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' Third 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 Mr. Guillermo Perez, Investor Relations Manager. Mr. Perez, please go ahead.
Thank you, Therese. Good morning, everyone. Thank you for joining us on today's call. We appreciate your interest in Grupo Herdez. 2022 has been a year follow-up of unexpected and impactful events. We keep dealing with the lingering supply chain constraints, the highest levels of inflation in decades and pressure on raw materials. Nevertheless, we remain focused on what is under our control, market execution, disciplined management of expenses and working capital. Net sales increased 17.7% in the quarter and 22.2% year-to-date.
Volume was responsible for 1/5th of the growth on a cumulative basis, although price increases are still the main driver of top line performance in quarterly and year-to-date numbers. Results in the Preserves segment remain with a similar behavior as the consolidated figures increasing 18.5% for the quarter and 21.1% year-to-date. Volume in supermarkets, wholesalers and foodservice remained steady in the quarter and increases were driven by pricing actions in the last 12 months. Impulse continued sequential recovery due to the reopening and normalization in stores as well as price increases, which translated into a high mid-single-digit average ticket for the quarter.
Similarly, the DSD channel at the [indiscernible] continue with the upward trend seen in the first half of the year. In exports, net sales increased just 8.4% in the quarter and 27.8% on a cumulative basis as demand softened somewhat. Home-style sauces was the best-performing category in the quarter. Consolidated gross margin in the quarter was 13.9%, a 130 basis points lower than in the third quarter of 2021. As input prices remain stubbornly high alongside other costs, which are not comparable versus last year. By segment, the margin was mainly impacted by 180 basis points decrease in preserves, although Impulse registered at 170 basis points improvement.
Consolidated SG&A was 23.8% of net sales for the quarter and 24.6% for the first 9 months of the year. This was 90 and 100 basis points lower, respectively, due to the operating leverage resulting from increased sales that completely offset higher freight expenses as well as other expenses. With that backdrop, I will turn the call over to Andrea to discuss profitability results as well as other company initiatives.
Thank you, Guillermo. Good morning, everyone. As you saw in our numbers, despite gross margin pressure, consolidated EBIT and EBITDA increased 30.5% and 32% with margin expansions of 100 and 160 basis points, respectively. On a cumulative basis, EBIT and EBITDA increased 34% and 30.5%, with a margin expansion of 100 basis points each. This was mainly driven by operating leverage at the Preserved segment. During the quarter, income from unconsolidated companies was MXN 92 million, 43% lower than in 2021, mainly due to the continued pressure on MegaMex results caused by the cost of avocados and increased logistics. Year-to-date, performance is similar with income from unconsolidated companies decreasing almost 57%, dragged down by the results -- that results that were 61% lower at MegaMex. Nevertheless, it is important to highlight that we have turned the corner resulting from price strategies and lower costs, which are reflected in a quarter-over-quarter recovery of 115%.
The consolidated net income for the quarter was MXN 469 million, 3% higher than the previous year. The above resulted from lower results of MegaMex as well as higher income taxes due to higher proceeds coming from operations in the United States. On a cumulative basis, the consolidated net income decreased 4.3% to MXN 1.3 billion, with a 160 basis point margin contraction, also explained by the gap on MegaMex performance when compared to last year.
Our financial position remains strong. Cash was MXN 5.1 billion, and interest-bearing liabilities were $12.4 billion, same as those of the second quarter of the year. As a reminder, these amounts include MXN 1.8 billion of a bank loan that will be paid in November. So we expect the cash position to return to normalized levels by year-end. In terms of our advancements on our sustainability strategy, this quarter, Grupo Herdez signed [indiscernible], an initiative for companies a long supply chains in Mexico to join forces to reduce food waste and losses by 50% in 2030. With this initiative, we will be contributing to one of the most important KPIs for our industry and the sustainable development goals, #2 Zero Hunger.
Lastly, we are very glad to share that Grupo Herdez was recognized by MERCO, one of the most important corporate reputation monitors in Latin America as one of the 100 companies with the best reputation in Mexico. Going up for position to hit the 13 place. In the food sector, we ranked [ third ]. Considering that this ranking takes into account practically all of our stakeholders, we feel honored to have these results and will continue to build communication strategies that strengthen our good relationship with all groups of interest and put up our good practices. With that, I will now turn the call over to [ Héctor ].
