Grupo Herdez SAB de CV

BMV:HERDEZ

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, everyone, and welcome to Grupo Herdez Fourth Quarter and Full Year 2020 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 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, Chief Financial Officer. Please go ahead, sir.

[Gerardo Miguel, executive]

Thank you, Anastasia. Good morning, everyone. Thank you for joining us on today's call. 2020 will be remembered as a tragedy for humanity but as a year of learning and transformation from everyone as well as for companies.

We focused at Grupo Herdez on keeping our people safe and satisfying our customers' needs, which was a hard thing to achieve considering the unprecedented demand we faced. Once again, I would like to recognize the passion and hard work of all our 10,000 employees as well as the commitment of our partners, suppliers and clients.

I will now turn the call over to Andrea to discuss 2020 results. As usual, we will take your questions at the end. Andrea?

[Andrea Casillas, executive]

Thank you, Gerardo. Good morning, everyone. During the quarter, the trend in home consumption caused by the global pandemic continues. The Preserves segment increased net sales at double-digit rates, offsetting the weak performance of the Frozen segment. Although during the quarter, most shops were open, decreased traffic due to mobility restrictions imposed in November had a negative impact on our retail business at the time that the traditional channel for Helados Nestlé continue to be depressed.

Net sales in the Frozen segment decreased by 18.4% during the quarter and 19.2% for the full year. On the positive side, Helados Nestlé sales continued to experience strong performance in modern trade and club stores, offsetting the significant drop in mom-and-pop's performance.

In exports, net sales increased 5.6% in the quarter and 23% for the year. These increases are explained by higher volumes and a stronger U.S. dollar throughout the year. Consolidated gross margin in the quarter was 36.8%, 150 basis points below the fourth quarter of 2019. The margin was mainly impacted by the expenses related to the adoption of the new labeling regulation; a strong performance of Helados in modern trade, which resulted in lower gross margin; and of course, the lower traffic at our retail stores.

On a cumulative basis, gross margin was 37.4%, 110 basis points lower than in 2019, mainly due to the new labeling regulation. Consolidated SG&A in the quarter was 23.3% of net sales, 150 basis points lower than in the same period of 2019 due to the postponement of marketing and promotions expenses at the Preserves segment.

Over the year, SG&A represented 25.5% of net sales, practically flat compared to the previous year. Consolidated EBIT before other income increased 6.8% in the quarter and remained flat for the full year. This is the result of double-digit growth in Preserves during the quarter and for the year, which fully offset the operating loss registered in Frozen.

For the quarter, we registered an extraordinary income of MXN 238 million related to the last part of the divestiture of the tuna business as well as a profit from the sale of a private equity fund related to Hispanic food companies in the U.S. During the year, other income totaled MXN 408 million, explained by the same transactions mentioned previously.

Consolidated EBIT increased 27% in the quarter, while for the year, the increase was close to 9% to MXN 3.3 billion. The above resulted from the extraordinary performance at the Preserves segment and other income.

EBITDA increased 24% in the fourth quarter, while the margin increased 300 basis points to 21%. On a cumulative basis, the EBITDA increased 10%, representing 17.8% of net sales.

In the quarter, income from unconsolidated company was MXN 267 million, 9.4% higher than in 2019, mainly due to the appreciation of the dollar and a sequential improvement at MegaMex. For the year, income totaled MXN 757 million to 2.4% lower than last year, mainly as a result of the challenges in the foodservice as well as Don Miguel underperformance. Consolidated net income for the quarter was MXN 826 million, while for the full year, totaled MXN 2.4 billion. Free cash flow, excluding the divestiture of the tuna business reached MXN 1.3 billion, 5.5% and 7.4% of net sales and stockholders' equity, respectively.

Our financial position at year-end remains strong. Cash stood at MXN 3.7 billion, and interest-bearing liabilities were MXN 9.5 billion, MXN 1.5 billion higher than in 2019 as a result of additional debt coming from the local bond issue made in August.

With that, I will turn back the call over to Gerardo.

