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' Fourth Quarter and Full Year 2019 Results Conference Call.
Before we begin, I would like to remind you that this call is being recorded and that 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, CFO and CEO of the Frozen division. Please go ahead, sir.
Thank you, Savis. Good morning, everyone. Thank you for joining us on today's call.
Uncertainty was a constant throughout 2019 in the international front and domestically. Unfortunately, from what we have seen so far in 2020, this year will prolong the unstable dynamics. On the domestic front, the country experienced 0 growth, something we have not seen since 2009, and there was a clear downtrend throughout the year. Despite the environment, we were able to increase market shares in pasta, vegetables, ice cream and marmalade.
With that said, I will now turn the call over to Andrea to discuss 2019 results, and we will talk about our outlook for this year. We will take your questions at the end. Andrea?
Thank you, Gerardo. Greetings, everyone.
Net sales increased 2.2% during the quarter and almost 7% for the full year. Growth was mainly driven by price increases over the last 12 months, and to a lesser extent, volume increased. Net sales in the Preserves segment were MXN 4.8 billion, which was slightly higher than in the fourth quarter of last year. And for the full year, growth achieved a rate of 6.7%. Definitely, the quarter growth was the most affected throughout the year. Net sales in the Frozen segment increased by 7.6% during the quarter and 8.2% for the full year. Nutrisa's average ticket increase was the main driver, while at Helados Nestlé, we experienced solid top line growth in the most relevant channels, convenience and traditional. In Exports, net sales increased 7% in the quarter and 6% for the full year.
Gross margin in the quarter was 38.3%, which is 80 basis points lower than in the fourth quarter. For the full year, the margin dropped 80 basis points to 38.5%. These declines are explained mainly by an unfavorable sales mix in Preserves. In Frozen, consolidated gross margin contracted by 3.6 percentage points in the quarter, mainly affected by seasonality, and increased slightly for the full year due to controls in the administrative expense. In Exports, the consolidated margin decreased by 2.3 percentage points in the quarter, and 50 basis points for the year.
SG&A in the quarter was 24.8% of net sales, resulting in an increase of 80 basis points over the same period of last year. For the full year, the SG&A represented 25% of net sales, which was nearly the same as in the previous year. The above resulted from higher distribution expenses that were offset by a decline towards the end of the year in marketing and advertising spending.
EBIT for the quarter was MXN 866 million, 6.3% lower than last year, while the margin stayed at 14.5%. For the year, EBIT totaled MXN 3 billion, while the margin declined 1 percentage point to 13.3%. EBITDA in the quarter was MXN 1 billion, 2.1% higher than last year, and in the cumulative figure, it was MXN 3.8 billion, 8.6% higher than in 2018. As we have mentioned, these increases are explained by the new accounting rules implemented in the year.
In the fourth quarter, our stake on equity investment in associated companies was MXN 244 million, 30% higher than last year. For the full year, we recorded a drop of 15.3% as a result of extraordinary prices of avocado.
Net income in the quarter was MXN 671 million, which was 11.6% lower than in the previous year. And in the cumulative figure, the drop was 8.2% to MXN 2.2 billion. These declines are the result of lower equity investment in associated companies and higher cost of financing as a result of the adoption of IFRS 16.
Our cash flow generation remains strong, allowing us to buy back shares during the year. The total buyback for the year amounted to MXN 900 million or 5% of total outstanding. As of December 31, consolidated cash was MXN 2.3 billion, 14% higher than in 2018. Considering the new debt, interest-bearing liabilities totaled MXN 8 billion with an average life of 4.9 years and an average cost of 8.6%.
Consolidated net debt to EBITDA was 1.7x and 1.6x excluding the effect of the IFRS 16. New debt to consolidated -- sorry, net debt to consolidated stockholders' equity ratio stands at 0.36x.
So with that, I will now turn the call over to Gerardo.
Thank you, Andrea. In the Frozen segment, Nutrisa was able to grow same-store sales in the mid-single-digit range, and Helados Nestlé experienced healthy top line growth driven by portfolio shift. We will continue working on innovations, adding very exciting, new products this year at KitKat. As you know, last December, we announced the acquisition of Cielito Querido Café, which is one of the most recognized brands in Mexico's coffee shop segment. Cielito is indicative of a Mexican culture in gastronomy and, for the last 10 years, has focused on reviving Mexican traditions through innovation. Additionally, we acquired the Moyo brand, a high-end frozen yogurt brand in Mexico to strengthen our strategy in ice cream.
In line with our commitment to our shareholders, we are currently assessing the feasibility of divesting from our tuna business to improve the company's portfolio. We expect consumer dynamics to improve slightly together with the economy activity.
We are increasing our investment in demand creation and advertising in order to support our 3 main initiatives: KitKat ice cream sticks, the new line of McCormick mayo, McCormick Balance and the new image of the Herdez brand. That said, we are expecting our top line growth -- our top line to grow mid-single digits while our gross margin will expand slightly, and EBIT and EBITDA margins will remain stable. In MegaMex, we expect sales to grow mid-single digit and EBIT at a high single digit for the fiscal year.
