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 Annual 2022 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. Guillermo Pérez, Investor Relations Manager. Mr. Perez, please go ahead.
Thank you, [indiscernible]. Good morning, everyone. Thank you for joining us on today's call. We appreciate your interest in Grupo Herdez.
In year 2022, the food industry faced challenging market conditions. We dealt with significant cost pressures coming from higher raw material and packaging costs in addition to the high interest rates caused by global inflation and the measures taken by central banks to address it. However, the company registered sound performance due to its market leadership and financial discipline.
Net sales increased 18.5% in the quarter and 21% for the full year. Although price increases continue to be the main driver of top line performance in quarterly and full year numbers, volume contributed with 1/5 of the growth on a cumulative basis.
Results in the Preserves segment are similar with the consolidated figures increasing 20.1% in the quarter and 20.8% at the year-end. The quarter saw a little change in volume at supermarkets wholesalers and food service with increase brought on by price changes. Import sales were [indiscernible] and increased 6.6% in the quarter due to lower store traffic. While for the full year, sales grew 19.7%, as a result of price increases, store reopenings and general store normalization. This resulted in a mid-single-digit gain in average ticket for the entire year.
Likewise, the DSD channel [indiscernible] maintained the upward trend seen in the first 9 months of the year. As a reminder, [indiscernible] strategy has evolved as the focus remains on DSD. This change is a result of [indiscernible]. We have been developing and diversifying the portfolio and as a result in the last 12 months, DSD has stood out from the rest.
In Exports, net sales increased 19% in the quarter and 25.3% for 2022. Home-style salsa and mole were the best-performing categories in the quarter and for the full year. Consolidated gross margin in the quarter was 36.5%, 110 basis points lower than in the fourth quarter of 2021 as input prices remain high on a comparable basis alongside incremental labor costs derived from legislation reforms. By
segment, Research registered a 90 basis point decline in the margin. However, compared to the third quarter of 2022, consolidated gross margin improved by 260 basis points and 410 for Preserves. Consolidated SG&A was 21.4% of net sales for the quarter and 23.7% for the full year. This was 130 and 140 basis points lower than last year, respectively, due to the operating leverage resulting from increased sales that completely offset higher freight expenses as well as other expense.
With that, I will turn the call over to Andrea.
Thank you, Guillermo. Good morning, everyone.
During the last quarter of 2022, we outperformed the market in terms of volume, as we increased our market share in supermarkets and wholesalers in half of the categories of our Preserves portfolio.
As Guillermo mentioned, gross margin was also a positive note. As seen in the report, the fourth quarter was the inflection point of gross margin performance since on a sequential basis, margins have started to improve. Income from unconsolidated companies was MXN 221 million in the quarter, in line with the previous year. However, on a cumulative basis, it was 42% lower than in the previous year, dragged down mainly by higher avocado prices for MegaMex.
Going forward, we expect MegaMex results to continue the trend of the last quarter as a result of more normalized prices of avocado, along with the pricing actions taken in the past months.
Consolidated net income for the quarter was MXN 938 million, a 36% increase over the same period of the previous year. The above resulted from normalized MegaMex performance and lower income taxes from the operation in the U.S. Full year consolidated net income increased 9% to MXN 2.3 billion, with a margin contraction of 70 basis points, explained by the aforementioned gap in MegaMex performance compared to last year.
Our financial position remains strong. Cash amounted to MXN 2.4 billion at year-end despite share buybacks of MXN 421 million and MXN 587 million used for the acquisition of Mediterranean in the fourth quarter. The above resulted mainly from improvements in working capital, particularly accounts receivables and payables. Free cash flow for the quarter and full year were very, very strong, and we generated MXN 1.1 billion and MXN 2.6 billion more than in 2021.
Finally, we would like to reinforce our guidance for 2023 announced last month. Preserves and Impulse are expected to grow in the high teens and mid-20s, respectively, thus, consolidated net sales should increase in the high teens. Consolidated gross margin should continue to improve quarter-over-quarter, thus, EBIT and EBITDA will grow in the low to mid-20s, while majority net income will increase in the high 40% range, mainly as a result of MegaMex's recovery.
Maintenance CapEx will be around MXN 900 million for the year. Free cash flow will continue to benefit from working capital improvement initiatives that should contribute to a reduction of our debt levels at year-end in the range of MXN 500 million to MXN 1 billion.
With that, I will now turn the call back to [indiscernible], so we can take your questions.
