Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Gruma's Q3 2026 earnings conference call. During today's call, all parties will be in a listen-only mode. Following the speaker's remarks, the conference will be open for questions. If you have a question, please press the star followed by 1 on your touch tone phone. Please press star 0 for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. I would now like to turn the call over to Mr. Adolfo Fritz, Gruma's Investor Relations Officer, who will present earnings and results. Then we will open the call to the Q&A session where Mr. Raul Cavazos Morales, Gruma's Chief Financial Officer, and team will be available to answer additional questions.
Operator: I would now like to turn the call over to Mr. Fritz, Investor Relations Officer. Please go ahead, sir.
Adolfo Fritz: Morning, and welcome to our Q3 2026 conference call. We are pleased to have you all on the line and thankful for the opportunity to share our results with you. With me today, as always, are Mr. Raul Cavazos Morales, Gruma's CFO, Rogelio Sanchez Martinez, Gruma's Corporate Finance VP. To start the call, we will take a few minutes to discuss the fundamentals and results for the quarter, and then we will open it up to any questions you may have. The tortilla market overall continues to see pressure in the US as a result of record low consumer sentiment in conjunction with uncertain economic outlook based on looming high interest rates, an uncertain job market, and geopolitical events in different parts of the world that have contributed to additional inflation in most raw materials.
Adolfo Fritz: Gruma's performance has been consistent with the overall performance of the tortilla category in the US, which remains under pressure with the perception of much weaker consumer purchasing power and added selectivity. Gruma continues to execute a strategy that we have communicated in the past to adapt ourselves to these circumstances, which we consider temporary in nature rather than permanent structural changes, until consumer confidence again reflects a perception of future purchasing power and job security. In Europe, we continue with our strategy of expanding retail, which has been optimized by the introduction of value-add tortillas in the market and well-received in all the European distribution networks the subsidiary serves. In Asia and Oceania, the trends remain positive overall, extending their solid performance both in Asia, mirroring the growth in food service industry, and Australia, where tortilla retail presence has increased.
Adolfo Fritz: In corn flour, lower government-sponsored programs have led to temporary declines in Mexico, while the corn milling business has added volatility given the nature and seasonality of the industry it serves, coupled with geopolitical events. Central America is in great shape and with plans to further expand its existing production capacity to satisfy growing demand. On a consolidated level, given these market dynamics that I just mentioned, volumes declined by 2.1%, primarily due to contraction in food service channel in the US, and lower government programs in Mexico. Because of the effect of the current sales mix, coupled with the appreciation of the Mexican peso this period, this actually led to a 1% rise in revenue. That said, inflationary pressures were evident in the quarter, resulting in a 1.5% increase in COGS, which, coupled with a 4.3% growth in SG&A, led to an EBITDA contraction of 4.2%.
Adolfo Fritz: This translated into an EBITDA margin of 17%. From a balance sheet perspective, net working capital decreased in line with lower inventories. The lower accounts payable also partially mitigated the benefit of free cash flow generation. Both our cash generation and balance sheet balance remain robust, with total net leverage of 1.3 times, down from 1.5 times last quarter after paying down some debt. Capital allocation remains the same with $100 million in dividends per year, and we will continue to be as active as we have been with our repurchase program. At least for now, we do not see any additional uses of capital in the form of M&A activity. In the US, in the quarter, we continued seeing the same trends we saw, where the consumer sentiment is still at all-time lows in conjunction with an uncertain economic outlook.
Adolfo Fritz: Both of these fundamentals have created a decline in the overall tortilla category in the US over the last 10 months of the year. However, within the category, the competitive landscape has changed and has drifted towards greater growth in private label rather than market share growth for a specific brand player in the market. On the bright side, for the first time in a few quarters, we have now been able to outperform the category overall and have started to a market share gain trajectory currently standing at 59.6%. There are still several variables we are tracking to see how they develop over time, not the least of which is the future inflation in raw materials next year and how that will further affect the consumer overall.
Adolfo Fritz: However, with the situation as it stands today, we can confidently say that there are already signs of improvement compared to where we were a few months ago. It is important to note, however, that our end game objective with our strategy is to create volume as an additional driver of absolute EBITDA growth, and in the future, with a specific price mix from which we can grow with a better and more balanced structure in years to come. We have, of course, not reached that point yet, and we will continue to work towards that end. But in the meantime, the results reflect the effects of this strategy, and we will continue adapting to future circumstances as they may arise. Inflation has also hit the cost structure, particularly in the form of transportation costs, which have been impacted on two fronts.
