And lastly, I would like to give an update on our guidance for the year with 2 important effects. First, we are including the appreciation of the Mexican peso, given that 70% of our business is outside of Mexico. And second, we are seeing better-than-expected trends in local currency. So as compared to our initial sales guidance, we have an impact of more than 6 percentage points.
Whereas in local currency, we are performing above our initial expectation. We are adjusting our sales guidance only from mid- to high single digit to low to mid-single-digit rates. These new FX adjustment in EBITDA represent close to 5 percentage points of negative impact on our growth. But also because of our performance being better than expected, we are now adjusting the guidance to a range of mid- to high single-digit growth from the previous high single-digit expectation. So as you can see, we are still expecting a margin expansion and trends continue to be strong, and we remain confident we will reach our expectations and surpass it in local currencies.
Remember that we are past the biggest impact on our results from commodities inflation. We will gradually start to see tailwinds during the second half of the year, but more on the fourth quarter. This coupled with the operating leverage coming from sales growth and productivity benefits from past investments in CapEx and OpEx as well as a positive effect coming from FX rate hedges will result in the margin expansion that we are expecting for the year. We can now proceed with the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions]
And the first question will come from Fernando Olvera with Bank of America.
Fernando Olvera
Diego, very quickly, I missed your EBITDA guidance. If you can repeat that, I will appreciate it. And my first question is how the volume elasticity has evolved across your territories now that you are not being aggressive on pricing or that you are not increasing prices at all? And how do you expect this to evolve in the second half of the year? That's my first question. I'll have a second one.
Diego Gaxiola
Yes. Thank you, Fernando. Let me probably divide the a question in 2 parts. And Daniel if you're okay, you can take the first part, the EBITDA expectation that we now have because of the appreciation of the Mexican peso, it's a mid- to high growth for the full year. Remember that the initial guidance was more on the high single digit. We have a more than -- a bigger than 5 percentage point impact. And again, as I said, our results have been above our initial expectation. So the negative consequence of the appreciation of the Mexican peso, it's less than this -- it's 5 percentage points, but we are adjusting less than 5 percentage points.
Daniel Servitje
Yes. Regarding the second question, Fernando, I would say that we have experienced elasticity in particular categories, I would say, mostly on the sliced bread category. And it depends country by country, but that is where we are. And we are reacting to these with the particular programs in each country, focused on restoring the opportunities that we find in this category and in some channels.
Fernando Olvera
Okay. Great. And if I may, just the last question. I mean, Diego, can you explain -- comment what explains the increase in interest expenses? And what should we expect in coming quarters?
Diego Gaxiola
Sure. We have -- on interest expenses, we have 2 effects. On one hand, at the end of the first quarter, as you probably remember, we call the perpetual hybrid bond. So since that day, the bond was continual debt and the interest expenses of this $500 million became also interest expenses instead of the equity treatment that they used to have for the previous life of this instrument.
So that created this accounting effect on our interest expenses as well as in the debt [indiscernible] that this in the first quarter had a 0.2x increase on our net debt leverage. Second, we have a higher debt today because we have had a negative free cash flow because of the CapEx and the acquisitions that we have been able to conclude in the first 6 months.
And third, also relevant, the increase that we have seen in interest rates. For the combination of these 3 things is putting some additional pressure to the cost of financing on our results.
Operator
The next question will come from Alvero Garcia with BTG.
Álvaro García
Two questions on my side. The first one on capital allocation and sort of you mentioned how your debt has shifted significantly to peso obviously to a higher peso mix. I was wondering sort of this would be a new normal going forward? Or if you'd expect that to fall going forward? It seems -- it sort of surprised us on the upside there.
And then my second question would be on mix in the context of your gross margin. Is there anything that we should be aware of in the U.S. or in Mexico in terms of something that might be sort of helping you on the mix front or hurting you on the mix front in this quarter?
Diego Gaxiola
Yes. Alvero, let me tell first, the way that we manage the currency mix of our debt is not necessarily fixed on a percentage basis. And so this means that we don’t necessarily have a perfect match between the percentage of revenues or profit from the different operations or segments versus the composition of the percentage that we have on the debt profile of the company. What we basically take care is that we do not run any risk from a currency perspective, having an exposure to a specific currency that we do not have either the assets or the cash flow in the company.
And that is why we feel happy with the profile that we have today, having 6% in euros, 4% in Canadian dollars. And yes, we did saw this very important increase in the Mexican peso mix. But as you know, we have a very important component of our profits coming from Mexico. So it makes sense to have this component. There was also a good opportunity to tap the market with the local Certificados Bursatiles.
