Grupo Herdez SAB de CV
BMV:HERDEZ
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
42
55.3
|
Price Target |
|
We'll email you a reminder when the closing price reaches MXN.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Earnings Call Analysis
Q3-2024 Analysis
Grupo Herdez SAB de CV
In the third quarter of 2024, Grupo Herdez's Export segment showcased remarkable resilience, achieving a striking 24.1% increase in dollar sales. This growth was propelled by a successful introduction of new products, particularly mayonnaise in supermarkets and salsa in 2-pound jugs in the U.S. market. Additionally, a favorable exchange rate played a significant role in enhancing sales volume. However, this success contrasts sharply with earlier forecasts impacted by difficult comparisons and unexpected weather-related disruptions in other segments.
On the domestic front, Grupo Herdez encountered hurdles due to severe weather, resulting in estimated lost sales of approximately MXN 40 million in their Input segment, especially hitting their Helados Nestlé for frozen desserts. Nevertheless, their retail business showed resilience, growing close to 7%, aided by innovative product launches, such as the Hello Kitty flavor collaboration, which resonated well with consumers. This suggests an ongoing recovery trend in retail despite external pressures.
The gross margin for Grupo Herdez stood robust at 40.5%, bolstered by a favorable sales mix and operational efficiencies. However, challenges persisted in the form of EBIT pressure due to weather impacts and increased commercial investments. Significantly, the Export segment reported a strong margin expansion, achieving the best margin since Q4 2020, contrasting with the pressure on margins from the Preserves business, which has experienced declining performance.
Problems in MegaMex, a subsidiary dealing with avocado products, have created ongoing challenges. The segment has suffered from soaring avocado prices, increased competition, and shifts in consumer preferences towards home-cooked meals. These factors squeezed margins and resulted in a notable decline in income from unconsolidated affiliates, particularly Avomex and Don Miguel. To address these difficulties, Grupo Herdez is exploring diversification in sourcing and strategic investments to stabilize the business.
Looking forward, Grupo Herdez is committed to growth and sustainability, with a planned capital expenditure (CapEx) focusing on specific projects over the next 15 months: expanding capacity with a new long pasta line, updating equipment for tomato puree and mole production, developing a multi-format salsa production line for exports, and upgrading their ERP systems. These investments are pivotal, especially as they also anticipate continued growth in their Input and Export segments, expecting low 20s percentage growth moving forward.
The management painted a challenging outlook for 2025, citing rising operating costs and complexities due to local economic conditions, including labor reforms that might strain resources. The company foresees a soft consumption environment, predicting low single-digit growth in volume amidst difficulties in passing cost inflation to consumers. They are focused on tactical and operational strategies, including expanding logistics and increasing manufacturing capacity, to mitigate these effects.
Grupo Herdez remains optimistic about future M&A opportunities, particularly in the U.S. market, as their Export segment continues to gain traction. They hinted at providing updated guidance for 2025 in January, which will be crucial for investor sentiments moving forward.
Good morning, everyone, and welcome to the Grupo Herdez Third Quarter 2024 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. [Operator Instructions]
At this time, I would like to turn the conference over to Andrea Amozurrutia, Head of Finance and Sustainability. Ms. Amozurrutia. Please go ahead.
Thank you, Drew. Good morning, everyone. Thank you for joining us on today's call.
As we anticipated in our previous conference calls, our third quarter figures were challenged by difficult comps in Preserves. We saw continued momentum in our Export segment, but faced unexpected weather-related disruptions in Input, and disappointing performance in MegaMex.
Starting with the good news, our Export segment truly shone this quarter, driven by the strong performance of mayonnaise in supermarkets and expansion into new clubs in regions like the Bay Area and South California, we saw a 24.1% increase in dollar sales. This growth was further fueled by a favorable exchange rate, and the successful introduction of our 2-pound [ jug ] salsa in the U.S. market, which contributed significantly to our sales volume increase.
On the domestic front, it was a more challenging quarter. Severe weather events, including hurricanes and flooding, significantly impacted our Input segment, particularly Helados Nestlé. We estimate these disruptions led to roughly [ MXN 40 million ] in lost sales.
However, it wasn't all bad news. Our retail business within the Input segment demonstrated resilience, growing close to 7% and continuing its recovery trend. This is thanks to several initiatives we've implemented across our brands, such as the flavor innovation with the Hello Kitty license, which was a real hit among consumers.
Turning to margins. Our gross margin came in at a healthy 40.5%, supported by a favorable sales mix and operational efficiency. However, the weather-related disruptions and increased commercial investments did put some pressure on our EBIT. The Export segment, on the other hand, delivered a strong margin expansion, achieving its best margin since the fourth quarter of 2020.
Now turning into the not-so-great results in the quarter. The performance of MegaMex continues to be very challenging. As you saw in our report, income from unconsolidated affiliates was significantly lower than last year, primarily due to challenges at Avomex and Don Miguel.