Adolfo Fritz: On the one hand, there are fuel surcharges related to high energy prices arising from the conflict in the Middle East. On the other, there is a shortage of transportation services, which has led to additional inflation on the cost structure. We expect these factors to continue going forward. Volumes declined by 4.1%, again, just as in the last quarter, led by dynamics I just mentioned in the food service channel, while revenues also fell proportionally. Although we did find some efficiencies in the cost structure in the US, the decline in volumes, coupled with high inflationary pressures on other items such as labor and transportation, as I mentioned a minute ago, offset those savings, putting pressure on EBITDA for the quarter and resulting in an 18.9% decline, which was equivalent to an EBITDA margin of 17.9%.
Adolfo Fritz: In Mexico, GIMSA's core businesses remain healthy and continue to deliver growth, which translated into positive performance. Nevertheless, outside of the core business, lower government programs yielded 2% lower volumes relative to a year ago. Given the type of product and its current mix, net sales decreased proportionally and in line with its volume concentration, declining by 1.2%. Please remember that as these results are under convenience translation accounting, they do not reflect the effects from the appreciation of the peso compared to a year ago. Although inflationary pressures were also present, particularly in the form of freight costs, GIMSA still delivered EBITDA growth of 4%. Volumes in Europe were impacted by a decline in the corn milling business due to the effects of the war in Ukraine, which center around ports in the region, coupled with seasonality effects from clients.
Adolfo Fritz: The performance on this side of the business overshadowed single-digit growth in the tortilla operation, which continues to operate as usual, expanding its retail presence across Europe and optimizing its sales mix. As a matter of fact, expansion that we have experienced in retail has led to a 60% composition in this market, with the added benefit of having progressively put private label production in a downward trend, helping both our brand and the introduction of newer products into this market. We will continue to move forward with our plans for this subsidiary, despite a few headwinds around transportation and overall logistic costs as a result of the conflict in the Middle East. Volumes declined by 6.5%, while net sales remained flat. This resulted in EBITDA growth of 2.4%, reaching an EBITDA margin of 15.1% for the quarter in this subsidiary.
Adolfo Fritz: Our subsidiary in Central America has had a remarkable run over the last few quarters, positioning itself as an important contributor to profitability. The Q3 of the year was no exception, as the healthy demand we have been serving drove volume growth of 2%, while the sales mix that we have been able to create over time resulted in a 6.4% higher net sales. As with our other subsidiary, inflation remained a common theme in this subsidiary as well, especially around materials, which prompted COGS to grow by 6.6% with additional pressure on freight costs. This quarter, it is important to note that we had an extraordinary gain from an insurance claim in the amount of $9 million, which benefited results. EBITDA increased by 46.9%, and EBITDA margin stood at 28.4% of the quarter.
Adolfo Fritz: Asia and Oceania's momentum continues to deliver results in line with both the food service evolution in Asia and a greater retail presence in Australia. In the quarter specifically, due to the geopolitical conflict in the Middle East, operations in Malaysia were temporarily hindered given some exports that are delivered to the Middle East in the regular course of business. This volatility will be a reality as long as the conflict is ongoing, but the overall health of the operation cannot be better and with a very positive outlook for years to come. Volumes declined by 2% as a result of the performance that I just mentioned in Malaysia, while sales grew by 10.3% on the back of a much healthier contribution from the retail market in Australia. Both of these fundamentals drove EBITDA to grow by 22.2%, yielding EBITDA margin of 15.2% for the quarter.
Adolfo Fritz: We are very pleased with the performance that this operation has achieved thus far, and currently we do not see immediate challenges that can compromise the revenue-generating dynamics that have led to this performance. Now that we have covered the subsidiaries and consolidated performance of the company overall, we would like to bring to your attention to our guidance again, as we would like to adjust it accordingly to the trends that we have been seeing and the changes in the marketplace that have taken place in the last four months of the year. Given the circumstances that we described in the US and the way we have been adapting to them to restructure EBITDA-generating capabilities, we are adjusting our guidance downwards for the US, where EBITDA margin is forecast to decrease by 250 basis points instead of 200 basis points we guided on in our first call.
