Grupo Herdez SAB de CV

BMV:HERDEZ

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone, and welcome to Grupo Herdez' Fourth Quarter and Full Year 2021 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.

At this time, I would like to turn the call over to Mr. Gerardo Canavati, Chief Financial and Information Officer. Please go ahead, sir.

[Gerardo Miguel, executive]

Thank you, Ariel. Good morning, everyone. Thank you for joining us in today's call. I hope you and your families are doing well.

This quarter's results reflect the power of our brands and the ability of the company to execute and generate robust and sustained growth. We were able to successfully navigate 2021 and made the challenges we faced, such as the unprecedented inflationary environment and the disruption in supply chains, while mostly achieving our goals.

I will now turn the call over to Andrea to discuss fourth quarter and full year 2021 results. And as usual, we will take your questions at the end. Andrea?

[Andrea Casillas, executive]

Thank you, Gerardo. Good morning, everyone. Once again, just as a reminder, 2021 figures are not fully comparable because of the divestiture of our tuna business, the integration of General Mills starting in April and the end of the distribution agreement with Ocean Spray. With that in mind, organic sales increased 15.3% in the quarter and 10% for the full year. Price increases were the main drivers for the quarter and full year results. Nevertheless, volume in Preserves remained flattish in the fourth quarter and slightly below 2020 figures for the full year.

Despite price increases in the last 12 months, we gained market share in 70% of our main categories. Impulse continues on an upward trend as not only did the average ticket increased in all brands, but food traffic in stores improved as well. Nevertheless, recovery by brand was -- has been very different. Helados Nestle sales performed well in all channels, notably in DSD and convenience for the second half of the year.

In Exports, net sales increased 8.2% in the quarter driven by a favorable sales mix, while for the full year, sales decreased 5.1%. Full year performance was impacted by the appreciation of the Mexican peso against the U.S. dollar and glass container shortages.

Consolidated gross margin in the quarter was 37.6%, 80 basis points higher than in the fourth quarter of 2020. The margin increased as a result of the 320 basis points quarter-on-quarter recovery in Preserves and a gain of 500 basis points in the Impulse segment.

On a cumulative basis, gross margin was 36.9%, 50 basis points lower than in 2020, in line with the guidance on previous conference calls. This was as a result of higher input prices that were partially offset by price increases.

Consolidated SG&A was 22.7% of net sales in the quarter and 25.1% for the full year, 60 and 40 basis points lower versus 2020 mainly due to the sales recovery in the Impulse segment, which translated into cost absorption.

Consolidated EBIT before other income increased 30.2% in the quarter and 8.3% for the full year. This is the result of double-digit growth in Preserves, along with the recovery of MXN 152 million in Impulse during the quarter. For the full year, expansion was driven by the recovery of MXN 293 million also in the Impulse segment.

Consolidated EBIT increased 6% in the quarter due to the recovery of MXN 116 million in Impulse, while for the full year, EBIT decreased 7.6% to MXN 3 billion. This decrease was the result of higher input prices as well as extraordinary income registered in 2020 due to the divestiture of the tuna business and income from the sale of the private equity fund.

EBITDA increased 6.1% in the quarter, while the margin decreased 210 basis points to 18.9%. As mentioned previously, we registered extraordinary income in the fourth quarter of last year. Nevertheless, Impulse had positive EBITDA for the quarter that was MXN 172 million higher than last year. On a cumulative basis, EBITDA decreased 6%, representing 15.1% of net sales mainly due to lower EBITDA on Preserves.

In the quarter, income from unconsolidated companies was MXN 225 million, 15.9% lower than in 2020 because of the extraordinary results presented by MegaMex last year. On a cumulative basis, these income totaled MXN 803 million, 6.1% higher than last year due to better results at MegaMex, specifically at Don Miguel. However, these higher results were partially offset by the appreciation of the Mexican peso and the higher results of other companies included in these headwinds.

Consolidated net income for the quarter was MXN 690 million, while for the full year, it totaled MXN 2 billion. Not taking into account extraordinary income last year, consolidated net income remained flat, with a margin contraction of 70 basis points.

Our financial structure at year-end remains strong. Cash stood at MXN 2.2 billion, and interest-bearing liabilities were MXN 10 billion, MXN 500 million higher than in 2020.