It was a very successful transaction. We went all the way, raising MXN 15 billion. So it’s not that this will continue to be the case. What I can assure you is that we will always have a responsible way to manage the currency mix on our debt.
So that, on one hand, again, it’s not that we have some specific targets in this regard just to have an enlightening. In terms of the mix on the different regions, I would say that, I mean, there have been not necessarily a big pressure, although private label started to grow, as we mentioned, and we have a higher cost of sales and, of course, a lower gross margin. There are some other categories that have continued to grow that have slightly better margins.
So today, we’re not seeing really a big impact from the revenue mix. I would say that the negative effect on our gross margin that was substantially lower than the previous quarters, has to do 100% with the – still with inflation that we’re seeing from commodities because of the hedging strategy. So it’s going to take time in our P&L to see the positive effect. And this, for sure, will happen during the fourth quarter.
Operator
The next question will come from Ricardo Alves with Morgan Stanley.
Ricardo Alves
I wanted to go a little bit deeper on the U.S. top line question on competition. We noticed, at least in our data, a little bit of more competition or intensified competition, if you will, on sweet snacks. This would be obviously beyond the private label, not that relevant for this category.
So I just wanted to get an update from you guys on the competition environment in the U.S. maybe taking into consideration more specifically the sweet snacks category. And then the second part of the question is we noticed in the second quarter a better top line in the U.S. than what we expected to some extent than what we've seen in the recent scanner data.
So just wanted to see from you guys specifically in the U.S. or in North America, what category or maybe brand that you'd care to highlight? I appreciate that Southeast has been booming. I don't know if there was couple of categories or brands that you could shed a light on. I have a follow-up.
Mark Bendix
Ricardo, this is Mark Bendix. What you're seeing in our volumes in the U.S. category volumes have been soft with the evolving economy and the consumer behavior. But we've got the pricing that has been part of the carry-in that you're seeing the benefit of but there is a favorable mix in terms of product that we have in there.
So salty snacks and premium have delivered for us in the second quarter. So you are seeing a favorable mix. And in terms of more competition, I think on sweet baked goods, there's always good competition in the U.S. on sweet baked goods. In this quarter, I think it's a little bit complicated in that across most categories, you've seen some decline because all of the categories, if you look at just edibles in total are down 4.4%.
And we're maintaining our shares in those categories, but there is a net volume decline because of the challenged consumer. I hope that makes sense for you.
Ricardo Alves
That makes sense. My last question would be on the profitability. On the SG&A versus gross margin, we noticed that in pretty much all of your divisions, we saw some gross margin pressure maybe with the exception of LatAm.
But then for all divisions, the EBITDA margin was actually stable to slightly up. So we've been discussing this for a while, I think that Diego went pretty deep into details on what's driving the SG&A and efficiency measures that you've guys taken across the regions, but maybe mostly significantly in the U.S., in North America. So I just wanted to hear latest thoughts on SG&A. If there's more that we could see from here, you're still clearly reaping the fruit.
So maybe to the point that Diego was making fourth quarter better COGS trends, do you see significantly bigger room for EBITDA margin expansion maybe on the back of SG&A?
Diego Gaxiola
Ricardo, this is Diego. Yes. I mean we will continue to work on finding opportunities to improve the efficiency and the profitability and find productivity initiatives that can allow us to be a more profitable company. It’s something that we have been doing for the past several years.
Of course, now it’s becoming harder and harder, because there is no low hanging fruit that we can quickly go like a big investment and have a big return. It’s a little bit more granular. But we do feel very confident that the different operations across the Grupo Bimbo will find those opportunities that will help us on continuously improving our margins.
Operator
Next question will come from Louis Villard with GBM.
Louis Villard
I wanted to ask how do you assess your overall price structure in the market in both Mexico and the U.S., especially when you compare versus your most relevant peers. And more positively, especially in the U.S., are you seeing any incentive or any push from mass retailers to reduce or to get you to be a bit more promotional or more aggressive from rollbacks, especially entering 2024 or the next negotiating cycle? I hope that was clear.
Diego Gaxiola
Rafa, would you want to take the Mexico question and Mark, the U.S. one?
Rafael Pamias
Yes. Can you hear me?
Louis Villard
Yes.
Rafael Pamias
Can we now.
Louis Villard
Yes.
Rafael Pamias
This is a Rafael Pamias. We do notice that higher pressure in Mexico when it comes to lowering prices. I think that both retailers and ourselves, we are on a search for going back to volume growth. So what we’re privileging here is value pack promotions, portfolio adjustments, some price pack architecture changes in order to get back home those consumers that left us for a while.