That concludes our prepared remarks, and we would now like to open the call to your questions.
[Operator Instructions] Our first question comes from Álvaro García with BTG.
I have several questions, but I'll limit myself first and circle back in. My first question, I guess, is on guidance. You mentioned you expect a slight expansion on the gross margin front. But I guess, if you could just expand a little bit more on why at the EBIT and EBITDA level you expect a stable margin. Sort of what explains that difference there? That's my first question. And my second one will be on tuna specifically. I was wondering maybe if you can confirm if this business makes money today or if it doesn't or if you can sort of give us as much color as you can as to the potential sales process.
The answer to your first question is that we are increasing our advertising budget, starts high to about 20 -- more than 25%. That will increase our operating expenses, and that would compensate the gross margin improvement, okay? And in the -- in your second question, we are not able to elaborate a little bit more on this. We just informed that we are in this process. And we will inform you as we get closer to the deals.
Please go ahead, Mr. Garcia. There are no other questioners at this time.
All right, great. On Cielito specifically, sort of my question is on how quickly you plan to grow the brand on the retail front and what the focus is -- or what the short-term focus really to try to take advantage of the opportunity in supermarkets with the coffee brand itself. Or do you have a specific store opening plan? Or will you try to just get used to the asset first and then have a store opening plan? I was wondering if you could sort of go over that strategy so we can have a clear idea -- in the context of having a clear idea of how much capital you're going to put onto that project over the next couple of years.
Right. Well, first, we're going to start integration on -- this Sunday. So first, we need to integrate it with our own POS. And after the integration, I believe we're going to take all this year to understand the brand to make some synergies, to make improvement. But we don't expect this year to be heavily in store openings. Probably, we will rationalize some store openings and then we will set up our strategy for growth in the following year. Obviously, there's an opportunity for the brand to cross channels, as we have done with Nutrisa. And we do have some plans for crossing channels. And we have -- this year, we have a campaign on the 10-year birthday of the brand, so we're going to be very active in terms of communication with the market. So don't expect big CapEx investment this year, but we will do a little bit of investment.
Great. That's clear. And then on -- specifically on the quarter, we saw a MXN 59 million gain in other income. I was wondering if you could expand on what that was. And then one last one, which would be the sales weakness we saw in the quarter, just trying to get a better idea. One thing that came to mind for me was maybe just -- maybe you're exposed more to the center of the country in the metropolitan areas, which a lot of retailers have sort of commented that's where they've seen most of the weakness. Maybe that is a potential driver, but it's sort of explaining the weakness in sales in your Preserves division relative to sort of the total sales growth from other retailers.
In the quarter, the channel that we saw more challenging was modern trade. So traditional or wholesalers outperformed modern trade. Particularly 2 clients had declining sales and 1 client outstanding. But that's where we saw the weakness in the quarter, okay? Not about region, only channel. And clubs was outperformer throughout the year because of our initiatives in vegetables and pasta.
And you asked another question. Oh, the other income. We record other income, all the marketing investments that we recover from the brands that we distribute. So in our small business of distribution, they contribute to marketing investments and they're recorded in other income. So that would explain that income, the majority of that.
Okay.
So it happens on a regular basis, Álvaro. And if you go back to other quarters, aside from the third quarter where we also have the sale of the vessel, we register these lines.
And there's another income that comes from Nutrisa because we swapped some stores with our franchisers. So we recorded an income profit on a sale of our store, and we purchased one of them. So that created other income but not on cash flow because the amount was worth the same. So it was an accounting income. And that is not recurring. It's very difficult to have that amount with a few stores [ in it ].
If there's no other questions, I have one -- I guess I'll ask one more, which is, I didn't catch your CapEx guidance for the year. So maybe...
I didn't say it.
It's MXN 900 million.
Yes. MXN 900 million for this year. And that's our budget. But recall that last year, we -- our hitting rate was 50%, okay? So what we do is that we budget, and depending on the project, every project gets authorized regarding the prioritization. So there is a big chance that our hitting rate would be lower than that.
Okay. And I'm assuming you'll remain active on the buyback front as well?
Definitely.
[Operator Instructions] Our next question comes from [ Emiliano Hernandez ] with GBM.
I was wondering -- I know you don't give guidance on mix and volumes, but directionally, if you could give us what would you say is going to drive sales growth in the year, that would be helpful.
The majority of our increase will come from pricing, about 2/3 from pricing and the rest from volume. Last year, we discontinued the -- some canned fruits that are affecting our volume in terms of the overall, but in our major categories, we are expecting very low growth in volume, one -- in low single digit, okay? But 2/3 would come from pricing in Preserves.
Our next question comes from Juan Guzmán with Scotiabank.
Just a quick one here. I know if you -- could you please give us some -- a bit more color on the tax resolution you announced yesterday? And what are your expectations regarding it?
Okay. Juan, we -- what we said is not a tax resolution. What we said is that we have not recovered our value-added taxes and that we are in a legal dispute with the authorities in order to recover that. The amount is about MXN 280 million, and we just made the note to inform the market about the situation with this. I cannot comment about our expectations going forward because it's in the legal courtrooms right now.
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. Good morning.
This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.