Adolfo Fritz: This is just to give you more of an insight of what we are expecting, given the additional production of private label products that are being placed in the market, in addition to any other trade-downs that may occur along our SKU offering as consumer sentiment continues in the low end of the spectrum. Adjusting EBITDA margin in the US to decrease by 250 basis points, coupled with a better performance in the rest of the subsidiaries, also means that on a consolidated basis, EBITDA should decrease by 120 basis points instead of 160 basis points we guided on during our last call. We hope that this gives the market a clear sense of the impact of the market dynamics in the US and where we think we are going to be as we adapt ourselves to these circumstances going forward.
Adolfo Fritz: Although we realize these are challenging times, we are pleased to see that our strategy that we laid forward at the beginning of the year has been materializing in line with our expectations. We have managed to increase our market share in the US with a full recovery to the levels we saw in 2025, as well as outperforming the category as a whole. As you can probably see from our results, the headwinds ahead have more to do with the economy in the US and its effects on the consumer, rather than the structural shift of the prevailing preference for tortilla over some other carb-intensive foods.
Adolfo Fritz: Given the nature of this challenge, we are confident that this is a transitory environment through which we will have to adapt ourselves to later have a better structured and more balanced approach to EBITDA generation once the operation for our US subsidiary has normalized.
Adolfo Fritz: Until then, we will be adapting and adjusting to the dynamics of the market as we have done in the past quarters to accommodate ourselves to the current demands and needs of the consumer during these challenging times and be in the best position as possible in the short term for the benefit of our long-term goals. With that, I would like to open the call for questions from the listeners today. Can you help us with that operator, please?
Operator: Thank you. We will now begin the question and answer session. As a reminder, if you have a question, please press the star followed by the 1 on your touch tone phone. If you would like to withdraw your question, please press the star followed by 2. If you are using speaker equipment, you will need to lift the handset before making your selection. Our first question comes from the line of Fernando Olvera with Bank of America. Please proceed with your question.
Fernando Olvera: Hi. Hi. Good morning. Thanks for taking my question. Adolfo, regarding the US, I understand that food service comparisons were expected to become easier starting this Q3. Can you comment on what explains the volume weakness, and what should we expect from food service in coming quarters? That is the first one. The second one, regarding your change of guidance for the EBITDA margin in the US, we have seen a contraction, or the contraction has worsened sequentially. In fact, year to date, you have a margin contraction of 250 basis points. I understand that is what you are expecting for the whole year. My question here is, it seems that this sequential contraction should reduce in the Q4. Is that correct? Is it something to assume? Thank you.
Adolfo Fritz: Thank you, Fernando, for your question. Yes. We expected a stabilization of volumes in the food service channel during the Q3. We are still expecting it. It is going to be probably at some point in the Q4. Right now, the dragging effect, if you will, is twofold. One is that the expectations of the consumer has worsened progressively over time as new economic data has been put out there in the US. They have become even more selective and the flow that our clients were expecting is lower than usual during these times, if you will. In addition to that, the cyclospora effect has also taken a toll on the speed of recovery that we were expecting. Overall, the conclusion is that you will see a stabilization for sure.
Adolfo Fritz: It will be obviously later than we were expecting, but it will be at some point in the Q4 as far as we can see right now. In regards to the sequential decline in margin, that is really the result of two variables: the additional private label production that we have put in place, and also this decline and continuous decline, if you will, in food service, which has been really the main factor because of how much volume it has represented in revenue generation. I would expect that that will stabilize in line with what I just commented in regards to the food service situation and the stabilization of volumes.
Adolfo Fritz: However, as we have talked about in the past, and as I mentioned a minute ago, the whole purpose of our strategy is to keep on generating value alongside the private label growth in the US, and provide our clients with solutions in terms of private label, given the circumstances. Overall, the strategy is intended for margins to readjust, so that we may grow once we hit a specific margin target in the future, once our clients receive their targeted volume of private label that they are requiring today. Once we see that, we are hoping that we can see some volume inflection once we get that margin target in place, and from there grow as we have grown alongside the category once the economy and the consumer sentiment changes.
Fernando Olvera: Okay, great. Thank you, Adolfo.
Adolfo Fritz: Thank you, Fernando.
Operator: Thank you. Our next question comes from the line of Alejandro Fuchs with Itaú BBA. Please proceed with your question.