[Operator Instructions] Our first question comes from [indiscernible] Group.
Congrats on a phenomenal quarter. I have a question regarding the guidance. Just if you could give more detail. I understand you already gave the digits, but what do you see in both Preserves and Impulse. For Preserves, for example, the increase is 17% to 19%, is it coming from pricing? Do you also expect [indiscernible] coming from volume? And where is the EBITDA margin expansion you are seeing coming from? And that's my first question on Preserves.
Good morning, [indiscernible]. This is Gerardo Canavati. In terms of Preserves, I would say that volume, we are expecting to grow in the low single digits. And the majority of the increase comes from sequential price actions. So you can expect between 1% and 2%. In terms of Impulse, Impulse is in a recovery mode after we implemented our pricing strategy. So we expect sequential increase weekly, but we are not expecting to recover volumes to the 2019 era. So it's going to be a very slow recovery as we consolidate our pricing strategy in the retail side of the business.
And in terms of Impulse. And in terms of Impulse in DSD in [indiscernible], all our efforts are to increase the traditional channel that has increase in volume on a sequential basis. So the drawback that we've seen in the last quarters is that we shifted our bulk, our take-home presentations because the price points per liter are significantly different than the traditional. So our strategy is more to increase the higher margin contribution of the channels.
Our next question comes from Emiliano Hernández of GBM.
Congrats on the results, very impressive guidance also. My first question is on Impulse. We continue to see EBITDA margin levels well below pre-pandemic levels. And viewing at the guidance, you're expecting it to continue on such levels. Should we see maybe high single-digit and your normalized EBITDA margin level for this division going forward? That will be my first question.
Hi Emiliano. Well, it depends how we define going forward. Because when you make significant changes to your business strategy, you should expect some trend differentials. But you cannot expect results so quickly. So if you're going forward would be the next 18 months? Yes. The answer is yes. If going forward is in the next 5 years, we should move to -- our target would be in the low double-digits or mid-teens.
Okay. That makes sense. And can you comment on those changes [indiscernible] the EBITDA margin?
Yes, sure. What we have done in terms of retail is that we increased our prices and we took significant [indiscernible] out of the equation. So the [indiscernible] was out in our ice cream shops, and we substitute that for -- for another promotion that is taking time for people to get used to that. So what we have done is we changed the [indiscernible] in favor of higher profitability, sacrificing short-term visits. That's why our pricing strategy has changed dramatically.
So sequentially, week by week, we have seen improvements. Now you can challenge us that this is not the best time to make that strategy when we are in an inflationary environment and where disposable income of the population is hit by inflation, and we can agree on that but there's never a good time to change the pricing strategy. So that's what we decide. And I think that we need to move forward in 2 or 3 months and to understand if our strategy has consolidated, okay?
So let's say that our traffic is down, our ticket is up and our sales are [indiscernible].
In terms of DSD, the strategy that we pursued 3 years ago was to increase market share in order to be relevant to our clients and list our ice cream portfolio. Obviously, with the pandemic that was very easy because we increased our self-store penetration. So let's say, we increased our market share, we became relevant and now that we are okay with that market share, we are increasing prices, and that's why we are lowering our SKUs in supermarkets in favor of traditional. So our strategy is more focused on our contribution -- margin contribution. I hope I explained myself.
Yes. Perfect. That's great color. And just a second one, if I may, on capital allocation. Regarding buybacks, you have been very active in the past years, not so much in the last, let's say, 5 months. Just wanted to understand your buyback strategy for this year at these prices.
Well, we believe it's fairly simple. When prices go up, demand comes down. So we increased our buybacks through debt. And now that interest rates are in the 10% neighborhood, we believe it's like a sour spot, and it doesn't make any sense from a capital allocation to continue with this strategy at these prices. If the market changes, we can revisit this, but we don't feel very comfortable pursuing that strategy at these prices.
Yes, that makes sense [indiscernible]. And on M&A priorities regarding Impulse and Preserves, would you say you're more interested in acquiring business -- sorry, such as the one you acquired like Mediterranean to add new categories to the portfolio or more on Impulse like maybe a business like Moyo or Cielito?
Well, I think that we have our plate full right now. Obviously, we continue to look for things to evaluate things but organic growth is an important strategy. So I think that in terms of Impulse, we need to put this profitability profile in order. We should capitalize on the new brands that we have acquired. And we have very good plans for a few of those brands.
