Grupo Herdez SAB de CV
BMV:HERDEZ
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Grupo Herdez SAB de CV
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Good morning, everyone, and welcome to Grupo Herdez's First Quarter 2022 Earnings Conference Call.
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.
At this time, I would like to turn the call over to Ms. Andrea Amozurrutia, Director of Finance and Sustainability. Ms. Amozurrutia, please go ahead.
Thank you, Cha. Good morning, everyone. Thank you for joining us on today's call. I hope you and your families are doing well. We started the year on the right foot. Despite skyrocketing inflation and continued pressure on commodities, we managed to post a strong performance. Without a doubt, despite still challenges, we are very optimistic about the recovery trend that we continue to see in our Impulse segment.
With that, I will now turn the call over to Guillermo. Unfortunately, Gerardo will not be able to join us on today's call. As usual, we will gladly take your questions at the end of our prepared remarks. Guillermo?
Thank you, Andrea. Good morning, everyone. Net sales increased 21.5% in the quarter. While price increases were the main driver for the quarter, volume was responsible for 20% of the growth. Preserves increased 19.9% with a similar behaviors at consolidated level, driven mainly by wholesale and supermarkets. Impulse continue its sequential recovery due to ongoing improvement in foot traffic in stores and price increases for the segment, which translated into higher average ticket. Similarly, the DSD channel in Helados Nestlé had outstanding performance, continuing strength from the last half of 2021.
In Exports, net sales increased 23.9% in the quarter, driven by volume and pricing actions. Consolidated gross margin in the quarter was 36.2%, 130 basis points lower than in the first quarter of 2021 as a result of high input prices, labor reform and incorporation of General Mills into the portfolio. The margin was mainly impacted by a 230 basis point decrease in Preserves due to higher cost of raw and packaging materials.
Consolidated SG&A was 24.8% of net sales in the quarter, 180 basis points lower versus the first quarter of 2021 due to sales absorption. Consolidated EBIT and EBITDA increased 29.3% and 23.6% with a margin expansion of 70 and 30 basis points, respectively. This is the result of double-digit growth in preserves and exports, along with the recovery of the Impulse segment.
In the quarter, income from unconsolidated companies was MXN 104 million, 57.4% lower than in 2021 because of a 61% decrease in the results of MegaMex caused by higher avocado prices, which were more than 4x previous prices and greater logistics expenses. Consolidated net income for the quarter was MXN 464 million, 14.3% lower than last year with a margin contraction of 280 basis points.
This was impacted by lower results of MegaMex as well as higher income taxes to proceeds from operations in the United States in 2021. Our financial position at year-end remains strong. Cash stood at MXN 3 billion and interest-bearing liabilities were MXN 11 billion, MXN 500 million higher than in the first quarter of 2021. We remained flat against the end of last year.
Thanks for your attention. I will now turn the call back over to Andrea.
Thank you, Guillermo. Just when it seems that the impact of COVID was beginning to disappear, the war in Ukraine increased the pressure on the already challenging condition of commodities and energy. As well, the decline in inventories and drops have exacerbated the prices of commodities, making inflation registered record levels in 20 years.
Due to the combination of all the above factors, along with the mobility restrictions recently applied in China, we do not expect the stability of the global supply chains to happen in the near future. Despite the numerous headwinds, the results for the first quarter are encouraging. On one hand, the Preserves division continued to register volume growth despite aggressive pricing actions taken in the last 12 months.
On the other hand, the retail operation as well as DSD sales continued its recovery trend, both compared to last year and quarter-over-quarter. At this pace, we expect our stores to return to 2019 levels at the end of this year, fully aligned with our expectations.
Conversely, MegaMex was significantly impacted by skyrocketed prices of avocado that, as Guillermo mentioned, have quadrupled when compared to last year. Despite pricing actions, we do not expect margins to recover 2020 levels in the near future, and we will continue to optimize SG&A and improve sales in order to offset as much as possible of this impact.
Finally, as you are all aware, yesterday, we held our Annual Shareholders Meeting. Part of the resolution stated were a dividend of MXN 1.20 per share, once approved. As in previous year, it will be paid in 2 installments in May and October. The share buyback program was increased to MXN 2.5 billion. As in previous years, this does not mean that it will be used immediately. On the contrary, we will continue to be very prudent and add value as much as possible. We will cancel 10 million shares coming from treasury and the final count of shares outstanding will be 354 million shares. For the full minute, please visit our website.
With that, we end our prepared remarks, and I will turn the call back to Cha so we can take your questions. Please go ahead.
[Operator Instructions] The first question comes from Luis Yance, an institutional investor.