Alejandro Fuchs: Thank you, operator. Hello, Adolfo, Jorge, and team. Thank you for hosting questions. I have two quick ones, if I may. The first one is also on the US. Adolfo, you mentioned maybe a little bit better trends in the short term that you guys are seeing, and it seemed that the 2027 prospect looks a little bit more constructive. I wanted to see maybe you can elaborate a little bit on which specific channels are you seeing this? Is it more food service recovering? Is it more the retail? And maybe better-for-you, like if you could give a little more color on where are you seeing these improvements? Then the second one, just very quickly, I want to see if you could touch up a little bit on the cost side.
Alejandro Fuchs: What are you guys expecting for 2027, when you look at corn, and any hedging position that you guys would have also on the FX? That would be also very helpful. Thank you.
Adolfo Fritz: Thank you for your question, Alejandro. Yeah, the first one in terms of better trends, you can also see that publicly in the Nielsen data out there. But for the first time, I think in the last, I want to say 18 months, we have been able to have a smaller decline in volumes relative to the category itself. As you know, the category has been declining overall from where it was a year ago. And the volumes that we have seen in the past have been greater in terms of their decline relative to the category. Since this is Nielsen, this is speaking exclusively only about retail. For the first time, those declines from our side have been lower than the category overall after we started implementing the strategy that we laid out at the beginning of the year.
Adolfo Fritz: That for us, in addition to the fact that we have recovered market share to be today at 59.6%, we were at 58% prior to that, speaks to the better trends that I was referring to a minute ago. We hope that this is the start of a trend and not a single data point. But that will be again dependent on the consumer's outlook on the economy and their purchasing power in the future. We are expecting hopefully that we will continue to see some improvements, but we do not want to be overly confident in that regard given the economy as it stands today. In regard to your other question, 2027 will be, by all means, a challenging year for everyone. I do not want to generalize here. Everyone has its own challenges, but I think it is no mystery that raw materials have gone up considerably.
Adolfo Fritz: Energy costs have gone up considerably. Transportation costs as a result have gone up considerably, in addition to all their challenges within the transportation industry and logistics. As you pointed out, we have been known for having very effective hedges throughout the years, but we will be experiencing inflation nevertheless. The growth that, for example, diesel prices have experienced relative to last year are just too much and wheat as well. We do have hedges in place, obviously, as you know. But we will still experience inflation that we will have to deal with next year.
Alejandro Fuchs: Thank you. Thank you, Adolfo.
Adolfo Fritz: Thank you.
Operator: Thank you. Our next question comes from the line of Henrique Morello with Morgan Stanley. Please proceed with your question.
Henrique Morello: Hi, everyone. Hi, Adolfo. Thank you so much for the space for questions. Maybe a quick one in the Mexico division, Adolfo. One thing that called our attention was the gross margin expansion in Mexico, despite the lower volumes. I know that may be some comp effect from last year as well, but if you could just dive a bit deeper on the dynamics around profitability in that region. You mentioned efficiencies in the release, so if you could explore a bit more about those efficiencies and also if you see an effect on raw materials pricing and how should we think about that in the context of higher energy and raw material costs that you mentioned into the next quarter and next year as well. Thank you very much.
Adolfo Fritz: No, thank you, Henrique. You cut off a little bit, so please let me know if I am responding all your questions. I am just going to respond to ones that I actually heard. First and foremost, in Mexico, we were able to pass on some of the inflation during the Q2 of the year. In that regard, that is why you could see an improvement in gross margins. We also see demand being very stable in Mexico. The one variable there, as we have talked about in the past, are government programs, which are very unpredictable year to year, and this year has been no exception. That itself represents approximately 6%, I want to say, of volumes in the Mexican operation, and that is what is causing the effect that you see there on volumes and on gross margins as your question was referred to that.
Adolfo Fritz: In addition to that, in terms of costs, I would say that for this year, you should be confident about the costs during the Q4. I do not think they will differ too much from the trends that you have been seeing or that you saw in the Q3 and Q2 of the year. I would be more cautious about 2027. As I mentioned, inflation is extremely high in items that are important for us in terms of raw materials and other products that we use in day-to-day operations. I would be very cautious with that given that, as you know, the timing of that inflation is unfortunate because of the economy in the US and how it is behaving.
