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 Fourth Quarter and Full Year 2018 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 detailed notes in the company's press release regarding forward-looking statements.
And at this time, I'd like to turn the conference over to Mr. Gerardo Canavati, CFO and CEO of the Frozen division. Please go ahead, sir.
Thank you, Katrina. Good morning, everyone. Thank you for joining us on this conference call. We'll be discussing our results for 2018.
As history shows, a year where we have elections in Mexico brings an upbeat consumption, that in 2018 we never experienced. All consumption indicators have been lower-than-expected, particularly, untapped and retail sales. In this context, and considering the volatility in key economic variables during the year, Grupo Herdez results were satisfactory.
I will now turn the call over to Andrea Amozurrutia, our Deputy Director of Finance, to discuss quality and annual results. And later, I will provide the outlook for 2019. Andrea?
Thank you, Gerardo. Greetings, everyone. Our net sales in the fourth quarter were 5% higher than they were in the fourth quarter of 2017. Net sales topped at MXN 5.8 billion, driven by price increases, and to a lesser extent, volume growth during the year.
Cumulatively for 2018, consolidated net sales grew 4.5% to nearly MXN 21 billion, mostly due to price increases in the Preserves division and volume growth in export. Solid growth of 4.5% already included the drop in sales in the Preserves division in the first quarter since several of our clients streamlined their inventories. In addition, in the second quarter, we have the impact of Preserves in the Frozen segment being relocated from traditional point of sales to stores that see more traffic so that they could increase profitability of the distribution route.
In our Preserves division, net sales grew by 4.7%. Our strongest performers during the quarter were homestyle salsa, mole, pasta, tomato puree and tea. Year-end net sales in this division grew by 3%, due to homestyle salsa, mole, pasta, jams and tea. The main drivers behind these signs of growth were better household penetration, added value in all categories due to our launch of premium versions, and packaging differentiation among our client base. These premium versions of our well-known brands enabled us to increase consumption, and thus, reduce the elasticity of the portfolio.
By channel, net sales outperformed in foodservice and modern trade. Foodservice improved because of higher client penetration, while overall sales advanced decently due to our differentiated portfolio that enable us to capitalize on important seasons such as lent and summer.
In our home salsa category, our growth was 2.5x higher than the rest of the industry, as we sold more guacamole salsa to a greater number of households. While guacamole already represents nearly 30% of our sales in this category, sales increased further because of the launch of regional varieties through the Presume tu Salsa campaign. In fact, this campaign was so successful that this was recognized by the Magazine Expansión as one of the 10 most outstanding campaigns in the country, and it also received an Effie Award for best innovation campaign.
In McCormick, we experienced double-digit growth for the third consecutive year, and an increase of 2 percentage points of market share compared to 2017. The above is explained by the launch of McCormick's Gourmet Tea, our performance in green chamomile and lime variety and specific differentiated initiatives among clients.
Through our Barilla Collezione products, we offer an option to make pasta a gastronomic meal to share with family and friends. We integrated new special cups as tortellinis, and we'll have a new lasagna format to grow our distribution in Bodega Aurrera and penetrate more household. In addition to spending into different retail formats and growing in e-commerce, we are developing new product sizes for the whole family to enjoy and continue to source the variety of our pasta cost of sauces to break the meal routine and help sharing happiness everyday.
Moving on to the Frozen division. In the fourth quarter, we reported MXN 614 million in net sales, which was 2.2% higher than the fourth quarter of the previous year. The outlier in the division was Helados Nestlé, which saw high single-digit growth. This strength, also the decline in same-store sales in Nutrisa, which fell due to the overall slowdown in the consumption environment.
In the Helados Nestlé portfolio, we launched La Lechera popsicle as one -- and was one of our top 10 best selling items. The result was an improvement in our price per liter, which is one of the main KPIs of this business. Take-home containers of ice cream anywhere from 500 grams up to 3 liters in size gained a significant amount of market share during the year. The take-home ice cream is where the largest volume of sales is located.
