Grupo Herdez SAB de CV

BMV:HERDEZ

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, everyone, and welcome to Grupo Herdez Third Quarter 2020 Results 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 it over to Mr. Gerardo Canavati, Chief Financial Officer. Please go ahead, sir.

[Gerardo Miguel, executive]

Thank you, Anastasia. Good morning, everyone. Thank you for joining us on today's call.

Before we discuss quarterly results, I want to recognize all the people in Grupo Herdez that made possible for our supply chain to continue working without suffering any downtimes. Thanks to their effort, commitment and hard work.

The third quarter brought contrasting results. On one hand, the Preserves segment continues to be benefited by the cook-at-home trend linked to the lockdowns, which we believe has staying power despite lower growth rates. On the other hand, the Frozen division still had a weak performance but with an improving trend. Having said that, as usual, Andrea will walk you through the results for the quarter, and we will take your questions at the end.

Andrea?

[Andrea Casillas, executive]

Thank you, Gerardo. Good morning, everyone. Net sales increased 4.5% in the quarter and 7.4% over the first 9 months of the year. In the quarter, 1/3 of the portfolio grew at double-digit rates. On the other hand, our Frozen and retail business continued down harder because of lower traffic in our stores when compared to last year. However, in Helados Nestle, sales continued to experience a strong performance on the modern channel, growing at double-digit rates during the quarter.

In Exports, net sales increased 19% in the quarter and almost 30% on a cumulative basis, reaching a level of MXN 522 million and MXN 1.5 billion, respectively. These increases are explained by a stronger U.S. dollar and robust growth in home sales forces and model.

Consolidated gross margin in the quarter was at 37.5%, 210 basis points below the third quarter of 2019. Despite higher efficiency derived from strong top line performance at Preserves, the margin was impacted by a MXN 60 million charge related to the implementation of the new labeling regulation, lower margins at the retail business and an unfavorable sale in Helados Nestle.

In the Exports front, consolidated gross margin increased 740 basis points, resulting from higher volumes and the exchange rate. On a cumulative basis, gross margin was 37.6%, 100 basis points lower than in 2019 due to the impact on our Frozen division.

Consolidated SG&A in the quarter was 26.1% of net sales, 70 basis points lower than in the same period of 2019. SG&A on the Preserves segment decreased 4.6%, mainly due to higher absorption of fixed expenses and lower advertising and promotion expenses. While in Frozen, SG&A increased 13.6%, resulting from the consolidation of Cielito. Over the first 9 months of the year, SG&A represented 26.4% of net sales, practically flat when compared to 2019.

Consolidated EBIT decreased 13.4% in the quarter as a result of a MXN 224 million operating loss in Frozen that fully offset the margin expansions in Preserves and Exports. For the first 9 months of the year, EBIT remained practically unchanged. EBITDA decreased 10.8% for the third quarter while the margin decreased 260 basis points to 15%. On a cumulative basis, EBITDA increased 4.4%, representing 16.2% of net sales.

In the quarter, income from unconsolidated companies was MXN 145 million, almost 50% higher than in 2019, mainly due to lower avocado prices and the recovery of certain sales channels in the U.S. On a cumulative basis, this income was MXN 490 million, 8% lower than the last year affected still by Don Miguel and the impact of COVID-19 in food away from home.

Consolidated net income for the quarter was MXN 383 million, 16.8% lower than in the previous year as a result of the operating loss of Frozen and higher interest paid along with a onetime expense of MXN 48 million related to the unwind of an interest rate swap linked to the HERDEZ17-2 bond prepaid in the quarter. In cumulative figures, consolidated net income was MXN 1.5 million, in line with the previous year.

As you are all aware, in August, we issued MXN 3.5 billion in local bonds, which proceeds to prepay local bonds HERDEZ17-2 and HERDEZ 18 as well as the committed credit lines used at the beginning of the pandemic. We issued MXN 2.5 billion on a fixed rate, achieving the best rate in our history, 7.78% and MXN 1 billion on a float grade with terms of 10 and 5 years, respectively. As of today, gross debt remained at MXN 9.5 billion while average maturity went up from 4 to 6.4 years.

Consolidated cash at the end of the quarter stood at MXN 3.7 billion, up MXN 195 million from last quarter after buying back 6.5 million shares that represent MXN 254 million and net CapEx of MXN 64 million during the quarter. Leverage ratios remained strong, and net debt consolidated EBITDA was 1.7x.

With that, I will now turn the call over to Gerardo.

