Grupo Herdez SAB de CV
BMV:HERDEZ
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Grupo Herdez SAB de CV
Earnings Call Analysis
Q3-2023 Analysis
Grupo Herdez SAB de CV
The company's journey this period has been marked by robust growth with net sales surging by 13.3% for the quarter and 16% for the year thus far, signaling a powerful rebound driven by strategic pricing actions. The sales trajectory continued its upward trend with a notable 23% increase in the Impulse segment quarter over quarter and an impressive 19% rise year over year.
Nourishing its portfolio, the Preserve segment witnessed a 10.5% growth this quarter, buoyed by the strong performance of a diverse product mix ranging from vegetables to homestyle salsas, making it clear that category-specific strategies are bearing fruit.
Exports have soared, marking a 26.8% increase this quarter, indicative of the company's ability to overcome prior distribution hiccups. The year-to-date performance showcased a steady growth of 4.4%, firmly positioning the company on the global stage.
The company's financial fabric has strengthened with consolidated gross margins widening by almost 7 percentage points, reaching a healthy 40.7%. This improvement reflects a successful turnaround in the preserved segment that saw relief in raw material costs.
Operational efficiency crystallized as EBIT and EBITDA leapt by 50.1% and 36.8% respectively, achieving margin expansions that highlight the company’s disciplined cost management and optimized performance.
The curtains rose to reveal a stellar performance in net income, which escalated by 76.8% for the quarter, complemented by a margin expansion that reached 9.2%. This fiscal fitness was underscored by a 75.4% increase in full-year consolidated net income to MXN 2.3 billion.
The fortress of the company's financial position remains unshaken, boasting a cash reserve of MXN 3.5 billion, and a reassuring free cash flow generation of MXN 1.8 billion. This stability primes the company to address imminent debt obligations while fortifying its liquidity landscape.
Looking ahead, the company raised its financial guidance, signaling confidence in its future. Anticipated top line growth, although trimmed to low teens, is balanced by expectations of gross margin increasing by 350 basis points in reserves and 250 basis points in the Impulse segment. Bolstering this positive outlook, EBIT and EBITDA are both projected to swell, with net income forecasted to skyrocket by 40% to 70%, illustrating a vibrant and optimistic fiscal future.
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Good morning, everyone, and welcome to Grupo Herdez's Third Quarter 2023 Earnings Conference Call. Before we begin, I would like to remind you that this call is being recorded and 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 Andrea Amozurrutia, Head of Finance and Sustainability. Mr. Amozurrutia, please go ahead.
Thank you, Brenda. Good morning, everyone. Thank you for joining us for today's call. As you saw in our earnings release, net sales increased by 13.3% for the quarter and 16% year-to-date. This growth is primarily driven by pricing actions taken over the past year, while our volume performance has surpassed the previously mentioned slowdown and is now stable and in line with our expectations. In the preserve segment, we saw a 10.5% growth in the quarter. Categories like vegetables, mayo, Tomato purée, spices, Mole and homestyle salsas performed exceptionally well. Supermarkets and price clubs maintained their leading position in channel performance. For the year, net sales increased by 16.8% of which Mediterraneo contributed 2.2 percentage points to the segment growth.
In the Impulse segment, the top line shows ongoing traffic recovery in stores, primarily driven by changes in the pricing strategy at Nutrisa. Cielito Coffee shops experienced the most significant recovery during the quarter, while environment played continued growth in DSD performance with MEGA as the top-performing product of the portfolio. Net sales for the quarter recorded an increase of 23% and 19% for the full year. In exports, net sales for the quarter rose by 26.8 primarily driven by the catch-up on sales that were delayed in the second quarter due to distribution challenges.
Year-to-date, they increased by 4.4%. In dollar terms, net sales increased by 15% for the quarter and almost 19% for the full year. Consolidated gross margins for the quarter expanded near to 7 percentage points reaching 40.7%, making our highest margin since the third quarter of 2019, before the disruption caused by COVID-19 began. This growth was primarily driven by the preserved segment, which finally experienced a relief in raw material prices. Year-to-date, our consolidated gross margins increased by 3.3 percentage points to 38.3%. For the quarter, EBIT and EBITDA increased by 50.1% and 36.8% with margin expansions of 3.5 and 3.1 percentage points, respectively.