On a cumulative basis, the Frozen division reported MXN 2.9 billion in net sales, which is 3.6% higher than in the full year of 2017. Again a lot of Helados Nestlé was the growth driver at both convenience and grocery stores.
For Nutrisa, the main growth driver was average ticket.
Our exports division saw strong growth in the fourth quarter and for the year, due to high volume and the strengthening of the U.S. dollar, which was 5% higher in the fourth quarter at 2% year-over-year.
On the operating front, EBIT and EBITDA margins for the year expanded 40 basis points each. The main drivers for the improvement were the 2.4% growth in Frozen and a stable margins in the Preserves division.
Equity investments in our associated companies totaled MXN 187 million in the quarter, a drop of 50% compared to the fourth quarter of 2017. However, for the full year, our equity investment in associated companies were MXN 916 million, close to 10% higher than in the previous year. Figures for the fourth quarter of 2018 and the fourth quarter of 2017 are not fully comparable, as the entire benefit of the U.S. tax reform was registered in the fourth quarter of the previous year for MegaMex.
In MegaMex, HERDEZ taqueria salsa received the editor's pick award from Progressive Grocer, which is the most important food retail association in the U.S. And salsa HERDEZ guacamole received an innovation and creativity award from GMA, the association of food, beverages and consumer products.
We also launched WHOLLY GUACAMOLE snack cup, which make it even easier to have tasty guacamole wherever you are, since the snack cups have just the right amount of tortilla chips sold with them.
Finally, we took advantage of the positioning of the film Deadpool among young consumers, and we launched a Don Miguel Deadpool Chimichanga at 7-11 stores, which is one of the most important channels for this brand.
Consolidated net income for the group in the quarter declined by 7.7%, while overall consolidated net income for the year increased 12%.
Finally, our financial strategy in 2018 resulted in a solid and flexible balance sheet. Our average debt maturity is 5 years, it is 100% Mexican-peso denominated and 97% of that debt is long term.
At year-end, our consolidated cash was MXN 2 billion, which is the highest amount in the recent history, and is 36.5% higher than at the end -- year-end 2017. While interest-bearing liabilities were MXN 6.6 billion, MXN 200 million lower than in the third quarter of 2018.
Consolidated net debt-to-EBITDA was 1.3x, and net debt to consolidated stockholders' equity was 0.25x.
With that, I will now turn the call over to Gerardo.
Thank you, Andrea. As you are all aware, since January 1, 2019, in compliance with IFRS 16, our 2019 financial statements will include changes related to our lease. We will capitalize approximately MXN 630 million of leases for presentation purposes, which means no changes to cash flow, and it will affect both assets and liabilities. From this amount, half is related to Nutrisa leases and the remainder is for real estate contracts and transport equipment in other unit.
Starting in our report this quarter, nominal lease payments will be capitalized on the balance sheet as a fixed asset and a net interest liability net of payment at present value for the term of the contract. On our income statement, lease expenses will be eliminated and additional depreciation will be added, related to this fixed assets plus interest payments in our financial costs. This will have a non-material effect on EBIT and net income. However, the effect on EBITDA is significant.
In summary, by the end of 2019, we have estimated the following adjustments: a benefit of MXN 54 million in EBIT, that is 1%; a benefit of MXN 330 million in EBITDA, which represents approximately 10% of EBITDA; a decline of MXN 29 million in the consolidated net income due to an increase of MXN 83 million in interest paid. As a result of the above, we do not expect any changes to our net debt-to-EBITDA ratios.
Now talking about the outlook for 2019. The overall outlook for the Mexican economy is for a slight slowdown. Growth in GDP in the fourth quarter was lower due to a contraction in the industrial sector, and the CPI ticked up in January to 4.4%. Although formal job growth in Mexico is slowing, consumer confidence in the first quarter of 2019 was at record high, a startling contrast versus private investment sentiment, which has had it lower.