[Gerardo Miguel, executive]

Thank you, Andrea. The stay-at-home trend brought unprecedented growth to small categories, which have huge potential. Balancing our sales mix looks good at this stage. Carving out the divested tuna businesses and adjusting for the new labeling one-offs, Preserves gross margin expanded 180 basis points for the first 9 months of the year. On the other hand, having opened 95% of our shops, weekly performance has improved somewhat, but we do not expect to surpass 85 index versus 2019 in the next 6 months.

Mom-and-pop sales are still very weak. Thus, we are doubling down on our omnichannel strategy, where sales of ice cream at modern trade has skyrocketed, gaining significant share in these channels. For the fourth quarter, we expect a slight gross and EBIT margin expansion across the board. Full year top line growth will stay at the mid-single-digit rate while consolidated EBIT and EBITDA should be flattish versus 2019.

Finally, the steep losses in Frozen will undermine the majority of net income by 1/3.

Even though guidance for 2021 is too early, we feel optimistic by our improved portfolio, innovation, the consumption environment, productivity changes at Frozen post pandemic and a strong balance sheet.

Lastly, we are proud to announce that the Global Compact Mexico picked Grupo Herdez as a study case for the successful integration of the sustainable development goals in our business model and was presented in the month of September.

That concludes our prepared remarks, and we are open for your questions. Anastasia, please go ahead.

[Operator]

[Operator Instructions] Our first question comes from Miguel Tortolero with GBM.

[Miguel Angel Tortolero, analyst]

[indiscernible] Cielito. I mean, it seems that when we exclude the results of Cielito, the reading of the quarter changed dramatically. So can you give more color on the dynamics within that business? Specifically, I would like to better understand the nature of the negative contribution of this quarter. How much of it should be thought as a onetimer? And going forward, should we expect any further impact coming from Cielito?

And the second one on Frozen. First, thanks for the color on the Cielito's effect on the segment's figures. But in this regard, when we exclude such results, EBITDA margin for Frozen was actually above 15%. Could you give more color on what's driving that level considering a quarter when sales declined over 20%?

[Gerardo Miguel, executive]

Miguel, please go ahead.

[Miguel Angel Tortolero, analyst]

Did you hear my question? So I already asked my question. I don't know if...

[Gerardo Miguel, executive]

Yes. We didn't hear very good your question, Miguel, but I'm going to try to explain the small things that I heard.

So carve out...

[Miguel Angel Tortolero, analyst]

I can repeat if you want.

[Gerardo Miguel, executive]

No, no, no. When you carve out Cielito, obviously, the trend is improving. We improved tenfold percentage point in sales sequentially versus third quarter. And you mentioned that it's a negative contribution to an already negative loss, okay?

So because the structure of the business is high expenses, all the division -- not all the division, only Nutrisa has experienced a loss from the operating level, okay? What we have seen is that the recovery is slower in Cielito versus Nutrisa because of the mix of the stores. 50% of our Nutrisa locations are in shopping malls, where for Cielito is lower than that, about 30%. And 20% our stores are coffee shops that are located at offices. And because the -- in the office space, the lockdowns continue and the traffic is very small, that's why Cielito is lagging the recovery at the same pace at Nutrisa, okay?

But obviously, it is a negative contribution to an already loss in the quarter of this business, okay? When you carve out this effect, the expenses at a stand-alone basis were reduced about 10% due to rent negotiations, leases negotiations and efficiencies across all the SG&A line.

I hope with that, I can answer your question.

[Operator]

The next question comes from Felipe Ucros with Scotiabank.

[Felipe Ucros Nunez, analyst]

Congrats on the quarter, Gerardo. So [ Angel ] took my first question, which was about Cielito. If I can do a follow up on that, just if you could tell us if there were unusual onetimers related to the transaction still embedded in the numbers. Or was this a fully clean result from Cielito?

And then if I can do a couple of other questions. The first one is on Nestlé. Obviously, very good news there. You're experiencing double-digit growth. And obviously, that's being enough to sort of completely offset what's happening at Nutrisa. Can you talk a little bit more about what's driving the double-digit growth? If there's anything in particular you're doing from the micro side aside from what's happening on the COVID front?

And also on foodservice. Apparently, foodservice in the U.S. is improving. At least sequentially, it looks to be improving on the results. If you can tell us how that's trending, any color you can give us would be great.

[Gerardo Miguel, executive]

Okay. So when you consolidate this business, obviously, you put -- it is diluted on the business, talking about Cielito. But you will not see any efficiencies until next year because we just incorporated the business. And with all the COVID, we didn't make any changes until this quarter, the fourth quarter, right? So the improvement will come going forward.