MegaMex is facing a tough environment with soaring avocado prices, increased competition from cheaper alternatives and a shift in consumer preferences towards home cooking. This has put a squeeze on the margins. We are actively exploring options to stabilize the businesses sensitivity to avocado price fluctuation, including diversifying our sourcing and investing in marketing to better understand and adapt to evolving consumer trends.
Despite the challenges, Don Miguel's cash flow is positive year-to-date, due to our redesigning the manufacturing layout and favorable soft commodity inputs. This underperformance underscores the need to structural changes at MegaMex. Together with our partners, we've recently named an interim CEO to ensure effective execution with a sense of urgency.
Looking ahead, we remain committed to investing in our growth and sustainability. Key projects include capacity expansion, equipment modernization and new store openings. Our strong free cash flow of MXN 603 million in the quarter allow us to continue this investment, while maintaining a healthy financial position.
With that, I will now turn the call over to Gerardo.
Thank you, Andrea. Good morning, everyone.
Despite the headwinds from global geopolitical uncertainties, input cost pressures, the exchange rate volatility and a slowing economy, we have maintained our focus on delivering results. While third quarter results may not match our expectations, we continue to allocate resources towards operational efficiency, including IT and product innovation.
For the next 15 months, our CapEx allocation will be in 4 major projects: a new long pasta line, equipment update for tomato puree and mole, a new multi-format line for salsa production for exports and obviously, ERP, among other smaller projects.
For the present quarter, we expect Inputs and Export with the same momentum. We see sales at both segments growing in the low 20s, while Preserves should be flattish. Consolidated EBIT and EBITDA will also be flattish versus last year, having Inputs and Export offsetting softer margins within Preserves. This fourth quarter expectation is in line with our full year forecast shared with you previously.
Lastly, due to the recent changes at MegaMex's leadership, we will not provide a forecast for this business.
I'd like to give you some perspective on what we expect going forward. Doing business in Mexico has become expensive and complex on all fronts. Despite an overwhelming welcome to the higher disposable income in our country, implementing all the proposed labor reforms will be strenuous. These changes will impact our operating cost, require adjustments in workforce shifts and demanding an already scarce resource labor.
Despite trying to mitigate these and other inflationary effects, 2025 looks very challenging. In a softer consumption environment, the ability to pass cost inflation will be hampered by share of market losses, while managing input and expenses costs.
On the other hand, we have tactical and operational strategies that must continue, such as the [ EMEA ] expansion strategy, the logistics footprint, increasing our manufacturing capacity and the implementation of our ERP, to name a few.
Having said that, we decisively will sacrifice our short-term performance for a stronger long term. We are confident in our strategy. The U.S. market is our priority as the Export segment has evidently shown, and we believe that M&A opportunities on both sides of the border will arise in the near future, and we are prepared to seize them.
We will update our 2025 guidance in January.
We're now ready to take your questions. Drew, please go ahead.
[Operator Instructions] The first question comes from Felipe Ucros with Scotiabank.
So my first question for you guys on the consumer in Mexico. Obviously, a lot of generalized reports from everyone in the segment saying that consumption has weakened in Mexico. But it's been kind of hard to pin down the cause, obviously, weather was an issue, the constitutional reform and the changes in government also generated uncertainty. There's elections in the U.S. But there's a bunch of things, and it's hard to pin down whether the slowdown is temporary or whether we should be thinking about more of a structural thing? I'm wondering if you have kind of an opinion on what we think it is for the coming couple of years?
And then if I can add a question on exports, pretty amazing performance here. I think it's been more than a year since you started broadening out the presence in price clubs and introducing new products, but you're still growing at very high rates. So how should we expect or how should we think about growth for the coming couple of years? Are you expecting more double-digit growth going forward? Or maybe another way of asking it is, do you have plans for more product lines, more regions, different retailers? Or should we assume that you've kind of -- you will soon reach a plateau on exports?
Felipe, so on the consumption environment, we saw [ deep deceleration ] in the first quarter, and that has -- that gap has closed recently. What we look forward is that regardless of what's all the things that you mentioned in your question, we believe that consumption in our sector is going to be between flattish and low single-digit growth in volume.
We see that all these initiatives are very strong for the disposable income. I think that those strategies in this administration will continue, and that will translate into more consumption, at least in our sector. So we are not worried about that in terms of the consumption environment.
And regarding your second question, is we're very excited about what's going on in the mayo categories. I think that our growth in this quarter would be higher if we had the capacity. So we are hitting some capacity constraints that are going to be addressed with more capacity to satisfy the demand that we're seeing in the United States. So we can expect to continue to grow probably in the single-digit range in terms of volume.
And for salsas, as I mentioned previously, we are increasing our CapEx, our investments in order to produce more salsa formats, multipack, multi-format for all the brands that we have in MegaMex. So that will also drive the exports when the line is ready in the next 12 months.
[Operator Instructions] Seeing no further questions, I would like to turn the conference back over to Gerardo Canavati for any closing remarks.
Thank you for your participation in the call today. We look forward to speaking with you again next quarter, and please do not hesitate to contact us in the interim.
Thank you, Drew. Have a nice day.
Thank you. The conference has now concluded. You may now disconnect your line. Thank you.