In terms of our operations, the tuna vessels diesel subsidy has come to an end under the current administration, and several raw and packaging material prices have already increased. We have hedged most of our foreign exchange exposure below our budget in order to take risk out of the P&L.
In this environment of mix indicators and still some uncertainty, we expect top line growth in the high single-digit range and stable EBIT and EBITDA margins ex IFRS adjustments.
In MegaMex, avocado prices have jumped as a result of the strike in Michoacán and Jalisco, the most relevant producers of this food in Mexico. This factor combined with a more aggressive competitive environment in the U.S. market will translate into mid-single-digit growth in top line, and a decline in EBIT and EBITDA margins of between 100 and 150 basis points. Going forward, we will continue to optimize our working capital, namely on the inventory side.
In capital expenditures for this year, we have budgeted about MXN 1 billion for...
[Technical Difficulty]
Please standby, we'll be back momentarily. And ladies and gentlemen, I give -- turn the call back over to the speaker.
Thank you. Sorry about that, we got disconnected. So we were talking about our CapEx for this year.
Capital expenditures, we have a budget of about MXN 1 billion for this year, which is mainly earmarked for expansion projects in our tomato puree business, tea, and salsa limes in Preserves. In the frozen division, we will continue with the rollout of the new Nutrisa image, and we will continue to deploy 20% more freezers around the country for Helados Nestlé.
During 2018, we acquired 7.1 million shares of our own shares for MXN 287 million, equivalent to 2/3 of the dividend paid by Grupo Herdez in that year. This means that the total return to our shareholders, that is dividends plus repurchase of own shares, was MXN 712 million, that is 4% of the average capitalization value of the company.
And finally, we will continue to actively evaluate M&A opportunities in both Mexico and the United States.
That is the end of our presentation. And now I would like to open up the call to questions. Katrina?
[Operator Instructions] And our first question is from Luis Miranda with Santander.
My questions are regarding the outlook, Gerardo. I don't know if you could help us to give some color with this high single-digit top line growth for 2019, what are you expecting in terms of pricing and volume if there's any color that you could give us? And with regard of all the information and determination, the company has been very active in terms of innovation, launching of new products and extensions. Is there a number that you could share, how much of the sales of the Preserves division come from innovation? And what could we expect in the medium term?
Thank you, Luis. In terms of our -- of the outlook, starting last year, our growth in volume in Preserves was flat all the year. We are expecting low single-digit growth in volume, plus our price increases. We have mentioned that our pricing policy has been ongoing. This year, we already have increased prices, except for bigger items like mayo because we did our price increase in October. So, let's say, that 2/3 of our growth will come from pricing and 1/3 from volume. In terms of innovation, I think we have been very active. I think that we have found a way to continue our growth path and from certain categories as salsas, tea, mayo, and ice cream, this has brought some significant growth opportunities. And I will let Andrea answer the specific question.
Well, as we have done in 2018, we have been creating campaigns, these rapid campaigns for the industry. The case of salsa is one of the most successful ones. In that case, we invited consumers to cocreate the products with us. So from the last launch that we did for the category that was the guacamole salsa around 4, 5 years ago, this is the first time that we are able to grow more than 2x the rates of the industry. And it is a differentiated product with a premium in price, too. So we will continue to do these separates for our power brands. And what we are doing for the rest of the portfolio is that we are working very closely with our clients in order to make differentiated offerings in terms of packaging presentations, flavors, et cetera. So it's not necessarily rocket science. But as Gerardo mentioned, we are -- we have found the path to capitalize on the strength of our brands and continue to grow in -- even in categories that seem to be very mature or that we already have a strong position.
And our next question comes from Miguel Tortolero, GBM.
Just a quick one regarding Preserves. We saw that the EBITDA margin improvement this quarter was fully explained by the reduction in marketing and promotion expenses. Actually, gross margin was flat year-on-year. So I just would like to get a bit more color on what is behind this expense reduction? And if we should consider this as the new normal? Or should we expect some reversion going forward?