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

[Gerardo Miguel, executive]

Thank you, Andrea. Inflation and supply chain bottlenecks remain the hot topics for the time being, and they are sticking for a while. Despite the challenges, we were able to prioritize our product placement on store sales as we continue working closely with our entire supply chain to make sure our products are always available for our consumers.

As we mentioned in our earnings release, we feel optimistic for the following years. We are expecting mid-teens sales growth for Preserves, and on a consolidated level, growth in Preserves will mainly be driven by strong pricing that will not be enough to offset input cost pressures completely.

We expect a strong rebound in the Impulse segment, with sales growth in the low 30s mainly as a reflection of higher traffic in stores, which we began seeing in the second half of 2021. We also expect to see employees returning to the corporate office, that will help traffic.

Thus, consolidated gross margins will decrease around 150 basis points for the full year. Volume in Preserves, we expect between 200 and 250 basis points erosion. However, for Impulse, we expect an increase of 400 basis points due to operating leverage.

SG&A is set to remain stable compared to 2021 mainly driven by Impulse. EBIT and EBITDA will increase in the low 20s, with margin expansion between 50 and 90 basis points.

We are expecting CapEx of MXN 1.2 billion, which includes the conclusion of expanded capacity in pasta, salsas, vegetables, tomato puree and building a new line to manufacture RedHot Frank's and French's as well as IT projects.

Finally, Grupo Herdez was recognized by MERCO for the ninth consecutive year as 1 of the 100 companies with the best reputation in Mexico, something that we're very proud of. This year, we ranked fourth in the food sector and 17th in the general list of companies, rising 2 and 31 positions, respectively.

In addition, the company got in the top 10 of MERCO's 100 Most Responsible ESG Companies, ranking 4th in environmental issues, 7th in social issues and 10th in governance of the 100 companies evaluated.

This concludes our prepared remarks, and we will take your questions. Ariel, please go ahead.

[Operator]

[Operator Instructions] Our first question comes from Luis Willard of GBM.

[Luis Willard Alonso, analyst]

I just have one on the Preserves side. I mean you all have talked about it in your -- in the guidance. But I wonder, how are you assessing the brands in the Preserves side, the brand equity or the brand strength, with this pricing environment heading into 2022 and as you mentioned, with ongoing price pass-through to counter the pressure in costs. That would be the first.

[Gerardo Miguel, executive]

Well, I think there are 2 basic forces that is driving this performance. The first one would be that our brands are -- have a very strong equity and we hold strong positions of market share north of 60%, 70% in some categories. And the other one would be, we believe, that the consumption environment is very firm.

So we have seen a lot of resources going into consumptions. You can talk about the remittances. You can talk about that's going to be forward-looking on the earnings participation, the profit participation change. We think that, that will keep consumptions going forward, starting in April.

So we feel that the market is in firm footing. Obviously, the comparatives, the comps versus last year, are negative because of the pandemic. But as some categories are dropping double digits, we are outperforming in 70% of those. So we feel very confident on our brand equity, and we are investing behind our brands in the [ comps ].

[Operator]

Our next question comes from Alvaro Garcia of BTG.

[Alvaro Garcia, analyst]

I have -- my first question is on the guidance. I was wondering what explains sort of the wide variance on the sales front. Is that leaving some room for error on the volume front depending on how you guys perform into this year? Or is that potential pricing actions you might take depending on where commodities sort of settle off? That's my first question.

[Gerardo Miguel, executive]

Let's see. It's a conservative approach on the range. We feel that the increase in sales is going to be driven between 1/5 of volume and the rest, pricing. So we are not sure that we're going to have more pricing going forward. That will depend on how the -- on all the developments, all the input pressures and the volume [ performance ]. Okay.

[Alvaro Garcia, analyst]

Yes. And then -- that's fair. That's fair enough. Makes sense. And then my second question is on the Impulse. There's obviously -- your guidance, I would say, is reflective of a much better environment in terms of mobility. And I was just curious as to what you're thinking into 2022 in terms of, let's say, Nestle, certain parts of the Nestle business on the street, which hasn't been as strong over the last couple of years and then also the inorganic element, right? There's been a bunch of inorganic additions throughout the pandemic. So if you could sort of walk us through what you're thinking on Impulse would be great.

