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

Good morning, everyone, and welcome to Grupo ERDES' 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. Erardo Canavapi, Chief Financial and Information Officer. Please go ahead, sir.

Thank you, Adeline. Good morning, everyone. Thank you for joining us today's call. I hope you and your families are doing well. These quarters result with 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 meet 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.

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 driver for the quarter and full year results. Nevertheless, volume in preserves remained sluggish 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 increase in all brands, but food traffic in stores improved as well. Nevertheless, recovery by brand has been very different. A lot of Nestlé 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 growth 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, the growth 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 preserve, along with a recovery of 152 million in impulse during the quarter. For the full year, expansion was driven by the recovery of 293 million, also in the impulse segment. Consolidated EBIT increased 6% in the quarter due to the recovery of 160 million in impulse, while for the full year, EBIT decreased 7.6% to 3 billion PECs. 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. Evita 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, input had positive EVDA for the quarter that was 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 225 million pesos, 15.9% lower than in 2020 because of the extraordinary results presented by Megamex last year. On a cumulative basis, this income totaled 803 million pesos, 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, including in these headlines. Consolidated net income for the quarter was 690 million pesos, while for the full year, it totaled 2 billion pesos. 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 remained strong. Cash stood at 2.2 billion pesos, and interest-bearing liabilities were 10 billion. 500 million higher than in 2020. With that, I will now turn the call over to Gerard.

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 shelves 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-teen 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 corporate office that will help traffic. Thus, consolidating gross margins will decrease around 150 basis points for the full year, While in preserves, we expect between 200 and 2,250 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 1.2 billion pesos, which includes the conclusion of expanded capacity in pasta, salsa, vegetables, tomato puree, and building a new line to manufacture red hot franks and trenches, as well as IT projects. Finally, Grupo Hervis was recognized by NERCO for the ninth consecutive year as one 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 two and 31 positions respectively. In addition, the company got in the top 10 of medical's 100 most responsible ESG companies, ranking fourth in environmental issues, seventh 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.

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. To join the question queue, please press star, then one now. Our first question comes from Luis Willard of JBN. Please go ahead.

Hi, Andrea. Good morning.

Thanks for taking my question. I just have one on the preserve side. I mean, you've more or less talked about it in the guidance, but I wonder how are you... assessing the brands in the preserve 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 and costs.

That would be the first. Thank you.

Well, I think there are two basic forces that is riding this performance. The first one would be that our brands 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... 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 comparative, 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 new comps.

Thank you, Carlos.

Our next question comes from Alvaro Garcia of BTG.

Please go ahead.

Hey, Gerardo, Andrea. I hope you're well. Thanks for the space for questions. 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, you know, 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.

Let's see. It's a conservative approach on the range.

We feel that the increase in sales is going to be driven between one-fifth of volume and the rest pricing. So we are not sure that we're going to have more pricing going forward, but it will depend on how all the developments, all the input pressures and the volume performs.

Yeah. 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.

Sure. So, um, what we are seeing is that obviously there's, there is a recovery in the top line, but not, uh, not the same recovery in visits, for example, in retail. So we are still far behind in, uh, in that recovery versus 2019, uh, 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 the 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 comes from pricing, but we are expecting a strong rebound in those visits. And in terms of Nestlé, we have seen one of our biggest channels that has improved significantly. We're talking about 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. Nice. Mm-hmm.

Nice. Yeah, that's encouraging. So just to clear that up, in terms of visits, 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 impulse 26% to 32% sales growth.

Yeah, but I mean, if you ask the question, why are you at a pre-pandemic level, 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, visits have come down significantly. So in order to be 100%, I think that we would need to be very close of 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.

Okay. Great. Now that's clear. Thank you.

Once again, if you have a question, please press star, then 1. Our next question comes from Rudolfo Ramos of Bradesco PBI. Please go ahead.

Thank you. Good morning, Gerardo, Andrea. A couple 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 could talk about maybe magnitude and the timing of these throughout the year. And secondly, a follow-up to the previous question on impulse. The Omicron started to hit more in the second half of December. What have you seen so far as far as food traffic goes? Seasonally, it's a more challenging time of the year, but are you seeing food traffic recovering or at least on a better level? footing relative to previous waves that Mexico went through? I mean, how would you characterize this most recent wave in terms of traffic?

Thank you. Right, Roberto.

Pricing was in the high single digits, and pricing is occurring as we speak. We hopefully don't expect to have more pricing going forward, if we feel that the input cost is stabilized. And the volume is responding. So high single digits across the board. In terms of your second question and 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 of a brand that is in offices, obviously the recovery has been slower than brands that have shopping malls and street stores. So we saw a couple of weeks that we were practically at the 2019 levels, in certain brands, but only for one week or two 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 gonna finish the year practically in pre-pandemic.

Thank you very much. I hope that answers your question.

Our next question comes from Paulina Morpita of Compass Group.

Please go ahead.

Thank you. 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?

Hi, Paulina.

Well, I hope you know how our e-commerce works. We lever a lot of our e-commerce to our client-based platforms. So we have a measurement that is in the low single digits, but we don't have our own strategy in the Preserve channel. We have our own strategy, but we don't 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 month. And so we will have to see how that goes.

Thank you. Our next question comes from Philippe Okros of Scotiabank.

Please go ahead.

Good morning, Gerardo, Andrea, and Tima. 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, you know, tough couple of years for Megamex, you know, 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 non-organic 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 and just was wondering how Holy Guacamole is doing at the retail at this point. And also if you could comment a little about how things have evolved in food service as well. Thank you.

Good morning, Felipe.

All right, so I would say that Megamex is facing a challenging year, okay? We have seen that retail business is struggling with difficult comps because of the pandemic, obviously. Food service is practically in an upward trend, still recovering and still growing. 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 three times. So how to counteract 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 with the progress.

So I think that wraps up my comments.

Okay, that's very clear. Thanks. And maybe a little bit on exports. You know, 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? You know, 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.

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 containers. So we had to sacrifice our volume to prioritize other categories initially. So that was dragging our exports. In terms of the category that we have in the U.S., I think they 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 salsa, but it's kind of slow 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 a capacity last year in Mexico to supply salsas in food service containers, what we call in Spanish garrafas. So that will go, I believe, 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 market. And obviously there's other markets that we are having very small sales because of the size of all the markets, but we are increasing sales.

those innovations also in those markets. That's really helpful, Culler. Thanks a lot.

Maybe the last one, and I was saving myself the last, so I'd 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 just wanted to see how things are going there. Thank you.

Well, thank you, and thank you for bringing that up. I think that the partnership is working 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 assertiveness of 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 you know, 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 sheets.

And these Google tools are helping us to do that. That's great. Great, Collin, and congrats again on a good year.

Thank you, Felipe.

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

Thank you, Ariel. 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.

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