Adolfo Fritz: We will have to see at the end of the year how we make our budget for that and how we adjust to that inflation during 2027 to give you a clearer picture of how that will unfold, not only in Mexico or in the US, but worldwide.
Henrique Morello: That is clear, Adolfo. Thank you very much.
Adolfo Fritz: Thank you.
Operator: Thank you. Our next question comes from line of Antonio Hernandez with Actinver. Please proceed with your question.
Antonio Hernández: Hi, good morning. Thanks for taking my question. Regarding private labels, how much growth are you seeing in this category? I mean, you are already participating there, but how much of that growth opportunity do you see there, and how much do they represent right now of total sales? Thanks.
Adolfo Fritz: No, thank you for your question, Antonio. Yeah, private label is now the fastest-growing player in the market. Right now, contrary to other times in the past, private label has got a very solid number of SKUs out there, so it has more SKUs being offered than in the past, and we expect that trend to continue going forward. Right now, we also gave you in the past the number 13% as a threshold. That is the highest number that private label has ever been at in terms of market share. In the latest Nielsen report, you can see that private label now is now at 13.5%, so they already went over the historical threshold. Now we are living a new normal, if you want to call it that, and it will be growing continuously until the economy and the purchasing power of the consumer changes.
Adolfo Fritz: Right now, it represents approximately 7% of our retail sales, and it is growing at around 10%. How much that can get to is an unknown based on or depending on the consumer, but we are definitely right now navigating a new normal. We do not see that growing to the extent of Europe, obviously, which is private label dominant. But I would assume we will probably see it at the highest levels that we have seen it historically in the US. We are right now at the highest point that we have seen it so far, and it will keep growing.
Antonio Hernández: Thanks. Just a quick follow-up regarding that. How much do the margins differ between private label and of course, better-for-you to have margin, but overall versus consolidated margins?
Adolfo Fritz: Well, they are substantially different, right? It is a branded product versus a private label. As I said, there are various SKUs right now in private label. But the conclusion, which I am assuming is what you are trying to get to, is margins will be adjusted proportionately with the higher production or the additional production of private label going forward to as much as it need be in order for the request of our clients to be fulfilled to answer the challenges that they are experiencing themselves with this situation. We are all in the same boat, and we are all experiencing the same pressures from the economy overall.
Antonio Hernández: Okay, thanks. You are very helpful. Have a nice day.
Adolfo Fritz: No, thank you. Bye.
Operator: Thank you. Our next question comes from the line of Ben Thor with Barclays. Please proceed with your question.
Ben Theurer: Yeah, good morning, Adolfo. Thanks for taking my question as well. Just two quick ones. I want to follow up on Alejandro's question earlier on in terms of corn, which has been obviously very volatile. I think we haven't received much of an answer just yet as where you are in terms of hedges. So how should we think about just the cost environment for the next couple of quarters, maybe on a rolling, whatever, 6 to 12 months basis forward? It's still higher, but have you done anything on the hedge side? Just to get an understanding how much more of corn cost we should anticipate. That would be just the first one I wanted to follow up on.
Adolfo Fritz: Sure, no problem. Yes, throughout the year, we've done hedges, of course, which is our custom to get the optimal inventory cost that we can get when harvest takes place. We layered in different costs, obviously, because we started from the beginning of the year, and we left some of the requirements on the spot market. On the one hand, we hedged at the beginning of the year having some benefits given the cost at that point. But when corn spiked, and we didn't want to wait a lot for it to get even higher than that, we covered another 40% of our needs. So we have approximately 70% of our needs covered, and 30% in the spot market. That is for corn. In regards to the other raw materials, we've been able to hedge just the Q1 of next year.
Adolfo Fritz: Given the volatility prices, we want to be opportunistic as possible. But again, as I mentioned, even with that, we are expecting inflation and we are expecting that inflation to potentially hit margins next year.
Ben Theurer: Yeah. That is actually my follow-up question on that then, and the real question. As you have this input cost inflation, you clearly have to kind of find the balance as to what you can and cannot pass on to the customer. So have you had initial talks with your key customers, be it in retail or food service in the US, as to where prices might go and a little bit of a preliminary indication as how much of a margin pressure it could potentially bring if pricing does not offset the cost inflation?