But also, we’re pushing a lot on added value innovation. So the – the point in here is to ignite back some excitement in the category, but doing it in a way that our price per kilo is not affected.
Operator
The next question will come from Sergio Matsumoto with Citigroup.
Diego Gaxiola
[indiscernible] answer the previous question. So Mark, if you want to retake it?
Mark Bendix
Yes. Just a quick comment on what's going on for us in the U.S. We continue to -- our disciplined pricing execution because we've got the face of ongoing inflation. So it hasn't mitigated yet in the U.S. And our retailer partners, they understand that, and they're seeing it. So we're not feeling that pressure.
But we'll continue to look at our demand elasticity trends and our channel mix so that we can adjust and meet our evolving needs of both of our customers and consumers so that we continue to drive margin management through our business in the U.S. So generally, we're not seeing any of that pressure, but we've got to keep a keen eye on all of those dynamics as we go forward.
Sergio Matsumoto
Okay. Thank you, Mark, and thanks for making that space for my question. It's so Sergio Matsumoto from Citi. My question is about Mexico. And if I'm reading the press release correctly, there may be a divergence in the channel performance, perhaps considerably faster at C-stores and modern channels than the traditional channel?
And if so, what does that say about consumers as it relates to baked goods category? And how are you responding to that in Mexico? That's my question.
Rafael Pamias
I guess it is back to me. This is Rafael Pamias. I would like to say that [Nova], we're fairly satisfied with the performance in Mexico, ahead of plan, double-digit growth here and there. But I agree with you that in some categories, we are seeing softer volumes. But first, let's clean up something from the equation.
In Q2, those who live in Mexico they have experienced a very unseasonable hot weather in June, and that affected directly, sweet baked good in the traditional channel. So your appreciation is good. In modern trade, we have had and we continue to have positive growth. And in June, we had some softer volume in sweet baked goods in DSD. So what we're doing now, and we have started in July already, is a special programs to ignite volume in sweet baked goods and DSD. It is unclear yet to see whether the weather which is more seasonable now is going to have a substantial effect.
What can I say is that versus June, our sweet baked goods volumes are better. But we're not going to wait longer. We're going to be pushing for activities to grow volume anyway.
Sergio Matsumoto
Okay. Great. That's clear. Can I ask another question on LatAm?
Rafael Pamias
Please.
Sergio Matsumoto
Yes. Okay. How do you view the LatAm segment stepped up performance? Do you see it as maintaining today's margin or actually having another leg up in margin from this point onwards, perhaps closer to the other regions? And how much is Brazil -- Daniel, you mentioned saturation in your prepared remarks. How much is that responsible for the improvement? And can you give us more color about your recent operations in Brazil?
Rafael Pamias
Yes. I'm going to take that one, too. I will start with LatAm, and then I will focus on Brazil. On LatAm, we do have momentum, especially some geographies such as Brazil, but also Central America, Argentina and some other countries. So I would say that we are bearing the fruits of a what we call a full potential programs across the regions, started 2 years ago, where the objective was a comprehensive effort to reset targets and ambitions.
And on the other side, upscale the organization where necessary. And we still have a long way to go. But I would say that we have better growth equations, number one. And number two, we still have a fairly solid pipeline of activities. So what I would say is that we still feel that we're going to be enjoying in second semester, good activity, both in net sales and margin-wise, for a couple of reasons, and then I will elaborate more.
We still see Brazil performing well. We also are heading towards a second semester, which in many of our geographies is high season. So for example, in Argentina, we're going to have more capacity available. It is high season, which is more volume for us. And we're going to be enjoying better costs like everybody else.
So I would say good prospects for the second semester, that's what we expect. When it comes to Brazil, this is actually the first country where we started our full potential program, and this is where we could believe that it has been working more thoroughly and deeply.
As of today, as I said previously, we have come out stronger when it comes to value equation. We have more brand power. We have changed our go-to-market. And we still have productivities to be cashed. So I would say that there is still good momentum ahead for LatAm.
Operator
The next question will come from Antonio Fernandez with Barclays.
Antonio Fernandez
Congrats on the results. Quick follow-up on Ricardo's earlier question regarding the group profitability across basically all regions on an adjusted basis, as you just mentioned in the last answer, the LatAm opportunity still ahead. Wanted to get a better sense on where specifically do you see more, if not the low-hanging fruits, but still more room for improvement in terms of profitability across all regions.
Diego Gaxiola
Daniel, do you want me to take that one?
Daniel Servitje
Could you repeat it again, please?
Antonio Fernandez
Yes. Regarding the profitability across all regions, where do you see more room for improvement?