Thank you, Miguel. The reduction is more about seasonality. We are a little bit more effective and efficient in our expenses. And fourth quarter is a quarter where cost of marketing and media goes up because of that seasonality. And the effectiveness of that in our categories seems limited because consumers are more focused on Christmas-related items. So we decided to reduce that expense, and we have increased our digital marketing as a percentage of total media. And you can expect that the following fourth quarters will have less expense versus total year. Having said that, we will not reduce our total marketing and promotion expenses as a company. In fact, for this year, we are expecting an increase around 10% of that expense. Okay?
And our next question is from Felipe Ucros with Scotiabank.
Let me start with this one on MegaMex. We usually don't have the same visibility in MegaMex because of how it's consolidated differently. But you had an excellent performance in the division, and obviously, it's the second most important one for you guys when it comes to your bottom line, following Preserves. And the 33% EBITDA expansion was quite impactful. And obviously, at the bottom line, it's a bit masked because of the tax impact. But I was hoping you could give us a little more color on this one. First, maybe tell us what drove the increases in EBITDA this year? And maybe give us an outlook of what you expect for 2019? And also if you could comment on the distribution charge and electronic logging device rule, which I wasn't familiar with.
Sure. We're going to divide the question in 2, and Grecia will address the logistic higher expense. In terms of MegaMex, you know better, for the last years, that our business is, first, it's a great business. Second, it has great prospects still for the next 5 years. And third, it is very volatile. Because our raw material, the avocado prices, are very volatile. So we keep growing at higher rates, and 2018 we experienced a drop in avocado prices versus 2017. So that was the main driver of our increased margin for the whole year. The crop is -- obviously, is not a calendar year, the crop starts in third quarter. So for this quarter, we've seen increase in avocado prices due to a strike in Michoacán. So that increased our costs. And that's what we experienced in the fourth quarter, and we're going to experience in 2019. In terms of overall business, we are increasing our capacity because we are at full capacity. So probably, the business is not at its optimum level, and we will see that in the next following quarters. In terms of growth as my second point, we still have a household penetration as a category, not as a brand, as a category, in the low-20s, where the fruit has a household penetration in the low-60s. So you can imagine the opportunities that we still have in terms of innovation and in terms of household penetration in the United States. So my recommendation would be to get used to volatility in terms of our margins, but this business has increased every year in the top line. And honestly, we are not worried about lower margin this year because it's the seasonality of the business. In terms of freight, Grecia -- I will turn the call to Grecia, so she can give you more details on freight costs.
So the log-in -- the electronic log-in device rule started in the U.S. at the beginning of -- well at the end of 2017. And all the companies had a limit to comply until -- depending on the industry, until the end of 2019. So this is a device that connects directly to the engine of the trucks to comply with the limit amount of hours that a truck driver can be on the highway. This is, obviously, for safety reasons. And it mainly impacts Don Miguel distribution in the U.S.
Great. And is it -- I mean, have you already gone through the entire wave of the expense? Or will it also bleed into 2019?
It's an ongoing expense...
It's an ongoing expense that will be throughout 2019.
And that it will stop, I guess, right, after 2019?
Yes -- no. No. No. I mean, it's a new rule. It's a new rule, Felipe, that limits the hours of drivers because of...
Safety.
I don't know -- safety and health reasons. So we need to get used to that. And that's why -- that's part of our lower margin for this year, but it's an ongoing issue.
Got it. So it's not related to the device, it's related to the lower productivity of the distribution chain?
No. It's related to a regulation in the United States that require that a driver has to limit the continued hours that it drives -- that he drives. And that's why the productivity per se of the system, not of MegaMex, of the whole driving industry in the United States is used to. And we have seen this for the last year.
[Operator Instructions] And our next question comes from Álvaro García, BTG.
I was wondering, Gerardo, if you could quantify the impact on the tuna front for this year. You mentioned the administration, there's some changes from this new administration on debt subsidy, I'm wondering if you could quantify that. And I'm just wondering if you could repeat your guidance on profitability? I missed it for 2019.