Adolfo Fritz: Yeah. I agree with you. That is the question that many of you have. However, to answer that question, first of all, we would need to get together and see what level of inflation we are actually experiencing with the different layers of inventories that we are counting on for next year, and that will be during our budgeting season at the end of the year. But we have not talked about this at all with our clients, and we will intend to talk about it with them whenever we have a very good understanding of what that inflation looks like for us in the cost structure. And we will try to get an adequate price for all, our clients, ourselves, and the consumer, given the circumstances that we are living through. But so far, I cannot give you a detailed explanation in that regard.
Ben Theurer: Okay. Thank you very much.
Adolfo Fritz: No, thank you.
Operator: Thank you. Our next question comes from the line of Alvaro Garcia with BTG Pactual. Please proceed with your question.
Alvaro Garcia: Hello. Adolfo, can you hear me?
Adolfo Fritz: I can hear very well. How are you?
Alvaro Garcia: Awesome. Great. I have a question on the category itself. I was wondering if you could delve deeper into what you guys are seeing in terms of category weakness overall relative to the past. Within that, how better-for-you is performing year to date within your portfolio? Thank you.
Adolfo Fritz: Sure. No problem. The categories overall, let's start with the value-add portion of the better-for-you, which as you know, represents approximately 32% of retail sales. That's been slowing down. There's no question about it. In the past, as we reported, we have been growing at around 15% per year, and that slowed down probably to 8% today. So it is a category that is slowing down, and it's been trading down to either, I'm going to call it plain value-add tortilla or even standard tortilla, given the circumstances. That portion of value-add tortilla is growing. Potentially, I would say that it could grow in line with better-for-you, but right now it's growing a little bit lower than better-for-you. It's growing at around 5% to 6%. Private label, as I mentioned, which is outside of those categories overall, obviously, is growing at 8%, more or less.
Adolfo Fritz: The rest of the categories, which are more standard in nature, are the ones being hit the most on the retail side of the business. Those are the categories that have to do with corn, which are aimed to Hispanics more so than anything else. They are standard wheat, which are aimed to people that may have more price sensitivity along the SKU or along the clients that buy different SKUs or the consumers that buy different SKUs. So those that are more prone to have that price sensitivity within the category, which are more or less 35% of retail sales, are the ones that are trending down to private label. Now within private label, the interesting part is that there are now levels of private label. There is also the standard one and now the value-add ones as well.
Adolfo Fritz: We will have, without a doubt, an environment where private label will have a lot more SKUs, where margins will be different between each of them. It won't be the same margin for the private label product. We'll see where that gets us at the end of the day once the consumer responds to that. But that's more or less how these things have been moving overall.
Alvaro Garcia: That is super helpful, Adolfo. That is great. Then just one follow-up on the guidance. You mentioned 250 basis point contraction in the US, and I believe you said 120 basis point contraction on a consolidated basis. My question is if that is right, and then two, does that include the 9 million gain within that calc from this quarter?
Adolfo Fritz: No, that does not include the 1 million gain. It is just an assumption that we are making that the other subsidiaries will have an accretive effect on margins that will make the consolidated margins have a better adjusted margin than the one we gave before in our guidance in our last call.
Alvaro Garcia: Great. So it is 120 on a consolidated basis.
Adolfo Fritz: Yeah
Alvaro Garcia: Just to check that.
Adolfo Fritz: Correct. Yes.
Alvaro Garcia: Great. Awesome. Thank you very much, Adolfo.
Adolfo Fritz: No, thank you, Alvaro. Take care.
Operator: Thank you. Our next question comes from the line of Froylan Mendez with JP Morgan. Please proceed with your question.
Froylan Mendez: Hello, Adolfo. Can you hear me?
Adolfo Fritz: I can hear you very well. How are you?
Froylan Mendez: Perfect. All good. Thank you so much. Just curious, Adolfo, I am sorry you have talked a lot about this, but it seems that it is the retailers, the ones that are pushing the private label further, right? They are the ones that are driving, let us say, a little bit of the demand. What will happen if at some point you see that the push that they are making is well beyond your optimal on your own, let us say, mix between private and branded, particularly given the margin dilution. How willing are you to follow the retailers on their own goals on private label, and how far do you think they are on their own mind as of how much private label should represent? That is the first question.
Froylan Mendez: Second, on Europe, can you just give a little bit more granularity on how the tortilla business is performing in terms of volume and retail penetration? If the, let us say, favorable mix that you are seeing will offset the challenges you are seeing in the milling business, will that continue? Thank you so much.
