Grupo Herdez, S.A.B. de C.V.

Good morning, everyone, and welcome to Grupo Heredia's first quarter 2021 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.

Thank you, Shannon. Thank you. Good morning, everyone. Thank you for joining us on today's call. I hope you and your families are doing well. We kicked off 2021 on a positive note. Although it seems it would be difficult to surpass the first quarter of 2020 due to a high comparable base, we achieved top line growth against last year considering the businesses withdrawn in 2020. Results in the preserve segment showed the resilience and strength of our portfolio. and we are optimistic about the household penetration of our products after a year of the stay-at-home restrictions. Meanwhile, results in the frozen segment continue to face challenging conditions due to the mobility restrictions at the beginning of 2021, which are starting to subside. As usual, Andrea will walk you through the results for the quarter, and we will take your questions at the end. Andrea?

Thank you, Gerardo. Good morning, everyone. As mentioned in the press release, this quarter is not comparable versus 2020 for several reasons. First, we don't have the sales of naive and fresh tuna. As well, we ended the distribution agreement with Ocean Spray effective 2021. And finally, EBITDA and EBITDA comparisons will be affected by the extraordinary income registered last year as a result of the divestiture of the tuna business. Having said that, on a comparable basis, net consolidated sales increased 7.7%, while preserves grew 10.4% in the quarter. Growth was mainly driven by price increases implemented in the last 12 months, but also by double-digit growth in categories that have experienced significant penetration as a result of the cook-at-home phenomenon. On the other hand, our frozen business continued to be affected by the mobility restrictions through January and February of this year, which resulted in limited-hour operations. At the Laos Nestlé, modern trade continued to drive sublime performance while the traditional channels lacked. Consolidated gross margin in the quarter was 37.5 percent, 30 basis points lower than last year. In the preserve segment, however, gross margin expanded 190 basis points to 37.4% as a result of higher prices and a favorable sales mix. Gross margin at frozen decreased almost 600 basis points as a result of sales channel mix in the level of the split and lower operating leverage. In exports, gross margin decreased by a stronger U.S. dollar. Consolidated SDMA in the quarter was 26.6% of net sales, 40 basis points higher compared to the same period in 2020 due to expenses related with the digital transformations announced in February. Consolidated EBIT before other income decreased 4.2%. In preserves, EBIT before other income increased 16.2% with a margin expansion of 200 basis points. Frozen, registered an operating loss of $195 million, which compares in favor of you versus last year. During the quarter, we registered other income of $8 million compared to the extraordinary $194 million recorded in the previous year, coming from the divestiture of 50% of the tuna fleet. Consolidated EBIT decreased 24.8%, but on a comparable basis, it would have decreased only 6.5%, representing a margin of 11. During the quarter, equity investment in associated companies was 243 million pesos, 78% higher than in 2020 as a result of sequential improvements in Megamex related to lower avocado prices, as well as the recovery of the food away from home channel. Consolidated net income in the quarter was $542 million, which was 18.7% lower than in the previous year, but excluding one of, it would have been flat. Pre-cash flow in the quarter was $535 million. We bought back 3.1 million shares, and CAPEX amounted to $129 million. As you may be aware, yesterday's annual shareholders meeting approved a share buyback program of 1.5 billion, and canceled 26 million shares held in treasury. It also declared a dividend of 1.2 per share paid into exhibition. With that, I will now turn the call over to Gerardo.

