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

And welcome to Grupo ERDE's fourth quarter and annual 2023 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 the forward-looking statements. At this time, I would like to turn the call over to Andrea Amosurutia, Head of Finance and Sustainability. Please go ahead.

Thank you, Aria. Good morning, everyone. Thank you for joining us on today's call. We are delighted to present our fourth quarter and fourth year 2023 results, which highlights the strength of our brands and the fruits of our operational discipline. We reached record levels of sales and profits, despite challenges such as shifting consumption patterns. And as the rest of the industry, we benefited from a downward trend in inflation, higher disposable incomes, declining commodities, and a strong Mexican peso. As outlined in our earnings release, our consolidated net sales increased by 10% in the last quarter of the year, reaching $9.8 billion. with full-year sales climbing 14.4% to $36.2 billion. This growth was mainly fueled by the positive effect of pricing actions taken over the past 12 months, while volumes remained steady. In the research segment, quarterly net sales reached $7.9 billion, a 6.3% increase from the last period of last year. Full-year sales rose by 13.7% to $28.8 billion, driven by strong growth in categories like mayo, tomato puree, mole, spices, and pasta. We reached a record high market share in mayo, reaching 67.2% in volume, and food service sales surpassed $2 billion. It is worth highlighting that recently McCormick was recognized as one of the top 10 brands in Mexico by Canva. In the income segment, Quarterly sales surged by 21% to 1 billion, with accumulated sales reaching 4.7 billion, up 19.4%. A lot of Nestlé played a significant role in driving this growth, particularly through the traditional channel. While in retail, we continue to witness a recovery in store traffic. Notably, this year, we surpassed 2019 net sales levels in three out of four brands in retail. In the export segment, quarterly net sales surged by 39.2% to 869 million, driven primarily by increased sales of canned vegetables, which doubled its volume, while peppers and home-style salsas experienced growth of more than 25%. Additionally, the mayonnaise category saw strong growth, and it attributed to the catch-up of sales delayed in the third quarter and increased sales of the new twin pack presentation of our Mayonesa Limon to Costco, which allows us to access new regions. Full year net sales reached 2.7 billion, marking a 13.5% increase over 2022. Our consolidated growth margin for the quarter reached 40.4%, up 3.9 percentage points from the previous year. This is mainly the result of lower prices for soybean oil combined with the strength of the pestle. Research on impulse segment experience margin increases of 5 and 2 percentage points to 41.2 and 59.2% respectively. Export growth margins remain steady at 9.8. For the four years, growth margins reached 38.9%, the highest level in the past five years. but it's still below our long-term target of 40%. SG&A expense for the quarter were 24.3% of net sales, up 2.9 percentage points year over year. Accumulated SG&A expenses were 25.1% of net sales, up 1.4 percentage points from 2022, primarily driven by increasing investments in the market to stimulate demand. Moving to EBIT and EBITDA, in the quarter we reached 1.6 and 2 billion respectively, which represented increases of 19.8 and 18.9%. For the full year, EBIT and EBITDA reached 5 and 6.2 billion, 31.1 and 25.7% higher than in 2022, while margins expanded to 13.9 and 17.2%. Consolidated net income for the quarter reached 997 million, increasing 6.3% year-over-year. For the full year, it surged by 46.8 to 3.3 billion, achieving a consolidated net margin of 9.2. This growth is primarily attributed to the improved performance of Megamex, which contributed 753 million to the net earnings, and the strong growth margin performed. Our financial structure remains robust, with available cash at $2 billion as of December 31st and consolidated debt of $9.5 billion. Our efforts to improve working capital discussed over the entire year generated $414 million in free cash flow in the quarter and $3.2 billion for the full year, enabling to pay down $1 billion in debt, $400 million in dividends, and share buybacks of $223 million. In terms of our commitment to propel sustainable finance initiatives, we are delighted to share that at the end of 2023, we reduced our water consumption per ton produced to 2.15 cubic meters, aligned with our commitment in the sustainability bond issued in 2022. We have just launched a supply chain finance program with BBVA aligned with our sustainability goals. Suppliers now can access a better interest rate if, after an independent evaluation, we have aligned strategies towards sustainability goals. With that, I will now pass the call over to Gerard.

Thank you, Andrea. Mexico finished 2023 with the highest consumer confidence levels since the beginning of 2019, aided by lower inflation, higher disposable income, plus some government spending for social programs that is likely to remain this year. These factors will relieve some pressure from consumers during the first half of this year. With this in mind, we present our guidance for 2024 year results, but with a ticket to give. After our outstanding results of the last two years, 2024 will be less dynamic. Impulse sales are forecasted to grow in the low teens. while exports are anticipated to maintain its growth trends in the high teens, as Andrea mentioned. Preserves are expected to remain flattish. Consequently, consolidated net sales are projected to increase in the low single digits. Growth margins for the preserves segment and impulse are expected to maintain the 2023 levels, while exports should return to the low teens. As a result, EBIT is expected to grow across segments with reserves showing steady performance aligned with EBITDA. Enjoyable net income is forecasted to increase in the high single-digit percentage range, primarily due to stabilization of Megamex growth. GAPEX for the year will be approximately 1 to 1.3 billion pesos, towards maintenance, carryover of the capacity increased projects ongoing, and ERP migration. We're now ready to take your questions. Ariel, please proceed.