Now if there's one-timers, there's always things that go into the P&L after the acquisition, but they are not material, okay? So the recovery, as I said to Miguel, is a little bit slower because of the mix. And we believe that in the next 6 months, we're going to see a little bit more upbeat because we are also changing the portfolio, the food portfolio, as we consolidate the business.

And the second question regarding Helados Nestlé, well, basically, we -- our strategy in the organic channel is horizontal and vertical. So horizontal, we are -- we have increased the listing of our products among all our clients, and we are increasing the number of SKUs with existing clients. So we are penetrating the market both ways.

Obviously, the sales mix is a disadvantage because margins are lower. But from a contribution standpoint is it looks very good. Also, there's some pricing action that we're going to take on this quarter, and that will help the margin contribution.

And the third one is about foodservice. Indeed, foodservice is recovering in the U.S. I think that the pace is very slow. I think that we are still -- we are not even close to 70%. And Mexico is recovering faster, by the way. So in this quarter, our recovery was extremely positive, considering that we are not out of the woods. So we expect to hit -- to continue to recover in the food away from home and MegaMex, but we don't see getting 100 index until at least the second quarter of next year.

[Felipe Ucros Nunez, analyst]

Very clear. If I can follow up just on one thing, on Nestlé. You talked a little bit about the mix disadvantage. Is the mix because of SKUs, people buying larger SKUs than usual? Or is there something else going on there?

[Gerardo Miguel, executive]

No. No, it's more about the structure of the market. It's more about the pricing of the channels where modern freight sales at a very steep discount versus [ DAD ]. That's the structure of the market.

[Operator]

The next question comes from Álvaro García with BTG.

[Alvaro Garcia, analyst]

I have a couple of questions as well. My first question is on commodity prices. I would love to hear your views on the direction -- the recent direction of soybean oil prices specifically. And if you could maybe give us some color on your hedges there and on the peso front, that would be very helpful.

And then my second question is just a clarification on the -- you mentioned in your prepared remarks that you don't expect to be at 85 index throughout the rest of this year for Frozen. But I'm just wondering if that's on a same-store basis or if that's including Cielito or not.

[Gerardo Miguel, executive]

Yes. Okay. Yes. Alvaro, yes, it's on a same-store basis. It's completely comparable. We're not talking about the line. The weekly improvement is significant, but we don't see that going beyond 85. I mean, as you know, yesterday, one of the states in Mexico went to the red light, and they're going to close shopping malls. So that's a big concern that we have. We don't have a plan, by the way. I mean you cannot have a plan if the local governments go to lock down again. We think it's unlikely because of the damage in the local economies. But at least one of our stores there, I mean, we have 2. One was going to be closed anyway, but one is going to be closed. I mean, it's not material, but that's a big concern.

[Alvaro Garcia, analyst]

Maybe on that point, just really quickly, sorry to interrupt. But maybe on that point, is there a clear difference, I'm assuming there, is between the performance between the performance in states, let's say, that are in yellow versus orange because of mobility restrictions or whatnot?

[Gerardo Miguel, executive]

Yes. Yes, there is. So that's a big concern that we have. And the other question is regarding commodities. Well, as you have seen, commodity, soft commodities have increased significantly from the lows in the last 6 months. We have some hedges in place that would be approximately about 6 months of next year. We think that medium term, this trend will not last because of all the overhang you have on crude oil inventories and all that oil complex that makes biodiesel less attractive at these levels. So we feel comfortable with those hedges. And also with the exchange rate, would be a little bit higher than 1/3 for next year. And what was your third question?

[Alvaro Garcia, analyst]

No, I think that was it. I think that was it. It was just to sort of get your view on -- I guess, the follow-up there would just be on pricing, right? Whether or not given the recent commodity -- the recent increase in commodity, you'd expect sort of more aggressive pricing actions next year? That would be the natural question, right?

[Gerardo Miguel, executive]

Well, we already did this quarter. And next year is going to be linked to inflation. So every year, we have this with price reset linked to inflation, I mean, pluses or minus. The biggest concern in terms of commodity would be the wheat, the semolina price because 2 things: first, wheat went up; second, the government took out a subsidy, so we're paying like market prices. And plus the exchange rate. So the biggest price resets is going to be -- it is impact.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

[Gerardo Miguel, executive]

Thank you, Anastasia. So thank you for your participation on the call today. We look forward to speaking with you again next quarter, and please do not hesitate to contact us in the interim. Have a good day.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.