[Gerardo Miguel, executive]

Sure, Alvaro. So what we are seeing is that, obviously, there is a recovery in the top line but not the same recovery in visits, for example, in retail. So we are still far behind in that recovery versus 2019, and there's a big reason for that.

If you compare traffic of our shopping malls versus our tickets, we are far behind. And that is because people were going or are going to their shopping malls but they are going specifically to do their shopping. So they are not staying around. They are not wandering in the shopping mall, and that makes us -- that put us in a difficult spot because of our Impulse nature.

So we are expecting to be probably between 90% of 2019, 95% in terms of visits going forward, obviously, when the Omicron shuts down a little bit. So that performance come from pricing, but we are expecting a strong rebound in those visits.

And in terms of Nestle, we have seen one of our biggest channels that has improved significantly. We're talking about the mom-and-pops. You know that we were very slow in the first part of the year. We were flat in the third quarter. And now, we have high-40s growth for the fourth quarter. So there's a frank and sustainable recovery in mom-and-pops.

[Alvaro Garcia, analyst]

Nice. Yes, that's encouraging. So just to clear that up, like in terms of visits, like let's say, what you're underwriting for 2022, your expectations for 2022 isn't so much a big organic -- a significant, let's say, pre-COVID recovery. More than anything, it's sort of all the inorganic elements that are contributing to the Preserves -- to the, excuse me, to the Impulse 26% to 32% sales growth.

[Gerardo Miguel, executive]

Well, yes, but if you ask the question why are you at the pre-pandemic levels, is that at least the first quarter is very challenging in terms of visits because we had a very nice December, we started very strong in January, but obviously, with the new Omicron, business has come down significantly.

So in order to be 100%, I think that we will need to be very close of the end of the pandemic. And we think that is very possible, that it's becoming an endemic. And I think that's going to happen in the second quarter of this year. So the sequential performance is going to be upward.

[Operator]

Our next question comes from Rodolfo Ramos of Bradesco BBI.

[Rodolfo Ramos, analyst]

A couple of questions on my side. Just I don't know if you can give a little bit of color as to the pricing actions that you're expecting for Preserves this year. I mean if you can talk about maybe magnitude and the timing of these throughout the year.

And secondly, a follow-up to the previous question on Impulse. When the Omicron started to hit more in the second half of December, what have you seen so far as far as food traffic goes? I mean seasonally, it's a more challenging time of the year. But are you seeing foot traffic recovering or at least on a better footing relative to previous waves that Mexico went through? I mean how would you characterize this most recent wave in terms of traffic?

[Gerardo Miguel, executive]

Right, Rodolfo. Pricing was in the high single digits, and pricing is occurring as we speak. We don't -- we hopefully don't expect to have more pricing going forward if we feel that the input cost is to stabilize and the volume is responding. So high single digits across the board.

In terms of your second question on Impulse, in December, as we mentioned in our press release, the dynamics by brand have been very different. And that is because the distribution of stores is very different among brands. So where you have a concentration for a brand that is in offices, obviously, the recovery has been slower than brands that have shopping malls and the street stores.

So we saw a couple of weeks that we were practically at the 2019 levels in certain brands, but only for 1 week or 2 weeks, okay? So as I mentioned in our previous question with Alvaro, we think that this is going to be an upward trend, and we're going to finish the year practically in pre-pandemic. I hope that answers your question.

[Operator]

Our next question comes from Paulina Moreira of Compass Group.

[Paulina Moreira, analyst]

My question is a little bit more about e-commerce, and it is how much does it represent of the total revenue? And what are you expecting for 2022 in this segment?

[Gerardo Miguel, executive]

Hi, Paulina. Well, I hope you know how our e-commerce works. We work -- we lever a lot of our e-commerce through our client base platforms, okay? So we have a measurement that is in the low single digits, but we don't have our own strategy in the Preserves channel -- but we have our strategy, but we do not have our own channel.

What we are doing in the Impulse is that we are constructing e-commerce initiatives that's going to be owned by us, and that is going to be rolled out in the next months. And so we will have to see how that goes, okay?

[Operator]

Our next question comes from Felipe Ucros of Scotiabank.