Adolfo Fritz: Of course. I am going to start with the second question. The first one, you cut out a little bit, so I am going to ask you to repeat that after I answer the second question, if that is okay. But in regards to the second question, Europe, things have been evolving quite favorably for us since we started adding more distribution outside of the UK. The retail presence that we have been able to create there has been really outstanding.
Adolfo Fritz: Right now it is, as I mentioned in the comments, is 60% retail today, which is something really incredible relative to where we were because as you probably know, this was a food service-centric subsidiary. That being said, within that retail presence of 60%, 30% or close to 30% of our sales are private label. That gives you a perspective how different the market is there relative to the US.
Adolfo Fritz: The other 70% is a combination of what we call the nostalgia market, which are tortillas that are targeted to people that are living outside of their home countries. They can have these options to buy tortillas that are in line with their traditional cuisine, in addition to standard tortilla or value-add tortilla today, which is something that is adding a lot of accretion to our margins in addition to the higher retail distribution. In addition to that, which is interesting, is that we have been able, because of the acceptance that we have been able to generate in Europe, the composition of private label or the growth, I would say, of private label has been diminishing over time. You can clearly see a preference or a trend line that points out to a clear preference of branded products, namely our brand Mission relative to private label over time.
Adolfo Fritz: We hope that this trend continues. We are doing all that we can in our control to continue that trend. As I mentioned, there are challenges also ahead. The conflict in the Middle East is something that affects us all globally. Diesel prices are challenging and logistics overall are challenging. But given the nature of the revenue-generating dynamics of that business, I think that subsidiary will be fine. I do not see any meaningful challenges that would compromise the trend that I was talking about. This quarter specifically, you probably do not see how well the tortilla channel is growing because of the volatility in the corn milling business, which does represent a lot of volume in that subsidiary.
Adolfo Fritz: In spite of the growth that retail has had in time, and the tortilla business overall has had it during all this time, the corn milling business, volume-wise, still represents a considerable amount of tonnage. Any volatility present there will affect the volumes, but that does not mean that the tortilla business is passing through a challenging time or anything of the sort. It is growing quite favorably. I will ask you now if you can repeat the first question, please.
Operator: I am sorry. It seems that he has dropped from the queue.
Adolfo Fritz: Oh, okay.
Operator: Our next question comes from the line of Luis Baraziel with Citi. Please proceed with your question.
Luis Brossier: Hi, Adolfo. Thanks for taking my question. We have two from our side here. First one, if you can please share how food service volumes have evolved throughout the quarter. I think that would help us understand how far into Q4 we should expect a stabilization in volumes. Also the second one, the US, if you could please break down the pressures between the higher logistic costs and higher marketing would be very helpful. Thank you.
Adolfo Fritz: Yeah. Thank you for the question. In regards to your first question, the food service channels experienced declines of around 15% over the last 18 months that we've been operating. This quarter it was no different. This quarter we experienced also probably a 17% decline in that respect. That is obviously accentuated by the cyclospora effect that I mentioned a minute ago. In terms of in the US, marketing and logistics. Marketing, I would say it's been an important factor. But as you all probably know, we're not a company that has a product that needs a lot of advertising in the traditional way. We do some in-store advertising when need be, and we've engaged in that to promote the brand and to promote the different products that we have and new products that we have.
Adolfo Fritz: But in reality, out of the entirety of SG&A, I would say 85% this quarter was logistics. The freight costs there have accentuated, and this quarter specifically was not so much because of the spike in diesel, more so than the availability of transportation services overall, which has been challenging and that has spiked freight costs a lot. So within logistic freights is the challenge. As I said in my comments, that will continue being a challenge going forward.
Luis Brossier: Perfect. Thank you, Adolfo.
Adolfo Fritz: Thank you.
Operator: Thank you. As a reminder, if you would like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Regina Carrillo with GBM. Please proceed with your question.
Regina Carrillo: Hi, Adolfo. Thanks for taking my question. I just wanted to know, as far as you can see, how should we think about free cash flow and therefore leverage in 2027, particularly around CapEx and working capital needs?
