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

Good morning everyone and welcome to Grupo Herde's third quarter 2023 earnings conference call. Before we begin, I would like to remind you that this call is being recorded and 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 segments. At this time, I would like to turn the call over to Andrea Amosirutia, Head of Finance and Sustainability. Ms. Amosirutia, please go ahead.

Thank you, Brenda. Good morning, everyone. Thank you for joining us on today's call. As you saw in our earnings release, net sales increased by 13.3% for the quarter and 16 year to date. This growth is primarily driven by pricing actions taken over the past year, while our volume performance has surpassed the previously mentioned slowdown and is now stable and in line with our expectations. In the preserve segment, we saw a 10.5% growth in the quarter. Categories like vegetables, mayo, tomato puree, prices, mole, and home-style salsas, performed exceptionally well. Supermarkets and price clubs maintained their leading position in channel performance. For the year, net sales increased by 16.8 percent, of which Mediterraneo contributed 2.2 percentage points to the segment growth. In the input segment, the top line shows ongoing traffic recovery in stores. primarily driven by changes in the pricing strategy at Nutrisa. Tielito coffee shops experienced the most significant recovery during the quarter, while Enlados Mezclés saw continued growth in DSD performance, with Mega as the top performer product of the portfolio. Net sales for the quarter recorded an increase of 23% and 19% for the full year. In exports, Net sales for the quarter rose by 26.8, primarily driven by the catch-up on sales that were delayed in the second quarter due to distribution challenges. Year-to-date, they increased by 4.4%. In dollar terms, net sales increased by 50 for the quarter and almost 19% for the full year. Consolidated growth margins for the quarter expanded near to seven percentage points, reaching 40.7%, making our highest margin since the third quarter of 2019, before the disruptions caused by COVID-19 began. This growth was primarily driven by the preserve segment, which finally experienced a relief in raw material prices. Year to date, our consolidated growth margin increased by 3.3 percentage points to 38.3. For the quarter, EBIT and EBITDA increased by 50.1 and 36.8%, with margin expansions of 3.5 and 3.1 percentage points, respectively. On a cumulative basis, EBIT and EBITDA increased 37 and 29%, while the margin expansions were 2 and 1.6 percentage points. These results are attributed to the recovery of gross margin in the perceived segment and reduced operating losses in impulse. During the quarter, the income from unconsolidated companies reached $139 million, a 50% increase compared to the previous year. This growth was primarily driven by lower avocado costs and the effect of normalized logistics. Over the past nine months, income from this segment reached 658 million pesos, which is 2.6 times the income earned during the same period in 2022, where we had a very low base. Consolidated net income for the quarter was 830 million, a 76.8% increase compared to the previous year, with a margin expansion of 3.3 percentage points, reaching 9.2%. This improvement was driven by the recovery of Megamex and growth margins. For the full year, consolidated net income rose by 75.4% to 2.3 billion. We maintain a solid financial position. We've accumulated 3.5 billion in cash as part of our strategy to pay down debt of 1 billion pesos that matures next month. This debt is associated with our 2 billion ERDE 17 bond. Our interest-bearing liabilities remain stable at $10.5 billion, and in the quarter we generated a free cash flow of $1.8 billion. With that, I will now turn the call over to Gerardo.

Thank you, Andrea. Following Andrea's comment, our top line growth has normalized after a soft second quarter. and we are upbeat about future performance in line with our own expectations. Domestical growth has recently been revised upward due to the resilience of private consumption, which can be attributed to a combination of factors, including historical low unemployment and government policies that have increased disposable income. With the disinflation process underway and the restrictive stance in monetary policies, we are tactically shifting our focus towards demand creation through market investments. We are very pleased with the performance of our portfolio as our market share held steady across the board on the back of strong brand equity. In the impulse segment, allows Nestlé continues to be the outlier due to consistent great execution, operating discipline, and an extraordinary product portfolio. Megamex continues its recovery trend, primarily due to lower avocado prices, reduced freight expenses, and Don Miguel improved performance after an in-depth review of the company's operations. Finally, we want to raise our guidance for the full year except for the top-line growth, which will be in the low teens against the mid-teens. Growth margin should increase in preserves 350 basis points and impulse 250 basis points, where exports will be flat. EBIT should grow in the high 20s, while EBITDA will increase in the low 20s. And finally, consolidated and majority net income are expected to grow 40 and 70% respectively. That concludes our prepared remarks, and we're ready for your questions. Brenda, please go ahead.

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We'll pause for a moment as callers join the queue. The first question comes from Alvaro Garcia from BTG.

Please, go ahead. Hi. Thanks for the space for questions. My question is on two questions. My first question is on the contribution margin, the gross margin in preserves in Mexico. It's very high level, obviously reflective, I think, reflective of of a stronger vessel and lower raw materials. I was wondering if there were any specific one-offs in the quarter, maybe the way, maybe certain categories were delivered this quarter relative to last, or if it was a clean number.

Good morning, Alvaro. No, there are not. This is the first quarter where we saw our cost per ton down versus last year. you'll recall that we were experiencing higher costs every quarter. And remember that we have an easy comps because last year was a very, very low gross margin. So it was a combination of factors, combination of the pricing policies, and finally cost per ton has come down from a year ago.

Would it be fair to assume that, you know,

if things stay where they are, that these gross margin levels... I think, no, I would take one or two percentage points. I think that we can assume that the gross margin for the whole year, not for the quarter, that it's in the 40s, would be sustainable. Because going forward, even though inflation is coming down from... percentage basis but inputs are going to stay high and we will return to experience input specific issues. For example, next year we're going to have a challenge for vegetables because of the hot weather, the dryness, so we're going to experience higher input cost in those categories. And considering the market dynamics, we are not expecting to have pricing actions across the board. Probably we're going to do very little augmented required pricing actions, but it's not going to be significant. So we're going to return more to category specifics. So I think that assuming that the full year gross margin could be sustainable, plus minus one.

That was very helpful, Carter. You actually answered my second question on pricing in Mexico. Maybe the second question would be pricing in the U.S. We've heard a lot of chatter from for CPG companies in the U.S. that might even see some pressure on the way down in pricing? Obviously, that's not the case in Mexico, but do you see scope for maybe pricing pressure on the way down from retailers, given how some raw materials have corrected, or is that not the case for your portfolio in the U.S.? Thank you.

No, no, it's not the case. We believe there's the same environment. We are not expecting... We are not expecting... regarding the category. In terms of overall consumption, the environment, depending on the categories, but the environment is still low. People, consumers switch to more affordable items. And from a volume perspective, We are expecting stabilization or normalization for the next month in the U.S.

Great. Okay. Thank you very much. Once again, if you have a question, please press star then 1.

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

Well, thank you very much for joining us in our earnings call. If you have any questions, don't hesitate to contact us. And thank you, Brenda. Have all a good day.

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