Thank you, Andrea. The stay-at-home trend continues to bring growth to small categories, which we believe has stayed in power, such as spices, pasta sauces, honey, and tea. Despite difficult comps, we still see flattish to low single-digit volume growth in light-to-light categories. What has been unprecedented is the run-up in soft commodities driven by renewable diesel demand. The food for fuel chatter is again on the table after 14 years. The input inflation has been the worst we have seen lately and may stay for a while. It will erode two to three full points out of reserves growth margin. No price action is big enough to fully offset this impact in the short term. But We plan to compensate for it over time when the dust settles. The frozen division is looking better as the economy reopens, but we do not expect to reach 2019 levels until 2022 on a comparable basis. Counterintuitively, SG&A is expanding somewhat due to maintenance investments in our biggest warehouse and IT expenses related to the digital transformation. On this issue, we expect to develop, using Google technology, artificial intelligence models to better predict demand and have a higher effective promotional grid. Together with this, is the ERP kickoff to upgrade our technological architecture. We are pleased to announce that we reached an agreement with General Mills to distribute several brands in Mexico. This portfolio includes iconic brands such as Betty Crocker, Pilgrim, Nature Valley, Cyber One, and Hagen-Dazs. This new business will represent about 4% of sales on an annual basis and will completely offset the divested businesses of 2020. We see tremendous opportunities expanding this portfolio. Lastly, I will share our revised estimate as follows. Topline growth, including the new General Mills business. Preserves will have a growth in the mid single digits. Frozen top line will experience a 40 plus growth rate. And as mentioned previously, preserves growth margin erosion of two to 300 basis points. While frozen will experience growth margin expansion of 200 basis points. And lastly, exports gross margin will decline by 200 basis points due to exchange rate. Consolidated EBIT before extraordinary income and expenses will drop 100 to 130 basis points. And finally, EBITDA margin will drop between 300 and 400 basis points due to the gross margin erosion, and non-recurring items of last year. That concludes our prepared remarks. We would now like to open the call to your questions. Please go ahead, Jenna.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. Our first question comes from Emilio Hernandez from GBM. Please go ahead.

Hello, Gerardo. Thanks for the space for questions. Two questions on my side. The first one, just a quick one. What's your strategy on pricing going forward? And then if you can provide more color in the termination of the distribution agreement with Ocean Spray, that would be very helpful. Thank you.

Sure. Good morning again. Well, as we mentioned in our last call, we have a pricing action that's going to be in place in May, and we're planning to have one in the fourth quarter. We haven't finalized the analysis, but we are probably going to have a second price action in the fourth quarter, the beginning of the fourth quarter. And of your second question, we terminated this agreement but it's not relevant for our business. We're talking here about 1% of sales. So it just ended because of both interests within the parties. Thank you.

Thank you, Carlo.

Thank you. Our next question comes from Rodolfo Ramos from Verdesco BBI. Please go ahead.

Thank you. Good morning. Thank you for the opportunity to ask a question here. My question is regarding your expected impact from the recently approved outsourcing bill. There was some disclosures in today's morning press from the President. mentioning different industries and the food industry figured in this disclosure. So I was wondering if you can help us understand what is the expected impact that you foresee from this bill?

Thank you. Thank you, Roberto. Well, we are working on those numbers. We are working internally in order to change our structure. But from an economic impact, we don't see it significant. It should be in the very low single digits in terms of EBIT. And the reason why is that all our insourcing is within our company, and we don't see a significant impact in terms of profit sharing, et cetera. What we do outsource is part of our sales team that works in self-service, in the self-service stores, but that is a specialized activity that we don't expect it to have changes. So we can provide more specific details on our next call.

Thank you, Fernando. Very useful.

Once again, if you have a question, please press star, then 1. Our next question comes from Joshua Pelman from BTG. Please go ahead.

Hello, everyone, and thanks for taking my questions. I was just wondering now that we're entering the beginning of the pandemic comes, how has Mayo and Spices performed in March and April against what we saw last year? and also knowing that export sales go directly to Mayamex, what are the categories that drove the result in this quarter? Thank you.

Good morning, Joshua. So in those small categories, we are still experiencing growth north of 20, 30%, and we have had that growth for the last year. And we think, obviously, that the rate will slow down. But it has a very good dynamic in order to expand in this portfolio and other channels. In terms of exports, well, don't forget Mayo also. So exports go to McCormick & Company and to Metamix. So we've seen good performance in the quarter. in terms of volume growth across all categories.

Thank you very much.

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

Thank you. Shana, 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 Internet. Have a good day.

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