[Gerardo Miguel, executive]

Thank you, Andrea. We definitely are turning into a better company as we adapted quickly under our own capacity restrictions. Our relationship with landlords is stronger, and we are embracing technology in a faster way with the best partner for this, Google.

Our long-term vision for our retail business remains unchanged as we have a strong brand portfolio with huge opportunities. Sales at mom-and-pops remain weak, which encourages us to keep on strengthening our omnichannel strategy for all brands. For 2021, Preserves sales growth will be flattish as we divested the tuna business, and we come from a pandemic-driven demand.

Despite this, we still see robust demand in certain categories. We expect a strong rebound in Frozen for the back half of the year, which will drive the consolidated growth to mid-single digits.

One of our challenges we face is input costs. We feel humbled as we significantly underestimated the commodities run-up as the global economy enters a recovery cycle. Our hedges will expire in the second quarter, where we will know the state of the new U.S. crop.

We expect to take pricing actions in categories where raw and packaging materials have increased significantly. Thus, we expect gross margins in Preserves to be flattish versus 2020.

EBIT and EBITDA without other income will also be flattish. We are increasing our CapEx to MXN 1.5 billion from MXN 600 million in 2020. In this amount, we include new capacity for tomato purée, vegetables, salsa and shortcut pasta. We are also starting to build a facility for organic chicken for Aires de Campo. In the IT front, we will start to updating our ERP with M3 by Infor.

So this concludes our prepared remarks, and we will take your questions. Anastasia, please go ahead.

[Operator]

[Operator Instructions] The first question comes from Miguel Tortolero with GBM.

[Miguel Angel Tortolero, analyst]

The first one would be on Preserves. When we look at 2020 figures, you have clearly outperformed other food companies in Mexico at your Preserves division. And I know you don't share volume details. But could you give any color on the composition of top line growth for the full year? Is it mostly explained by volumes, by pricing, any directional comment in this regard with health.

And the second one, I know it is too early to talk about 2021, specifically in the Frozen division, given all the uncertainty around. But could you give more color on the dynamics you have seen so far at the start of the year? And also, in this same regard in your base scenario, how long would it take to come back to pre-pandemic level? Any color you could share in this regard will be helpful.

[Gerardo Miguel, executive]

Sure. Okay. So let's say we are taking pricing action in a few categories, where all the inputs are impacted. So that will give us -- because we are doing this not in the starting of the year, but in the second quarter, that will contribute about 2 or 3 points of our growth, where the other one would be 2 or 3 points in terms of volume.

Now remember that we divested. So it's not comparable. So if we see all the categories that are comparable, we are still expecting roughly 2 or 3 points in volume, plus 2 or 3 points by price. So that will give us, in a comparable basis, 5%. Okay.

In terms of Frozen, so we saw a recovery in the last quarter in the month of October and in the first half of November, that it was roughly about 60% of what we had in 2019. Then came the second lockdown or the second mobility restrictions, and our traffic drop to 1/3. So what we are expecting is -- and we are seeing in the first quarter is that we are back in the mid-40s, and we are expecting to go to 60%, 70%, 80%, but we are not expecting a full recovery for this year.

So to answer your question, we are expecting 100% versus 2019, early in 2021. So as the vaccine rolls over that we think is going to be very slowly, we are not expecting full recovery until January of next year.

Now that will be for the retail business. What we have seen in the mom-and-pop is that there definitely was a disappearance of mom-and-pop stores. Inegi talks about 600,000 businesses all over the country that disappeared in this pandemic. We estimate that mom-and-pops at least were disappeared about 100,000, at least. And we expect that they will reopen -- probably not reopen the same, but as you create new mom-and-pops, we think that, that's going to be towards the fourth quarter of this year. So we also expect a very slow recovery on that front that it will also be offsetted by a great performance in modern trade by that division.

I hope I answered your 2 questions.

[Andrea Casillas, executive]

And just to add on volume performance for the year, I would say that the outperformance was all over the portfolio. Obviously, there are some categories that experienced higher growth, like for the case of spices or marmalades or even teas. But as we mentioned in the press release, it was a very standardized performance throughout the portfolio. We don't know how much of that will keep up going forward once the mobility restrictions are over. But definitely, we have seen greater penetration of certain categories across the portfolio.