Adolfo Fritz: Yeah. Thank you for your question, Regina. Free cash flow, we are fine. We are generating close to $400 million per year. That is not bound to change, even more so with the requirements of CapEx that we have today, which are not many and will not be many in the short term or medium term, really, unless we build a new plant in the US. But in terms of CapEx for the future, I think the plan that we have, at least right now on the whiteboard, is we need some additional storage capacity in Europe. We need to invest for that. Some additional production capacity as well. We are probably going to invest in Central America further. As you know, that is one of the main priorities right now because demand is just too much for the capacity that we have installed there.
Adolfo Fritz: In addition to that, also some storage capabilities in Australia. So that will be really it as of now in terms of our immediate needs. That will probably translate into $200 million in terms of CapEx for next year, which will ease further capital in the forms of free cash flow. Net working capital, since we have a priority of having enough corn and enough wheat every year, we normally grow at around, I would say, between $80 million to $100 million per year. So given the circumstances today, we will probably also be saving in that, but just not as much as in CapEx.
Adolfo Fritz: So in all senses, we will have a much better picture in terms of free cash flow. It is already great, but it will be even better with these little adjustments. Well, I do not see, at least right now, something that would challenge that in the future.
Adolfo Fritz: Free cash flow is perfectly fine.
Regina Carrillo: Thank you, Adolfo. That is very clear. Just to clarify, because I think I did not hear you well when you answered a few questions ago. You said you had 70% of your needs of corn hedged for next year. Is that right?
Adolfo Fritz: 70, 7-0, for next year's.
Regina Carrillo: Perfect
Adolfo Fritz: needs.
Regina Carrillo: Okay. Perfect. Thank you so much.
Adolfo Fritz: No problem. Thank you.
Operator: Thank you. Our next question comes from the line of Nicole Helm with MetLife. Please proceed with your question.
Nicol Helm: Hey, thanks for taking my question. It was actually answered, but I did want to follow up on this last point that you mentioned. If I understood correctly, you are expecting net working capital to be positive despite the higher raw material prices. If you can clarify that, and if there was anything specific or you can comment if there was anything unusual on the big release in inventories this quarter that we should or what we should expect for next quarter. Thank you.
Adolfo Fritz: Yeah. The release, the use of inventories had more to do with seasonal reasons rather than anything else. We are coming off of the harvest season in Mexico and you had that spike last quarter there, so this quarter you have that release. In terms of net working capital, yes. That is the whole point, right? We still have needs in terms of net working capital, and we will pay more for them relative to the hedges that we may or may not have relative to inflation and other adjustments of cost. We cannot let go of increasing or growing our net working capital based on just inflation given that is our main raw material to produce our product.
Nicol Helm: Okay. Thank you.
Adolfo Fritz: Thank you.
Operator: Thank you. Our final question comes from the line of Felipe Ucros with Scotiabank. Please proceed with your question.
Felipe Ucros: Thanks, operator. Good afternoon, Adolfo. Quick couple on my side today. On the US, given that food service has been on a different track than the rest of the tortilla business, has the composition of the business materially changed? Where is the composition today after this divergent trends that you are seeing on better-for-you on one angle and then food service declining on the other angle? And then the second one on Central America. Obviously, you will be adding new capacity because the segment is performing very well. Just wondering on whether you expect a quick deployment of that capacity and whether we should imagine an impact on margins initially as you ramp up and you start diluting the new fixed costs. Thank you.
Adolfo Fritz: Well, thank you for your question. In the US right now, with all the declines in volumes in food service, we are approximately at 84% retail and 16% food service. Obviously, the mix in that retail portion, I gave it a minute ago, has changed, and also the growth rates for each one of those components in retail. That will keep on changing relative to the consumer in the US and the US economy overall. In food service, I think that once volume stabilize, you will have a much clearer picture of what is happening in retail and the evolution of retail going forward. In terms of Central America, the deployment of that, the deployment of capital for the new mill that I just mentioned, we are going to be investing in it next year.
Adolfo Fritz: I would say that the deployment will take place next year, but in reality, the actual benefit in margins of that new mill will not be immediate. I would say at the end of next year, probably Q1 of the following year.
Felipe Ucros: That is very clear. Thanks a lot, Adolfo.
Adolfo Fritz: Thank you.
Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the floor back to Mr. Adolfo Fritz for final comments.
Adolfo Fritz: Thank you so much, everyone, for being with us this morning, and we hope to see you in future market events. Take care, everyone. Bye.
Operator: Thank you. This concludes today's Gruma third quarter 2026 earnings conference call. Thank you for your participation. You may now disconnect your lines.