Daniel Servitje
Well, I mean, definitely, Mexico is doing very well on the margin side, as you could see. And the regions that have been improving over the past 2 years are the EAA and the LatAm regions. I would say that all in all, I feel comfortable on the different regions performing in the way they have been.
So I mean, this quarter was, I would say, a quarter that was similar to your expectations, I don't foresee in the next quarter or 2, a big change for what we're doing right now.
Antonio Fernandez
Okay. And in terms of competition, anything worth highlighting any specific region where using maybe consumer trade down and competition is tougher?
Daniel Servitje
Well, definitely, I have a lot of respect for all our competitors. And I wouldn’t say that we have a harsher or an easier path on any market. The structure of the market changes from one country to the other, and we might have more fragmentation and probably more micro competitors that do their job, like, for example, in Mexico, The Tortilla, the Postada, [indiscernible] industry is super fragmented and competition is quite intense.
And in others, we have a strong private label brands that do command a very respectable share of the market. And in those cases, we have to play probably different. We have competitors that are global in nature and that they favor more innovation.
And in that sense, I mean we have to play a different ball game in each market, and we have plans for it. But I wouldn’t say that besides my earlier comment on private label and sliced bread. In general, I would say that the competition is more or less what has been in the past quarters in each market.
Operator
Next question will come from Felipe Ucros with Scotiabank.
Felipe Ucros
Maybe a follow-up on a question that was asked about volumes. The question was a little focused on elasticity, but I was wondering if, generally, whether you could comment if volumes were flattish to positive across regions. And then my second question relates to EAA. Very, very good post 31% growth on sales in local FX. Obviously, a lot of moving parts in there.
We have 3G comps in China, the QSR recovery and then organic forces, among others. I'm not sure if you have a number or approximation with you, but what does EAA look like in an organic basis? Just wanted to get a sense of that.
Daniel Servitje
I'll take the first one, and I don't know, Rafael, or Diego, if you want to take the second one. On the first one, what I would say is that the only category that we're missing importantly is sliced bread.
And all in all, our volumes dropped a little bit more than 1%. So that's where we are in volumes. But I mean we compensate some categories that were up and some that were down. And in a temporary basis, as I mentioned, sliced bread was the one that was generally hardest kit, not in all regions, not in all markets but in many of them.
Diego Gaxiola
I can take if it's okay, Rafael, the second question regarding the organic growth. Let me put it this way. The -- as it was mentioned, the growth on local currency was 31%. The FX impact that we have during the second quarter was slightly above 15%. So having said this, the organic growth in local currency was more than 16%.
Felipe Ucros
Okay. That's a very good perspective. That's exactly what I was looking for. Maybe a last one, if I could. You mentioned how C-stores and modern are growing particularly strongly in Mexico. Just wondering if that could cause any negative mix effects.
Rafael Pamias
Yes. Actually, no, without getting into detail, we have robust profit margins in both categories that you mentioned. So what do we see is that it is helping out in the overall profitability? Obviously, we want to put our brand and sweet baked goods in the hands of everybody. So we’re doing similar exercises of volume growth in DSD too but we’re pretty fine with the mix so far.
Operator
Next question will come from Alejandro Fuchs with Itau.
Alejandro Fuchs
Congratulations on the result. Two quick questions from our side. First would be -- could you please maybe provide some color on the proportion of the hedges that you're taking today, maybe on the FX and on the raw material side into next year into 2024. And then I have a follow-up after that.
Diego Gaxiola
Sure, Alejandro. Well, let me answer probably on the 2 big components. On one side, the commodities and the other is FX. In terms of commodities, we have fully hedged the commodities that we hedge for 2023, we already started to take some positions for the first quarter of 2024.
Still, I would say a fraction of the commodity needs that we will have for the first quarter of next year. The point here, as compared to a year ago, we are extending the length of the hedges that we're taking as the cost and volatility have been coming down. Still both are high as compared to historic levels, but we are starting to feel a little bit more comfortable and confident on taking longer hedges.
For the FX, we are fully hedged operationally speaking for 2023 as well. And we have continuously taking some positions hedging the peso versus the USD. I would say that we have approximately 9 months today. So if not fully, very close to being fully hedged for the first quarter of 2024.
Alejandro Fuchs
Maybe just a quick one, the second one. Given the potential changes that we're seeing maybe on the working days in Mexico going from 6 days to 5 days, that should most likely be discussing Congress soon, I wanted to ask maybe how is the company thinking on these potential changes into next year? And maybe if you have thought about maybe potential impacts on the SG&A front, given these changes?
Daniel Servitje
Alejandro, we don’t speculate on things that are out of our capacity. This is just one proposal on the Congress. So we don’t have any comment on it.