[Operator]

[Operator Instructions] The next question comes from Álvaro García with BTG.

[Alvaro Garcia, analyst]

A couple of questions. One, if you could clarify the guidance. I understood mid-single digits consolidated sales growth, and you said gross margin would be flattish. And you said, EBIT and EBITDA would be flattish as well, but I'm not sure if you mean the margin or on an absolute basis you expect EBIT and EBITDA to be flattish.

[Gerardo Miguel, executive]

So when I spoke about mid-single, it was on a comparable basis, okay, in terms of Preserves. So Preserves, we are expecting that it's going to be flat -- the full year is going to be flattish because we divested in some categories.

And when we are talking flattish, we are talking about pesos, okay? And in terms of -- so gross margin will be flattish. Probably when we say flattish, we can be 50 basis points around what we had last year and because of all these pressures. And EBIT and EBITDA in value is going to be flattish without the extraordinary income.

[Alvaro Garcia, analyst]

Okay. Yes. That makes sense. That makes a lot of sense. Perfect. And then my other question is on commodities. I guess just sort of your outlook on soybean oil. You mentioned you'll take pricing actions in the second quarter, but if spot prices stay where they are, I'm assuming you probably have to take some more pricing actions.

I know you've done a lot in the past, and you had some packaging headwinds because of the new regulation this quarter and this sort of thing. And I know you've done some great stuff in the past to try to help your gross margin. But if you could just help us understand sort of the magnitude of the pricing actions that we need to see if spot prices were to stay here and just sort of your outlook generally on soybean oil.

[Gerardo Miguel, executive]

All right. So our pricing actions are going to be in the mid-single digits. So So we have -- we were very aggressive when wheat doubled, and we lost all the benefits of the hedging programs that the government provided. So at that time, pricing was a little bit higher than 10%. But we don't see those price increase in magnitude this year.

So what happens in the past, what we have done is we try to recover the peso amount. So gross margin will suffer a little bit in the short term until the commodity prices stabilized. You know the saying that the best medicine for commodity prices for higher prices is more higher prices. So that's why we expect that at least in the pricing intentions in the U.S. came higher. We expect that these prices will incentivize more acreage, and there's going to be a fight between corn and soybean.

But as we have seen in the past, we haven't seen this run-up in the past 10 years. So the last time we saw this is what when soybean reached MXN 0.75, right? Today, we are at MXN 50. So we think we're going to overshoot.

But -- and this is also driven by managed money. If you see a graph of managed money, they have never had many longs in the last 10 years, like 3 times. So they are long 3x the harvest. So eventually, we believe that prices are going to settle. Obviously, not at the levels we had, but at least it's going to settle. And that's why the short term, we are not worried because we have all our hedges, and we hope that to see a better environment for the second half until the U.S. crop comes out.

So -- and because we had all this extraordinary income, last year, we think that because we will not see that higher demand, that pandemic-related demand to deliver the same amount of EBIT, it's achievable for this year.

[Alvaro Garcia, analyst]

Yes. That would make sense. And I guess, just one last clarification there on the guidance per se. If I exclude tuna, which is presumably a lower-margin business, there's, let's say, an implicit slight decline in your sort of core profitability. Would that make sense?

[Gerardo Miguel, executive]

Yes. Well, tuna, let me elaborate on that. Last year, we have -- for the first 2 quarters, for the first half of the year, we have a really good margin on fresh tuna. So that helped us a lot last year. But that was driven because the peso dropped significantly, and the bulk of the fresh tuna is made international.

So if we carve out for 2020, the tuna business and the labeling regulation, our gross margin in Preserves went up 1 point, 1 full point, 100 basis points versus 2019. So that tells us a lot about the sales mix.

So that sales mix is going to have that performance this year. And as we see less input pressure, you will see a gross margin expansion. Now this year, on the fresh agricultural products like tomato, we are seeing tailwind because the crop is coming in very good, very, very good. So that's going to help that segment, particularly.