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 two. We will pause for a moment as callers join the queue. Our first question comes from Luis Yance of Santander. Please go ahead.

Hi Gerardo and Andrea. Thanks for taking my questions and congrats on the results. My first question is regarding the guidance you just mentioned. in particular for preserves, you know, that kind of flattish top line, and if I understood correctly, also, you know, flat margins relative to 2023. Could you elaborate a little bit further on that view? Is it because you're seeing already some sluggishness in consumer demand that is making you cautious, or is it just, you know, you're coming off a great year, therefore, you know, it's prudent to suspect a bit of a slowdown, just trying to understand, you know, the flat volume, but also on the margin side, I mean, I would assume you're still having some tailwinds from the lower commodity prices, et cetera. So I would have thought that perhaps we could have seen a bit more margin expansion. So if you could elaborate on that, that'd be great. Right, thank you, Lise. In terms of the market dynamics, the market is moving from flattish. When we talk about flattish, we're talking about flattish is 0, 1, 2% in volume growth. So we believe that is going to be the dynamic going forward. Remember that last year in the second quarter, volumes dropped from a category perspective. Then they started to move a little bit upward. And now we're talking about low single digits, flattish 1%, 2%. The majority of our categories are experiencing these dynamics. Having said that, in terms of inflation slash pricing strategies, there's none this year. We just adjusted some SKUs that needed some adjustments, but you will not see and we're not forecasting any pricing actions. So that will make all the growth in sales is going to come from volume. Now, this year, we are going to invest more in the market in order to incentivize demand. So we feel confident about these actions, but there's still four reserves are going to be in the low single digits. In terms of gross margin, we expect gross margin to maintain, to increase slightly in preserves. And because we are seeing some inputs, some raw material inputs that are increasing, not from generalized inflation, but from specific situations related to weather. So we are anticipating a little bit of friction in some raw materials that are grown in Mexico, vegetable related. Some packaging materials are still in the last cycle of inflation. even though SOPCOMIs have come down significantly. So that would be on the margin side. And in terms of EBIT, we're also seeing some low single-digit growth. That's for preserves. In impulse, we're seeing some traction in traffic in our stores. So also all the growth that we are expecting from low double digits is coming from traffic and from analysis. So I don't know if that answers your question. Yeah, that's great. Thanks a lot, Gerardo. And I guess a follow-up on the margin side, and if you could give us a bit of an update in terms of your hedges, both on Forex and some of the raw materials like soybeans that you do hedge, how do they look like for this year and perhaps next year? How do they compare versus the realized levels you had in 2023? And given the further decline we see, are you actively in the market perhaps now even hedging towards 2025 or you're still focusing on the hedges for 2024 well you know I would say that we have been actively managing those risks for 2024 we are almost done for 2024 and to start adding for 2025 I think we need a little bit more information on the Planting intentions in the U.S. are going to come in the second quarter of the year. So our hedging strategy has been very flexible. So our inputs are going to be slightly lower than 2023. But again, we're going to invest in some demand creation. And that's going to help us to have a better gross margin than last year. but it's not going to grow as big as 2023 or 2024. So we're almost done. I think that there's going to be some risks that the market is not expecting for the second half of this year and probably 2025 that makes hedging very expensive. so we need to finish 2024 and we're almost there okay how about the forex hedging also you're almost done for 2024 or that's just for the soybeans part can you repeat that please yeah i i was wondering if that you know the fact that you said that you're almost done for 2024 Does that relate to hedges to the raw materials or also to hedges to the currency? Both. Both, because raw material is bought in currency, so we hedge both. Okay, great. And my last question, could you give us some color on how you see Megamex business evolving?

I mean, you had a very good year. in general terms, especially on margins.

I mean, but we did see some weakness on the fourth quarter. I mean, you kind of said it on the press release, you know, some marketing investments in salsas and some pressures on the slowdown in guacamole and food services. But as we go into 2024, how should we think about this business, both in terms of growth and also margins? Right. Okay. So let's start first saying that The U.S. market is very intense in price elasticity. So from a general standpoint, and that's not only related to Megamex. You can read all the public CPG companies' reports. And we have seen across the board lower volumes due to downsizing or lower consumption, et cetera. So that is still going on. So Megamex has experienced lower volumes as any CPG in the United States. And we are also planning to invest in demand creation in terms of, that would be in terms of sales. And in terms of gross margin, Uh, the bad news is that in fourth quarter Megamex had a very difficult comps from 2022. That's when the price of avocado turned and, uh, and comps are not helpful, but we really don't, don't put a lot of, of, uh, focus on comps. We're more focusing on the future. And we think that this year is going to take a little bit more time to gain some volume traction. Again, no pricing. There's also, from a dollar standpoint, Melamex is facing higher costs because of the PISO has strengthened. And we believe that we can achieve the same profitability than last year. for the whole year, not for quarters. I also believe that we are making a lot of progress in the new year, so this year we're going to see a turnaround in the new year, and that will help drive all the profitability in the company. I can add also that Airbus is still Hervis is still the only salsa that is growing in the category. Hervis is expanding portfolio, is expanding more flavors in salsa, and the brand has a lot of motion going forward. Okay? Great. Thanks a lot, Gerardo, for the answers, and congrats on the results again. Thank you.