And in terms of Preserves, I think that the [indiscernible] that we bought in the last quarter has a lot of opportunities across channels and across territories. So I think we can work on that as of today. The priority for our cash flow after all that we have done in working capital would be to pay down debt.
Great. Thank you so much, and congrats again on the results.
[Operator Instructions] Our next question comes from Álvaro García of BTG.
I have a couple of questions. One, the first one is on improvements in working capital. We noted significant free cash generation in the year and in the quarter, specifically primarily in the year and just maybe if you can walk through some of the specific improvements in working capital. That would be great. That's my first question.
Guillermo can answer that. He's responsible for this.
We have been working on what was a project for the whole company. And we have different strategies in different accounts. We [indiscernible] we were extending the maturity of them, and we try to be more efficient in terms of inventories as the pandemic is normalizing. We are seeing -- trying to work there and reducing inventories. And the rest will be the account receivables that we are working on in terms of collecting them more aggressively and more efficiently.
Great. My second question is a broader question on the traditional channel. You have a lot of presence in the traditional channel [indiscernible] and obviously, via wholesalers that ultimately sell in the traditional channel. There's been a lot of chatter in our world about the beer players chatter in our world about the beer players and the Coke bottlers getting involved with distributing themselves directly to the traditional channel. I was wondering if you've entertained this potential option and what you might think of it vis-a-vis your wholesalers?
Well, Álvaro, I think that we always analyze and study those alternatives. I think there is a very unique balance between how we -- our go-to-market strategy through wholesalers or go direct. And I think we need to understand the benefits of both and obviously look for territories that don't overlap in order to avoiding to create a price war or margin compression for clients, et cetera.
So we're very open to that, and we would be very careful with that core marketing strategy going forward.
Our next question comes from Rodolfo Ramos of Bradesco BBI.
I have a couple and they're both somewhat related. I mean the first one is, just wanted to understand how you're seeing -- I mean we are hearing from many companies that they are seeing a lot of pressure on the cost side. I mean besides the raw material side, also a lot of things on labor. So I wanted to see how is that impacting you starting this year, things like minimum wage, pension contribution, the vacation days, whether you've seen any disruption there? And turning to your -- the second question is turning to your -- to your guidance and what you're expecting for volume growth. Just want to understand how are you seeing the -- in this -- perhaps in what you've seen so far this year and obviously the fourth quarter, but how are you seeing consumers positioned to take on these price increases that you're counting on to offset some of these pressures? You mentioned the lower disposable income on this higher inflationary period. So I just wanted to see how do you see the consumer position to take on these price increases now, which might be a little bit tougher than what we saw last year. Thank you, everyone.
Well, everything that you mentioned in terms of labor pressures are baked in, in our forecast. We see that in general terms as a positive thing for disposable income. We perceive that the consumption environment is very strong or is at very solid footing because of these initiatives. So we are not concerned about that. And we believe that the consumer is, generally speaking, in a strong environment and probably when you drill down categories, there are some categories that are more elastic to pricing.
You can think about ice cream, you can think about vegetables, you can think about commodity type of categories. But in the overall, we perceive this very firm and we expect this to continue at least for this year.
Every now and then when we do a price increase, we can lose a little bit of share, but then competitors match our price increases, and we end up gaining some market share in general terms. So we are not concerned on the overall portfolio. Obviously, there are opportunities category by category where we set up some strategies to attend those issues.
And just as a follow-up, Gerardo, in terms of magnitude of price increases, is there something you can share there on timing?
We don't expect. We did a small price increase early this quarter, and we don't expect to do any price increases going forward. Those that were baked are already off the table because of the -- because costs are stabilizing and our price increases have made our margin -- gross margins start expanding. So we don't see that going forward.
Our next question comes from Felipe Ucros of Scotiabank.
Congrats on the results again. I think we'll also dug a little deeper on the pricing question that I have. But maybe if you can comment generally on elasticity. Some of your peers have been describing some initial cracks on elasticity, especially in the U.S. I haven't seen a lot of commentary on elasticity in Mexico. Just wonder if you can give us any commentary about whether you're seeing anything in the U.S., via exports, via MegaMex or any other types of business and whether you're seeing any in Mexico because I haven't seen a lot of comments about it in Mexico? So just wondering if you could compare those 2 regions.
Well, as I said, in Mexico, it is by category. So it's very specific. I mean I would say that we -- we lost a few basis points -- basis points in 2 or 3 categories, okay? So it's nothing to worry about.