And on the same front, we are seeing a lot of tailwinds in the avocado price. Avocado price have dropped significantly in the last month. So we are expecting also that MegaMex will have a tailwind in terms of gross margin due to avocado prices. And by the way, we are also expecting a recovery in the foodservice for that business. So you can also expect better comps for MegaMex this year.

[Operator]

The next question comes from Felipe Ucros with Scotiabank.

[Felipe Ucros Nunez, analyst]

Congrats on the results. I think I got to ask most of what I had on soy. But I wanted to ask for a small clarification. You said you have hedges for a couple of more -- till middle of the year, if I understood correctly. Are those hedges, 50% hedged, 100% hedged? Like what percentage of needs do you have there?

And then I was hoping you could share a little more details on the sale of the PE fund, I was not aware of PE fund. So just wanted to know what it was and any details you can give us.

[Gerardo Miguel, executive]

Sure. Okay. All right. So let me just elaborate a little bit more in terms of MegaMex. We are expecting in terms of that improvement in our unconsolidated income, a growth of probably 10%, around 10% for the next year.

Now in terms of hedging, we have fully covered the first half. Okay. So the first half is already covered. And the second half is where we have our exposure open. And this was intentionally made because in the second half, we will know what's the state of the U.S. crop.

And July is very important. July and August are very important months because of weather. So we will really know what's the state of the crop.

If you see the futures today of soy and agricultural commodities, they are inverted. So short term, that means that short term is higher than the forward contracts. That's because the current situation is where stocks are tight in the short term, but the market is expecting that in the medium term, this will offset a little bit. And that's the reason why we are unhedged for the second half.

Now if the market stays the same, we will not take any pricing action, additionally, that I have mentioned. So in our forecast -- in our flattish forecast in terms of margins and EBIT, we are considering current prices.

Having said that, we -- if price is correct or if price is stabilized in the commodity front, we can probably have a better gross margin picture than what I'm -- what we are expecting, okay? So when we say flattish, we are thinking about 50 basis points, 100 basis points, the most so being very specific.

If prices remain the same on the commodity front, we will be flattish. If prices stabilize, we will probably have a 50 or 100 basis points improvement versus 2020 in Preserves. I hope I was extremely clear about margins.

Now on your second question, Felipe. On the PE, from time to time, we invest in companies looking for innovation, looking for new ideas, et cetera. This was an investment we did a few years ago in a fund that invests in Hispanic companies. We were completely passive, completely passive and the private equity decided to sell their investments. So that's why we made a very good income, very good return on this investment that is obviously, extraordinary, and we don't expect anything else for the short term.

We -- and if I may elaborate a little bit, we made an initiative very -- a very good initiative that is called Semillero Nutrisa, where we were looking for some entrepreneurs that Andrea will explain very good because she was the leader of these initiatives. And that will give us -- give you an idea of what we are doing in those fronts in terms of investing in small companies.

Andrea, can you talk about Semillero Nutrisa please.

[Andrea Casillas, executive]

That is an initiative that we started in the second quarter -- or in the second half of last year. And what we intended was to incorporate innovation into our platforms by boosting the performance of the small companies lead by women so entrepreneurs that have products that we can incorporate into the portfolio.

In particular, this first edition was intended to help the innovation pipeline of Nutrisa. So we looked for products in the categories of food beverages and wellness. So at the end of this program from the 12 companies that we incorporated, we are analyzing already 4 or 5 of them to be incorporated into Nutrisa's supplier network in the next couple of months.

So we believe that by doing these initiatives and programs, we will continue to support innovation at the time that we encourage local economy. So basically, that was it. We will continue this effort, at least for a couple of years more. And we will look for other brands that can benefit from this collaboration.

[Gerardo Miguel, executive]

Okay. Thank you, Andrea. So this will give you a global idea of what we are doing in the marketplace. So Felipe, I hope we answered your questions.

[Felipe Ucros Nunez, analyst]

So would it be right to say that you're sort of migrating from investing passively in PE funds to being more active in a venture sort of direction?