Thank you, Andrea. In the last weeks, we have seen consumption soften a bit. This was completely expected as inflation [ was ] across the board and should be sticky for the foreseeable future. Despite this environment, our performance was better than the market as we gained market share in half of the categories in our Preserves portfolio. There is still work to do in Impulse as by definition, the segment takes a back seat when disposable income takes a hit. Conversely, as Andrea mentioned, we have pivoted at MegaMex, and now our attention will be to keep demand steady. On the other hand, early results of our [indiscernible] U.K. launch are encouraging.
We have conquered mid-single-digit market share and have good traction to expand our distribution next year. In the quarter, we saw good signs of working capital improvements. Half of our free cash flow came from these efforts, and we expect more to come in the following quarters. Maintenance CapEx for this year will be lower than guided, but we expect to execute small M&A that will fill the gap. Total CapEx for the year will end up around MXN 1.3 billion. Lastly, as this year draws to an end, we reiterate our guidance, except for net income. We expect Preserves and Impulse to grow in the high teens at mid-20s, respectively. So consolidated net sales will increase by 20%. Consolidated gross margin will still be 170 basis points lower for the full year, driven by Preserves. EBIT and EBITDA will grow in the low 20s while majority net income will increase in the 10% neighborhood due to the MegaMex shortfall.
For 2023, we see flattish volume growth and expect income and expenses pressures to ease towards the back half of the year, translating into margin expansion. We will brief you when we have the forecast. Thank you for your attention. We will now take your questions. Please go ahead.
[Operator Instructions] The first question comes from Juan Ponce with Bradesco.
Regarding gross margins, we saw the pressure from raw materials during the quarter. Do you see these rising costs abating anytime soon? And if you can talk a little bit about each item? And how should we think about pricing going forward?
Well, we are still in that pressure environment. If I can use a measure in the quarter, our input cost per ton increase in the low 20s. So going forward, we're going to see this pressure. But obviously, the rate of change is going to come down, but the price level is going to keep high. Going forward, probably we would do some pricing action that's going to be less than what we have taken this year. So pricing is going catch up with our cost input. That's why we see that in the second half of next year, gross margin will start to expand from a year-to-year basis. But obviously, you're going to see gross margin improvement on a sequential basis. So for this quarter, we are expecting a sequential increase in gross margin as our pricing action catch-ups with cost pressures, I think that answers your question.
Yes, it does. Very, very clear. And I'm sorry if I missed the last part of the opening remarks, where you guys talked about growth expectations for revenues, EBITDA, bottom line. Could you please repeat that, please?
For '20 -- for this year?
Yes, for this year.
Okay. for this year, so we reiterated the guidance. So Preserves and Impulse will grow in the high teens and in the mid-20s, respectively. And EBIT and EBITDA will grow in the low 20s. Our gross margin will still compress somewhat about 170 basis total and net income will grow around 10%. -- for 2022.
For 2023, our early indication or what we are seeing right now as we build our budget for next year is that volume is going to be flattish. And there's going to be less price actions. And gross margin is going to expand in the back half of the year. There's also some pressure in other things other than Impulse. So SG&A sees pressures. We also will have the minimum wage increase for next year that has effects in a lot of things. There's also some public policies that's going to start next year in terms of social security -- so there are a few things that are still in the pipeline that are going to pressure COGS and Impulse.
The next question comes from [indiscernible] Group.
I have 2 questions. First, I was wondering if you could give me a little bit more information about volume and maybe a breakdown from each sector. And the other question is, do you see volume contractions due to the increase in prices in the last quarter of the year.
In what period are you referring? Can you be more specific, please?
Yes. The breakdown for the volume for industry for the third quarter -- and the volume contraction for the next period?
Okay. So we said in our press release that volume is flattish versus last year in Preserves. And we said in this conference that volume is lower. In the last week, demand has come down. And for this year, we're going to finish probably in the low single digits for the whole year. And next year, we see volumes flattish. Does that answer your question?
The next question comes from Alvaro Garcia with BTG.
I have a question on your comments in your remarks, the one on softness that you started to see certain signs of softness. I was just curious if those comments have to do with what you're seeing in Preserves because it seems Preserves is doing quite well. You're gaining share in a lot of categories. But you did mention you outperformed turn category. So is that specific to what you're seeing in Preserves and in supermarkets more generally? Or is that maybe driven by what you're seeing in the more discretionary Impulse division? Sort of what's driving those comments would be very helpful to understand.