[Felipe Ucros Nunez, analyst]

Congrats on another good year. Just a few questions on my side. I think a lot of what I had has been covered. But maybe starting with MegaMex, tough couple of years from MegaMex, partly was due to the pandemic, but also due to competition before the pandemic.

I recall, before the pandemic, we discussed how competition was a little more aggressive with the nonorganic products and how you had a strategy to revamp branding and kind of better communicate with the consumer about the organic attributes of the product. So you're a couple of years into that. I just wanted -- I just was wondering how Wholly Guacamole is doing at the retail at this point. And also, if you could comment a little about how things have evolved in foodservice as well.

[Gerardo Miguel, executive]

Good morning, Felipe. All right. So I would say that MegaMex is facing a challenging year, okay? We have seen that retail -- the retail business is struggling with difficult comps because of the pandemic, obviously. Foodservice is practically in an upward trend, still recovering and still growing.

And -- but our biggest headwind is avocado price. We have always discussed the volatility about avocado price, but we have never seen this amount of price increase versus last year. We're talking that avocado prices have grown 3x. So how [ we kind of attack that ] is going to be obviously by pricing, all right? So that's why our guidance for MegaMex is shy of last year because we feel that there are headwinds going forward.

In terms of Don Miguel, the Don Miguel recovery is going in place. We feel that we're going to have cash neutral towards the last part of the year. So we are encouraged of -- with the progress. So I think that, that wraps up MegaMex.

[Felipe Ucros Nunez, analyst]

Okay. That's very clear. And maybe a little bit on Exports. Obviously, having some USD sales is a nice hedge, right? [ Devaluation ] hasn't been a huge factor for Mexican companies in recent years. But looking at what has happened in Brazil and Chile and in Colombia with currencies, do you ever think it would be nice to have more sales in dollars? And it has certainly been a good commodity hedge for Arca, BIMBO and Gruma. So just wondering whether you have any plans to grow Exports in any significant way.

[Gerardo Miguel, executive]

Well, it is always nice to have more sales in dollars, but our challenges last year was on supply chain. And those challenges are still in place today. So our sales were lackluster because we had shortages of glass containers. So we had to sacrifice our volume to prioritize other categories nationally. So that was dragging our exports. Okay.

In terms of the category that we have in the U.S., I think we are performing okay. I think that the growth versus the market over there is in the mid-single digits. It's growing. We are increasing our household penetration. We have a plan to increase our share of market in salsas, but it's kind of slow. So -- because it has to be in firm footing.

The other categories are small. The other categories are just like flattish, and we are increasing our innovation in terms of having new products in the categories that are dynamic, like salsas. So remember that we are still the only salsa growing in the U.S. versus the category because we are an authentic salsa. And that's our strategy to capitalize for further exports.

And just to end, we built the capacity last year in Mexico to supply salsas in foodservice containers, okay, what we call in Spanish [Foreign Language]. So that will go, I believe, that in the next quarter, we will be exporting those products.

So to wrap up my answer, is that we are -- through new products and innovation, we are trying to expand our exports in our main markets in small sales because of the size of all the markets, but we are increasing those innovations also in those markets. Okay.

[Felipe Ucros Nunez, analyst]

That's really helpful color. Maybe the last one, and I was saving myself the last, just so I have a little bit more time. Just wondering if you could give us an update on the Google partnership. We haven't talked about it in a few quarters. So I just wanted to see how things are going there.

[Gerardo Miguel, executive]

Well, thank you, and thank you for bringing that up. I think that the partnership is looking very good. I think that we are in the process of adopting that technology across the board. So we are very pleased on the results. I think that our effectiveness of our -- [ nailing our models ] in terms of predicting sales is quite significant, and some of our clients are very pleased also with those projections.

So what we are doing is rolling out those tools to other parts of the company, so we can be more specific and so we can try to have some gains in working capital. Because as you have seen in our numbers, that our working capital last year required a significant amount of money, and that is because input costs also are higher. So our target for this year is to try to control those working capital and free some resources of our balance sheet. And these Google tools are helping us to do that.

[Operator]

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

[Gerardo Miguel, executive]

Thank you, Ariel, and 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. Bye.

[Operator]

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