[Gerardo Miguel, executive]

Well, I guess that's fair. And let me tell you a story where we invested in Aires de Campo due to these mechanisms. So we were invited to angel capital fund, where all the small companies were looking for capital. So that's how we -- well, even though we knew the brand before as a consumer, Aires de Campo. But when Aires de Campo was in this fund, seeking for seed money, well, angel money, that's how we invested in that. We bought 50% of that on an exclusive basis, and then we bought the company. So I think these are very good mechanisms to be close to entrepreneurs to understand new trends and to try to build longer-term innovation.

[Operator]

The next question comes from [ Emiliano Hernandez ] with GBM.

[Unknown Analyst]

Can you provide more color regarding how much of the EBITDA in percent comes from the integration cost of Cielito? And should we expect more pressures coming from the integration during the first quarter? Anything you can share here would be helpful.

[Gerardo Miguel, executive]

Sure, [ Emiliano ]. There's no pressure. What we try to specify is that it was a new business and comps were not comps. So that's why you see an increase in all the expenses at Frozen because we integrated 2 businesses that would be Moyo and Cielito.

So we still expect EBITDA for that division to be -- well, EBITDA is going to be flattish. And EBIT is going to be a negative still because of the first half run-up that we are expecting. So to answer your question, we do not expect any more negative, particularly in that integration.

[Operator]

The next question comes from Álvaro García with BTG.

[Alvaro Garcia, analyst]

Just a quick follow-up on avocado prices. I'm no expert. So I was just wondering if you could impart some wisdom on what's going on and why. I mean, obviously, there's been a big decrease in demand because of what's going on in foodservice in the U.S. But I'm wondering if maybe there's a supply element to this decrease in prices? Any color on sort of pricing dynamics there would be super helpful.

[Gerardo Miguel, executive]

Well, there are 2 things. We are in -- when the crops come out, it was a very good crop. Traditionally, these are the months that prices are lower, but we are seeing very big crops. So obviously, the price is going to come up as we enter the summer because of the seasonality. But we haven't seen a special situation, Álvaro, about outsized effect. So it's more about supply and demand.

I wouldn't think that it's just because of the foodservice in the United States. I think it's more -- because, obviously, that came down. But demand for avocado increased in your home. So as an industry, I don't think that the overall consumption came down, it was -- it shifted from one channel to another one.

So you know that it's very volatile. And today, we have a headwind on that front. And that's what's driven -- yes, about profitability, that's what's driven profitability in MegaMex, plus the recovery in sales. I mean, as foodservice recovers, we're going to see the same effect that we're seeing in Mexico that strong demand in supermarkets is going to come a little bit off, right? But the trend, let's say, in salsa is very good. The trend with the HERDEZ Salsa continue to be strong as a very authentic Salsa.

[Alvaro Garcia, analyst]

Yes. But let's say, we're still at risk that depending on how supply turns out in the summer that we have another sort of explosion in prices like we've seen in the past. That could totally still be a risk, just given how the market looks.

[Gerardo Miguel, executive]

Yes. It is, but we will not see -- if you see our numbers, if you graph our numbers, we have -- last year, avocado prices are in line with 2017. I believe, '18 was an outlier in terms of avocado prices. This 2021 may be another outlier. So when you see the prices increase, they will increase, definitely. I mean if they double -- let's suppose that in the summer, avocado prices double, they will still going to be about 2/3 of what they were last year. If they triple, they will be a little bit less than last year, like 10% or 20%. So we still have very good room.

Now the problem with this is that there's no way we can build inventory because we do it fresh. And that's a very headwind for our business model. You cannot store avocado because we said...

[Alvaro Garcia, analyst]

That's why it's so good.

[Gerardo Miguel, executive]

So -- yes. So we need to live with this volatility, as we have mentioned. And this is not the first time, and it certainly is not going to be the next -- the last time.

[Alvaro Garcia, analyst]

No. But I'm thinking the way you're thinking about that is super helpful.

[Gerardo Miguel, executive]

Okay.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

[Gerardo Miguel, executive]

Thank you, Anastasia. 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 very nice day. Thank you, Anastasia.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.