On a cumulative basis, EBIT and EBITDA increased 37% and 29%, while the margin expansions were 2 and 1.6 percentage points. These results are attributed to the recovery of gross margin in the preserved segment and reduced operating losses in imports. During the quarter, the income from unconsolidated companies reached 139 million, a 50% increase compared to the previous year. This growth was primarily driven by lower avocado costs and the effect of normalized logistics. Over the past 9 months, income from this segment reached MXN 658 million, which is 2.6x the income earned during the same period in 2022, where we had a very low base. Consolidated net income for the quarter was MXN 830 million, a 76.8% increase compared to the previous year, with a margin expansion of 3.3 percentage points, reaching 9.2%. This improvement was driven by the recovery of MegaMex and gross margins.
For the full year, consolidated net income rose by 75.4% to MXN 2.3 billion. We maintain a solid financial position. We've accumulated MXN 3.5 billion in cash as part of our strategy to pay down debt of MXN 1 billion that matures next month. This debt is associated with our MXN 2 billion [indiscernible] 17 bond. Our interest-bearing liabilities remained stable at MXN 10.5 billion. And in the quarter, we generated a free cash flow of MXN 1.8 billion. With that, I will now turn the call over to Gerardo.
Thank you, Andrea. Following Andreas' comment, our top line growth has normalized after a soft second quarter, and we are upbeat about future performance in line with our own expectations. Mexico growth has recently been revised upward due to the residence of private consumption, which can be attributed to a combination of factors, including historical low unemployment and government policies that have increased disposable income. With the disinflation process underway and the restrictive stance in monetary policies, we are tactically shifting our focus towards demand creation through market investments. We are very pleased with the performance of our portfolio as our market share held steady across the board on the back of strong brand equity. In the impulse segment allows Nestle continues to be the outlier due to consistent great execution, operating discipline and an extraordinary product portfolio. .
MegaMex continues its recovery trend, primarily due to lower avocado prices, reduced freight expenses in Don Miguel improved performance after an in-depth review of the company's operations. Finally, we want to raise our guidance for the full year, except for the top line growth, which will be in the low teens, against mid-teens. Gross margin should increase in reserves, 350 basis points and impose 250 basis points, where exports will be flat. EBIT should grow in the high 20s, while EBITDA will increase in the low 20s. And finally, consolidated and majority net income are expected to grow 40% and 70%, respectively. That concludes our prepared remarks, and we are ready for your questions. Brenda, please go ahead.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Álvaro García from BTG.
My question is on -- I have 2 questions. My first question is on contribution margin, your gross margin in preserved in Mexico at very high levels, obviously, reflected, I think, of reflective of a stronger peso and lower raw materials. I was wondering if there are any specific one-offs in the quarter, maybe the way maybe certain categories were delivered this quarter relative to last? Or if there was a clean number? .
No, they're not. This is the first quarter where we saw our cost per ton down versus last year. You'll recall that we were experiencing higher COGS every quarter. And remember that we have an easy comps because last year was a very, very low gross margin. So it was a combination of factors, combination of the pricing policies. And finally, cost per ton has come down from a year ago.
Would it be fair to assume that if things stay where they are that these gross margin levels?
I think I would take 1 or 2 percentage points. I think that we can assume that the gross margin for the whole year, not for the quarter, that it's in the 40s would be sustainable because going forward, even though inflation is coming down from a percentage basis, but inputs are going to stay high. And we will return to experience input specific issues. For example, next year, we're going to have a challenge for vegetables because of the hot weather, the dryness. So we're going to experience higher input costs in those categories. And considering the market dynamics, we are not expecting to have pricing actions across the board. Probably, we're going to do very little segmented required pricing actions, but it's not going to be significant. So we're going to return more to category specifics. So I think that assuming that the full year gross margin could be sustainable, plus minus 1.
That was very helpful color. You actually answered my second question on pricing in Mexico. Maybe the second question would be pricing in the U.S. We've heard a lot of chatter from your CPG companies in the U.S. that might even see some pressure on the way down in pricing? Obviously, that's not the case in Mexico, but do you see scope for maybe pricing pressure on the way down from retailers given how some raw materials have corrected? Or is that not the case for your portfolio in the U.S.? .
No, it's not the case. We believe it is the same environment. We are not expecting [indiscernible] it's going to be tactical regarding the categories. In terms of overall consumption, the environment, depending on the categories, but the environment is still low. People, consumers switch to more affordable items. And from a volume perspective, we are expecting a stabilization or normalization for the next months in the U.S.
[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Gerardo Canavati for any closing remarks.
Well, thank you very much for joining us in our earnings call. If you have any questions, don't hesitate to contact us. And thank you, Brenda. Have all a good day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.