Luis Yance from Compass. Two quick questions on my side and congrats on the results. Based on what you've seen so far in the first quarter and the outlook that you have, could you comment on any changes on the guidance that you gave initially in the year, both on the top line as well as on the margins?
And specifically on the margin side, just wondering, with this sharp move in commodity prices, are you still comfortable with that margin? And if so, how much more price increases would you require to kind of offset those pressures? Maybe if you can give an update on your hedges and how comfortable do you feel about your visibility on your cost structure, I believe, for this year? That would be my first question.
Thank you. Well, at this point, we will not make any changes to our guidance. We believe that we are still on track to meet the numbers. The most significant deviation would be on the MegaMex side. And we will -- or in the market, we will take some pricing actions to partially offset the increases that we have seen in the cost during the second and third quarters. So we believe that at year-end, the deviation will be not as significant as the one that we have seen in the first quarter.
In terms of the local operations, since we have already hedged for the remainder of the year, the main raw materials, we do not expect to take further pricing actions. And what we are analyzing right now is what should be the next move in terms of hedging for 2023. We haven't taken any decisions yet, but we will keep you updated on that front.
Great. And maybe a follow-up on the buyback program. I mean, I know you guys have been a little bit more active than usual over the past few weeks when we saw a pretty big decline in the stock price. And now you said that you're going to cancel some of those shares.
Just wondering, are there still shares in treasury that you're not going to be canceling this time? And as we move forward, can we expect that any buyback that you will execute will also be canceled at the next meeting? Or are we at a point where you don't want to cancel too much to avoid bringing liquidity of the stock down?
We will still keep around 7 million shares in treasury from the buybacks. And we will take the decision of canceling in the next months. We will continue to be as prudent as possible, but considering the current levels of the stock, definitely, we believe that the best investment that we can do is to continue to buy our own share.
So -- but on the other side, obviously, we have to be very careful on the excess cash of the company because we believe that all the situation on the supply chain will also keep some stress on our working capital. So to give you a straight answer, we will continue to look closely the share price, and we will continue to make buybacks as long as the cash flow needs allow us.
Great. And my last follow-up is we've seen other Mexican companies being taken private. Given that valuations remain low despite all the efforts by the companies. I guess the recent example was Lala and also now Bachoco in the midst of that option. Just wondering if that is something that the management and the Board are currently analyzing, even more than in the usual path? Or you still trust that the valuation discrepancy will be closed by good results, buybacks, et cetera?
Well, this is a conversation that we have had not necessarily only today, but in the past couple of years at least, but it's only a discussion on the table. We haven't taken any decision to take the company private as of today.
The next question comes from Felipe Ucros with Scotiabank.
Yes. Congrats on the results. So Luis took a few of the ones that I was going to ask, but maybe first on elasticity. Obviously, like everyone else in industry, you have to react with steep price increases. So just wondering if you could tell us how volumes reacted? You did mention that volumes were positive, and it was about 20% of the movement to top line.
But maybe you could comment a little bit about the different categories since you have some basic staples, but also some high value-add categories in the portfolio? So just wondering if you've seen any signs of pushback at this point?
Generally speaking, no. Obviously, there are some very specific cases where the volume didn't react very well. But this was something that we were expecting, as leaders in main -- or in the majority of the categories where we participate, we were the first to take the pricing action to the market. So it was not necessarily a negative effect on volume, but we saw some reductions in market share.
We are not worried again because this was something that we were expecting. And obviously, we are also comparing with a very tough base, things you can remember in 2021. We were expanding our market share in practically all of the categories where we participate. So we think that in the following months, along with the price increases that the competitors will take because obviously, this is not a situation that is particular to Herdez for the entire industry. We think that we will see some stability in the shares and that we will return to the previous levels.
Perfect, Andrea. Very good color on that. Let me follow on with avocado prices. Obviously, it's very difficult to gauge where our commodities price will move. But do you see anything particularly different in the avocado cycle when you compare it to prior cycles?
Because it seems that the cost increase was a lot more pronounced than other times. I mean it's certainly not the first time, but it's definitely the most pronounced. I'm not sure if there's a specific weather event or it's just the logistics disruptions? Or if this is just par for the course, for the category?
Well, you said it well. This is not the first time that we are experiencing these distortions in the prices of avocado after practically, well, 11 years of having Wholly Guacamole in the portfolio. We are used to this kind of volatility and the disruption in the margin fees for the short term. As you have seen in our results, we tend to catch up with price increases. And obviously, we are very careful today in terms of revenue management. So we can offset part of the pressure to pricing, promotions and also SG&A.