Well, it's across the board, Alvaro. And it's not only in our business, we have also seen some indication or some consumption performance in the financial sector that draw that conclusion. So as we -- this year has evolved every call that we have, we have said that consumption was strong. Volumes were growing until when. That was the question. It could be that September is a month of high seasonality in terms of back-to-school, in terms of summer ending, et cetera, et cetera. But September was particularly soft.
Our vacation period in foodservice was very good. people was out more often because they were out from the pandemic. And that explains also the softness that we have seen in Impulse because instead of going to a shopping center, you went to the beach. So it's very interesting to cross those numbers because food service did very good and Impulse did very poorly. So that could be an explanation. But even though we saw some softness last quarter, second quarter, we grew in the mid-high digits in terms of volume. And the next quarter, we are flattish. So obviously, there's [ deacceleration ] on consumption. We're not very worried about it, but it's a softness. Now in terms of performance, when we do better than the category, we gained market share. That doesn't say that we grow in terms of volume. If a category drops 10% and we dropped 5%, we have an outperformance versus the market.
That's the context of our performance in terms of market share. So in fact, in some important categories, we have gained market share in terms of volume, but that doesn't mean that the category is up in terms of units [indiscernible]. I hope I explained myself.
Yes. Was -- that was very clear. That was very clear. Tough environment. I'd say we're hearing a little bit of everything on both sides there. And then in the U.S., specifically, I was wondering maybe if you can give some more comments on [indiscernible], specifically on the dynamics you're seeing there into the year?
Because of the dynamics in the U.S. are very powerful, I can say that overall, not particularly in our business, but with all these price increases made by CPGs demand fall from a cliff in the last 3 months. So because you have as you have a lot of [indiscernible] we have seen in categories across the board that consumers are trending that. So we have seen some private label categories go up while other branded. And this is basically from the industry as we read the reports, et cetera. So what we expect there is that after the price increases, some allowances will be used to incentivize demand. So I believe we said last time that we are -- we have been behind the curve, and now the risk would be to overshoot.
So I expect some activity in terms of promotions across the industry in order to incentivize demand as input costs stabilize. Regarding avocado, the price of avocado has come down. So now we are seeing gross margin expansion from a sequential basis, and we think that's going to continue in the -- for the next year. Does that answered your question about Alvaro?
[Operator Instructions] The next question comes from Bernardo [indiscernible] Group.
Just a quick question from the Impulse segment. I was just wondering if you had any targets or any idea to where the EBITDA margin of the Impulse segment could reach? I mean we saw a lot of periods before the pandemic of double digits and EBITDA margin. Just wondering if that is the target in the medium, short to medium term?
Well, definitely, it is the target. It is the target to have low double-digit margins as we have had in the past. Now when I say there's a lot of work to do is that pricing has been very strong, and now we have to work on demand creation in both channels within the Impulse. We have a very good structure in terms of fixed assets in order to sell more. So this business is highly -- has a high operating leverage. So we have the assets and the SG&A to do much more in sales. And that's how we're working. So we worked in the last couple of years in the portfolio. I think that the improvements in our ice cream portfolio has been great.
We have been recognized in terms of relaunching some brands internationally from our partners. But we think we have a very good portfolio in order to achieve those goals. The timing is not perfect because when disposable income, as we mentioned in the call, goes down, will you cut on your Impulse or your indulgent purchases. So obviously, that's a concern, I think it's going to be challenging, but definitely, our goal is to reach those margins. We believe that in retail with all this multi-brand strategy, we can achieve some synergies that we are exploring right now. And probably that will help us to reduce or to increase our operating leverage and reduce our expenses in terms of percentage of sales. And I think we're going to see that throughout the next year.
The next question comes from Emiliano Hernandez with GBM.
" My first question is on MegaMex. As you just mentioned, we've seen our cover prices go down and even down year-over-year in October. How much time does the price takes to reflect on the results? I know there's also pressures from supply chain. So maybe the question is when could we expect MegaMex margins to return to more normalized levels? And second question is, you mentioned part of the CapEx for the year would come from M&A. Could you elaborate more on these transactions you referred to?
Okay. When we say that MegaMex just turn the corner is that we are seeing those gross margin expansions as we speak. So going forward, we're going to see that in a sequential basis. Probably in year-over-year is going to be tough, but sequentially, the trend is on the upside. In terms of M&A, well, obviously, we cannot share with you anything because we could -- we already would have. But you can expect some news in the next weeks. But it's more, as I mentioned, our acquisitions based on a percentage of our total assets are less than 5%. So there is very interesting, but there's not -- they will not move the needle.
As there are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Gerardo Canavati for any closing remarks.
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.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.