When you think about the U.S., definitely, I agree with you that elasticity there is very dynamic. So in the U.S., our major categories have been down in the mid-single digits. So if you have increased price increases, and this is across the board, across the industry. So when you have price increases of 5%, 7%, 8% or 10%, you see that volume come down. So it's something that we have our eyes on. It's something that we are monitoring weekly, but we are not overly concerned regarding our forecast in the U.S.
So I think the market is going to stabilize. And indeed, there are some categories in the U.S. that still need some pricing actions this year, okay? Because when you are in the U.S., obviously, when you buy products from Mexico, you are buying, that product is expensive here because of the stronger peso.
So cost from the U.S. have increased with the raw materials plus the exchange rate. So some pricing has -- has to be made in the next month. We are okay with volumes softer, we are okay with it.
Very clear answer. And maybe if I can do a follow-up on MegaMex. Just wondering if you can give us more detail. Obviously, the results were very good, the rebounding you did have the net results of the year in just one quarter. Just wondering what you're seeing for the upcoming year when it comes to the supply of avocado, what you think? I mean it's very hard. It's super volatile, but what are you thinking about cost of avocado for 2023 and whether you'll be able to continue recovering margins there?
Yes. We have a few initiatives to mitigate avocado cost. That would be increasing our supply mix with South America, as you know. And we are seeing sequential increase, but it's in the range of our plan. So we are not expecting what happened last year because we -- last year also, we had a very bad yield in the crop, and that made us pay for higher fruit.
So let's say, we are comfortable with what we are seeing for the margin environment. I think that what needs more attention would be food service, our segment food service and also because when the fruit comes down, process Guacamole. So there's a change there.
And in retail, as I mentioned, the price elasticity. But in terms of pricing, I think we are quite comfortable with our guidance, pricing and gross margin.
Great. And my last one on sauces, I wanted to see if you could expand a little on this category because it's been a key driver over the years. It very often grows in the double digits. And it seems like now it's also doing very well in the Exports division, which at least [indiscernible] didn't seem to be as big of a driver in years past. So just wondering if you can comment what the drivers are for this? Are you introducing new products to the U.S. or maybe increasing client coverage? Maybe it's just a general increased appeal of Mexican food? Any color you can give us on those changes.
Well, in general terms, let's start with Salsa. It's a category that is worth $2.8 billion in the U.S. 1/3 of that is in the West. And the Aires brand is the only growing salsa in that category. But we are increasing our market share. We have a strategy for the following years to increase household penetration and to become leaders in the salsa category. So I think it's very straightforward. We have been aided by innovation, the Avocado Hot Sauce, the Avocado Dip under the Aires brand, also in Guacamole. Now it has about 10% of -- 10% of the size of Wholly, so we're still growing.
And I think that the appeal of Mexican foods in the U.S. is just getting started. So we are MegaMex. We are a company of salsas, sauces and dips. So Salsas under the Aires, La Victoria and ChiChi's brand, Sauces under Dona Maria, and Dips with Wholly. And in dips is where we see this big opportunity to expand to other flavors. So when you put hot sauce or you put a pepper in some dips, it becomes Mexican. So we have a very good opportunity with the latest acquisition that we have in order to increase.
Now in terms of Exports, remember that we are producing for La Victoria in Mexico. So we brought -- we made some investments, and you can think about in our space, all relative like a near-shoring. So La Victoria production is done here in San Luis. So that's also a driver of growth [indiscernible].
Great color. And congrats on what you're doing on that segment.
Our next question is a follow-up from Alvaro Garcia of BTG.
Sorry, I was on mute there. A follow-up on [indiscernible]. I think you mentioned with the [indiscernible] potential synergies and what you're thinking about specifically from [indiscernible] in terms of growth over -- how it complements your portfolio over the next couple of years?
Well, [indiscernible] is a debt company. Obviously, in Mexico, it has a very nice portfolio between [indiscernible]. So we think that we can expand that portfolio across our brands and across our territories. So if I'm talking -- if we think that salsa, sauces and dips, you can do a lot of things with [indiscernible], with Hummus, with Chipotle, flavors, et cetera. So you're going to see a lot of innovation going forward. I think that this business easily can triple in 5 years and is going to be a platform -- we have plant-based and we have dairy, so it's going to be a platform for innovation across the board.
This concludes the question-and-answer session. I would like to turn the conference back over to Andrea for any closing remarks.
Thank you all for joining us today in today's call. We look forward to see you in the next quarter, and please do not hesitate to contact us in the interim in case you have questions. So have a good day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.