Our next question comes from Felipe Ucros of Scotiabank. Please go ahead.

Thanks, operator. Good morning, Gerardo, Andrea, and team. Congrats on the results. Two questions on my side. So the first one is on exports. Just wondering if you could give us some more details about the expansion that you're doing with wholesalers. and whether this type of growth that you've posted the last two quarters, you know, in the 50% range in U.S. dollars is something that will continue until you complete a full year of those changes, or if those very high rates were related to building new inventory in this expansion. Then also, if I can have a follow-up on M&A, It's been a few years of operations under the belt on some of the M&As and new distribution contracts that you have signed. So just wondering if you can comment on the performance of those transactions and how your opinion of those acquisitions compares to what you envisioned when you did the acquisitions. And obviously, there's been a lot of them. But if you could comment on the largest ones, that would be great. Okay, thank you, Felipe. In terms of exports, this is a new distribution, what we did in clubs, in the club channel. So when you do new distribution, you have this bump in terms of sales, and then we have to focus on repeat rates. So even though we are expecting a double digit growth in exports due to these listings, we will wait a little bit in order to keep increasing distribution and see how this goes. So the message here in exports is that the brands are increasing distribution with new channels. And particularly this is, in terms of, I can add that our, in our strategy of taking Elvis to the world, we are still adding some new countries in a very small, in a very small scale because nothing, There's no market in the world that compares to the United States. We are entering some countries in Latin America, South America. We are increasing our distribution in the UK with the Airbus brand. We started with a big retailer, client of ours, and now we are increasing our distribution. Slowly, you will see that our international expansion is gaining traction, but obviously it's a small fraction compared to the U.S. And the other question was about M&A, right? In terms of M&A, when we're talking about distribution, that is not M&A per se. It's just increasing our... operating leverage. We're very interested in exploring those opportunities, but we're not actively searching for more distributions in Mexico. In terms of M&A, we have seen some opportunities, but we have been very, very strict with our capital allocation, as you've been aware and you have mentioned in the reports. In the last three years, we focused on repurchasing our own shares, and after interest rates spiked, we lowered our debt. So I think that that discipline will continue for the near future. I think our plate in terms of the impulse category is full, and we need to focus on execution before we think about inorganic growth. Just going back to my question, I was wondering if you could comment about the M&A that you have already done in the last few years. Anything that you can give us on how those businesses are performing compared to what you envisioned when you did those acquisitions rather than future. Can you be more specific because our communication is not great. We're talking about the expectation of our latest M&A, like the Mediterranean business? So I'm talking, and I'm sorry that it's not very clear, but you've done some M&As in the last five years, a number of them. Just wondering how those are performing compared to your expectations. Any comments you can give us there on the largest acquisitions that you have done? Well, I think that history can give us the answer. I think that the development of impulse has not been as expected. That's in our reports. I think that for several reasons that we have mentioned in the past, but what I can tell you is that, on great paths it took us about three years to to put some operating discipline in the business it took us uh three years to change the portfolio it took us three years to segment uh to do some segmentation on channels so i think that that is doing very good uh and i think that the future for that business looks great We have been gaining market share, and we have a portfolio to increase penetration and profitability. In terms of retail business, I think that the curve was very steep. I think that the brands that we bought are great, and we are seeing some traction right now in terms of tickets. and it's going to take a little bit more time than we expected but these brands are crossing channels probably this year you're going to see in the market some some new products in the channels and you're going to see some new formats that by the way are already in the market but we don't want to we need a little bit more time to to see the performance so And in terms of Mediterranean, I think that this year also you're going to see some products across brands and across geographies involving our latest acquisition in dips. So probably I extended a little bit, but we feel comfortable on what's coming for these M&A opportunities. And it has taken us a little bit more than expected. That's exactly what I was looking for. Thanks a lot. Okay.

Once again, if you have a question, please press star then 1. Our next question comes from Juan Ponce of Bradesco BBI. Please go ahead.

Hi, thank you for taking my question. You mentioned earlier that wages, higher wages have helped demand and are going to help demand in the first half of this year, but how much of an impact do you see on margins, specifically from the higher wages that we're seeing in Mexico? Thank you very much.

Right, right, right. That's a very good question, Juan. The big impact that we see is in impulse, because impulse has, and probably not impulse generally, just retail, because salaries are very close to those minimum wages. So the impact comes there, but it's for all the industry, okay? And you have a lot of rotation in that business as a retailer. So even though the impact is high, we're working more on training the people in order to have more productivity in those sales. So it is for the last four years. the impact has been in retail. In preserves, there's no impact.

Got it. Thank you very much.

Okay.

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

Okay. Thank you, Adi. So thank you for participating in our call. If you have any questions, don't hesitate to contact us, and we'll see you in our next meeting. Thank you, Adi.

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