So I would say that this level of disruption is basically the combination of the cycle of the avocado but also the disruptions that we are seeing on the freight side and supply chains in general. So in the following months, we will take the pricing actions needed to partially offset this impact. And as all the other cycles at the end of the second quarter and the third quarter, we will start to see some stability. So probably the most precise answer is that it's basically market conditions as we have seen in previous years.
Okay. Perfect. That's very clear. And then maybe my last one on Impulse. Obviously, the category is recovering very well. It's very clear in the numbers. How far are we from pre-pandemic traffic levels in those stores?
Well, we -- listing that the fourth quarter will be the first to be very similar to 2019 levels. So -- and that was how our budget was built, to have a quarter-over-quarter recovery. And it is also important to mention that it is considering all top line. Given a specific on traffic, that will probably take us until 2023 to see those numbers back. Traffic is not necessarily recovering at the same level as sales are.
And the positive thing is that even though that people is not going to shopping malls as much as pre-pandemic levels, we are seeing that the purchasing power of people is remaining very, very strong. So that is helping our average ticket to improve versus last year. And at the end in the combination, that's what is making our estimates of full recovery in the fourth quarter.
[Operator Instructions] The next question comes from Álvaro García with BTG.
A bunch of questions were already asked, but I will ask about MegaMex. I know it's probably very difficult to think of a long-term margin, but you've talked about sort of mid-teens being sort of a target that makes sense over the long haul, something close to 15%. This avocado environment is very tricky, just wondering how you're thinking about that long-term margin, if that's still a target that makes sense for us to think about long term?
Definitely, yes. We see that the fundamentals for our operation in the U.S. remain intact. The household penetration of Guacamole still has a lot of opportunity. And with the launch of the Herdez Guacamole last year, we have seen household penetration increase in a very significant way.
So in terms of the Guacamole segment, the opportunities continue to be there, and we think that we have the 2 most powerful brands in the category to continue to increase our share and household penetration. And on the other side, we have the Herdez brands that continues to grow at double digits through innovation, but also through higher household penetration being like the very authentic recipe of salsa when compared to others in the segment.
So yes, we still believe that in the long run, we will be able to get those levels of margins. But we will have to dive in to or to see what would be the word to sell through the volatility of the market, particularly when speaking about avocados.
Agreed. Agreed. Agreed. And then just one on -- and it will be interesting to see when the seasonality into 1Q or into other -- excuse me, into the summer. It will be interesting to say down the line, but given the pricing actions.
But on Impulse, just one quick follow-up to Felipe's question, you gave great color sort of on how you're seeing traffic trends in Nutrisa and shopping malls. But I was wondering if I could follow up on Nestlé and on street sales. I know that's been very weak as well or not as strong as we would have liked. Is that near pandemic -- pre-pandemic levels? Is that -- are we there yet? I feel like people are certainly back on the street. I'm just curious if you're seeing strong dynamics there yet?
We are seeing recovery quarter-over-quarter, but definitely, I will not use the word strong. Most of the growth in Helados Nestlé play is still coming from the [ more line ] channel. And that's where we have the biggest opportunity because obviously, the profitability in that -- in those clients is not the same as we have on the DSD, right? So it's encouraging that we have like a sustained trend of recovery, but still to get to 2019 levels, I would say that it will take us until 2023.
In the case of the different -- sorry, in the case of the different brands in retail, Nutrisa is the one that is recovering faster than Cielito, for example, because as we have discussed in previous calls, a lot of the stores of Cielito were depending on offices, more headquarter traffic. So that is not recovering at the same pace.
And even though the traffic, generally speaking, is still not there, we think that with the recovery in the average ticket, the main benefit will be seen in the margin because we are selling higher...
Yes. And just on -- I know you sort of -- would you say the last one would be on the margin for Impulse, specifically. Is it safe to say -- which I think is the case -- is it safe to say that sort of -- I know there was a loss this quarter, but safe to say that we're still sort of on track in line with what you guys sort of budgeted at the beginning of the year?
Yes. Yes.
The next question comes from Emiliano Hernández with GBM.
Most of my questions have already been asked, but maybe a quick one. We can see the reported CapEx was around MXN 94 million in the quarter. So do you feel comfortable with the CapEx guidance, I believe it was around MXN 1.2 billion for the full year?
Yes. As of today, we haven't made any change.
This concludes the question-and-answer session. I would like to turn the conference back over to Ms. Andrea Amozurrutia for any closing remarks.
Thank you, everyone, for your participation on the call today. We look forward to speaking with you in the next quarter. Please do not hesitate to contact us in the interim if you have further questions. Have a nice weekend.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.