Sure. So as a percentage of total sales, the diesel subsidy represents about 20 to 25 basis points. And in terms of our profitability guidance, without considering the IFRS, we are expecting stable margins, probably with a 50% basis points variation versus this year -- versus 2018.
So ex IFRS impact, we should expect flat margins into next year?
Right. Correct. Correct. Considering the IFRS and the EBITDA, basically, then you will see an increase of the margin that is not cash flow.
And our next question comes from Felipe Urcos with Scotiabank.
So another one, Gerardo, very small one on temperature. Some of our covered companies, in softdrinks in particular, we saw unusually cold conditions in Mexico in the last quarter, especially in November. I was wondering if you observed the same issue or not, and whether that kind of had an effect on the Frozen division. Maybe it had to do with the same-store sales in Nutrisa? And then, also on Frozen, we saw some pretty impressive gains in productivity at the gross profit level. Can you tell us a bit more about what changes were made in the production processes without giving all these gains?
Sure. Sure, Felipe, and you are right. Fourth quarter weather was very bad. We saw a decline in traffic in Nutrisa, basically for weather and for the consumption environment in general because we see that traffic in general terms has come down. And definitely December was down, November, et cetera. That changed quite a bit in January, where we had a very hot January compared to our cold fronts of last year. So we had a little tailwind in terms of weather, but the last 2 weeks have been a little bit cold and rainy. So going through productivity in Frozen, basically, we -- last year, as we mentioned throughout the year, we didn't increase our capacity in freezers because we spent our time streamlining processes and cash collections. We also made significant changes in our executive team and we have seen those results in the second half of last year. Profitability increased significantly. We expect to continue delivering in that front. In terms of strategy in the top line, it's very straightforward. We are increasing our footprint in DSD. That is a significant part of the business. And we are increasing our portfolio with innovation as we mentioned prior. One example of that would be La Lechera, where we are levering the power brands of our partner. And we are increasing that in convenience store. So it's a mix on portfolio, for convenient, and number of client -- increasing number of clients in DSD. So that's driving a better price point for the whole business. And as we add some volume, we are absorbing some fixed costs.
Okay. That's very clear. And if I heard correctly, the increase in freezer coverage for next year is going to be 20%? Or 10%?
20%.
[Operator Instructions] And our next question comes from Álvaro García, BTG.
I'd like to go back to the increase in marketing you mentioned for this year of roughly 10% despite what we saw this quarter. And I was wondering if you could tie that into the conversation that Andrea was having on innovation. I don't know if maybe there's a conversation to be had there, but the relationship maybe a different type of marketing, maybe more at the point-of-sale. Or is there any sort of relationship between that increase in innovation from the decrease we saw this quarter and the increase we expect for next year?
Right. Well, for the years, Álvaro, we have the mix between promotion and advertising have shift a little bit more to promotions. The big change that we are seeing right now, and that has to do with, obviously, market trends is that our digital marketing is increasing significantly as a percentage of total investments. So obviously, that is tied with innovation, with more social marketing, for example, in Nutrisa, we've launched an app in the last quarter in order to have our loyal program with our customers. And then in the near future, that will become a payment method for our stores. Second, innovation and marketing would be all the campaigns that Andrea was mentioning in terms of connecting with our consumers. We didn't mention in the call of what Herdez is doing for sustainability and cleaning the beaches and recycling our cans, and all those are embedded in that -- in those investments in marketing. So what you are seeing is an overall increase in the amount that is probably aligned with our sales, but the shifting of the mix in terms of engaging more with the consumer. In fact, we have a BI area and a digital marketing area that is getting -- is going to be more relevant to our strategy in the future.
And there's no further questions at this time.
Thank you for participating in today's conference call, and we look forward to speaking with you next quarter. Please do not hesitate to contact us if you have any questions in the interim. Have a good day.
Thank you, Katrina.
Thank you. And thank you for your participation on today's conference call, and we look forward to speaking with you next quarter. Please do not hesitate to contact us if you have any questions in the interim. Have a great day.