Operator
The next question will come from Ulises Argote with JPMorgan.
Ulises Argote
Just a follow-up here on capital allocation and M&A. So how should we think of M&A kind of for the rest of the year given the activity we already saw in the first half of the year? And your comment, Diego, there on the impacts around free cash flow generation.
I know the math has been for small acquisitions, but just looking for any additional color here. And also kind of on those same lines, if you can remind us there on the kind of capital allocation preferences between like inorganic growth, buybacks, dividends and where you feel comfortable there in terms of leverage given the 1.8x where we are right now?
Diego Gaxiola
Sure. And let me start by the second part of your question. Our capital allocation preference hasn’t changed. The priority of the company has been and will continue to be to give money back into the business. As you know, we are in the middle of the most intensive year for CapEx projects. We have a plan to invest between $1.7 billion to $2 billion, close to $750 million were already executed as of the end of June.
So that is the priority. That, of course, includes the 3 big buckets, maintenance CapEx, which within the 3 buckets, I would say, is the priority number one. We will always make sure that we have available resources that are required by the different operations, either if it’s manufacturing or distribution. Growth CapEx and also the productivity initiatives that require an investment.
So that’s the preference [indiscernible] and it will continue to be. The second one, in order to continue to advance with our strategic plan and with the opportunities that we see in many different markets. We will continue to look and to be able to conclude inorganic growth, some M&A projects say, none of them are going to be transformational. It’s not that the projects are going to move the needle in terms of leverage of the company.
As you know, we already concluded 3 acquisitions during the year. And I can tell you that we have a very robust pipeline of potential targets across the different geographies, either if it’s market in which we are already present or even new markets. So hard to tell and given a specific expectation because, as you know, there are too many things involved in order to be able to conclude a transaction.
What we can say is that we’re going to continuously and actively look for opportunities. In terms of the leverage of the company, 1.8x, I would say, it’s even below the target zone that we have. We’re coming from a 1.5x after the deleverage process and also because of the sale of Ricolino at the end of last year.
Then we have this pickup of 0.2x because of the conversion of the hybrid from equity to debt. Some cash flow needs that we have had during the first 6 months that have put deleverage at 1.8x, we feel very comfortable. We believe that we have the right capital structure to be able to conclude the organic and the inorganic opportunities and continue the growth path of the company.
Operator
The next question will come from Federico Galassi with TRG.
Federico Galassi
Congrats for the results. Two quick questions. The first one is, Diego in the original guidance, you -- I believe you used MXN 19.5 of FX. What is the level that they're using now?
Diego Gaxiola
Yes. Yes, effectively, at the end of last year, we did consider that the FX was going to be slightly above MXN 19 between MXN 19 and MXN 19.50. We are now having a situation that the average for the full year will be below MXN 18, between MXN 18 to MXN 17.50. So that is why we have this negative effect on the expected growth in top line and EBITDA.
Federico Galassi
Almost 10% of lower effects and effect in the guidance is only 2%, 3% if we take the middle of the branch. It's logical to say that?
Diego Gaxiola
Yes and little bit less than 10%. It's like MXN 1.50 what we are adjusting which is probably 7%. And yes, as you mentioned, we are lowering much more less than that guidance because, as you're seeing, all the regions have been performing better than expected.
I mean, we were seeing EAA, 31%. Mexico, of course, in local currency, 12%. And then the U.S., North America growing almost 12% low double digit and then Latin America, 17%. So all the regions during the quarter and first quarter was a little bit similar, had been performing very positive in local currency. So because of this performance, we feel confident that we do not need to adjust the full effect of the FX on our guidance. So basically, excluding the effects, we're uprising the guidance to bottom line.
Federico Galassi
Great. Perfect. And the second question is in Latin America, you expand margins, gross margin, 120 basis points. This is one country in particular, this was in all the regions, if you can say your thoughts on that.
Diego Gaxiola
Yes. This has to do a lot, Federico, with the turnaround process of Brazil that Rafa was commenting on that has positive impact across the whole P&L, including the cost of sales, will change the way that we’re going to the market, the portfolio. And all these actions have helped substantially on an improvement on gross margins and also being more efficient on SG&A in Brazil because of the size of Brazil, this is material on the LatAm segment.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Servitje for any closing remarks. Please go ahead, sir.
Daniel Servitje
Thank you very much, all of you, for your time today. And as always, please do not hesitate to contact us with any further comments or questions you may have. Thank you very much.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Grupo Bimbo, S.A.B. de C.V. (GRBMF) Q2 2023 Earnings Call Transcript