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

Good morning, everyone, and welcome to the Grupo Herdez first quarter 2024 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. Now at this time, I would like to turn the call over to Mr. Gerardo Canavati, Chief Financial Officer. Please go ahead, sir.

Thank you, Beau. Good morning. Welcome, everybody. We're going to change our format in this call. So we're going to start, instead of reviewing the quarter that we expect that you already read it, we're going to go directly to our forecast. prepare remarks and questions and answers. So, as we anticipated, the top-line dynamics are transitioning to a flattish growth rate, as discussed last quarter in our guidance for the year. And no pricing actions are anticipated since we are finally witnessing a somewhat lower inflation pressure in commodities. We expect a stable outlook going forward. So in the coming months, we will reinvest part of these benefits into the market to take advantage of stable unemployment and positive consumer environment in order to strengthen the power of our grants. The other positive note of this quarter was free cash flow, which benefited from improvement in basically all the components of working capital. This is very important. on spite of the capex that we have projected for the year, and which will be mainly allocated to a new production line for long cuts in Barila, the acquisition of 4,000 freezers for allowed Nestlé in the traditional channel, in the convenient channel, the refurbishment of Nutrisa stores, new ovens for Cielito Querido, and new coffee makers. New lines for La Victoria and Herde Salsa for the export market. The NEO project that is called internally is the implementation of a new ERP. We are expecting to update our data centers and invest in securing higher cybersecurity in the company. Despite a very first strong quarter, we reiterate our guidance for the year. Consolidated net sales are projected to increase in the low single digits. Preserves is expected to remain flattish. Impulse sales are forecasted to grow in the low to mid teens. Exports are anticipated to maintain its growth trends in the high teens. In terms of gross margin, preserves would be flattish, impulse will be flattish, and export will be in the low teens. And lastly, for majority net income, it's forecasted to increase in the high single digits due to the stabilization of Megamex growth. To conclude, I'd like to share the key outcomes of yesterday's annual shareholders meeting. In the meeting, shareholders approved a 1.5 peso dividend per share in two installments and the cancellation of 5 million shares. Additionally, the share buyback program was approved at 2.5 billion pesos. Shareholders also accepted the resignation of Ana Sofia Sanchez Juarez-Cardoce, as an independent member of the company's board of directors and appointed Angela Gomez-Aiza as a new independent member. Thank you for your attention, and we're ready now to take your questions. Bo, please go ahead.

Thank you, Mr. Kanabati. Ladies and gentlemen, at this time, if you would like to ask a question, please press the star 1 on your telephone keypad, and you may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question, and we will pause for just a moment to allow questions to queue. We'll go first this afternoon to Sara Maldonado of Santander.

Hi. Congrats for the results. Thank you for taking my question. My question is about Megamex. Maybe if you can explain the reasons behind the decrease in sales in guacamole, And going forward, what can we expect? You mentioned before the recovery, but maybe understand more Megamix.

Good morning, Sara. Thank you for your question. Megamix is experiencing a very challenging environment as all the CPDs in the United States. We have seen that after the inflation, In the last two years, volume were hit across the board. We have seen some stabilization in some categories. So now the rate at which volume is dropping is being diminished. So we are expecting like a flattish environment for the next six months. In terms of our category, the only category that is suffering the most is guacamole. We have seen a lot of pressure in that category and we are investing in order to reverse that trend. That is the only category in our portfolio and is basically in retail, not food service. Only in retail we have seen this dynamics, this competitive dynamics for the last month. In terms of Salsa, we are seeing some good growth. And in terms of Don Miguel, we have also seen some strong growth in the portfolio, and we are turning around in that business, so we expect a free cash flow for that brand. So probably we will not meet last year's performance because of difficult comps, but the trend is encouraging.

Thank you very much. And maybe, I know you're reiterating the guidance, but maybe with the margin expansion, I know we can expect maybe better volumes because of this reinvestment or what would happen in the next quarters with the margins to be in the guidance?

I'm not aware of the guidance, thank you. Would be in line between flattish and 50 basis points overall. In terms of preserves, it's gonna be like 50 basis points higher. Yes, you can expect a recovery in volumes. This quarter was down. We are aiming to make our plan. Our plan was to be like one single digit growth. So we are putting some dollars behind the brand, despite that Felipe Ugros doesn't like the idea. But we plan to support our brand with these benefits and gross margins. Thank you very much.

Thank you. We go next now to Felipe Ucros at Scotiabank.

Good morning, Gerardo and team. Congrats on the results again. Thanks for the shout out there. Gerardo, I wanted to ask you particularly about the reinvestment in the market. You know, when I think of the statement that said that you were going to reinvest part of the benefits into the market, just wondering how you're kind of thinking about allocating that. Is it going to be more marketing investment? So should it flow through maybe more advertising through SG&A? Or are you thinking more about price reductions to entice the customer back into product categories that might be experiencing some pain?

That was a great introduction of Sarah's question, Felipe, to yours. So it's going to be a combination of both. And we have seen, for example, particularly in this quarter, we have seen that what we call cross-channel activities where clubs and wholesalers are in a very dynamic environment. So in order to be more competitive, we use temporary price reductions for that matter. On the other hand, if we want to increase household penetration in certain categories, then we're going to increase our advertising and promotion. So it's going to be both, depending on the channel and depending on the brand. And in the region, for example, we have seen a lot of competitive pressure in the north part of the country because we have gained market share significantly in the last six months. We are going to be more price sensitive and more activity in order to defend those market shares that were gained in the last quarter. Both investments, either in the top line or below the line, are considered in our forecast. So it's not going to change that much.

That's super clear, really helpful. Maybe if I can do a follow-up on impulse, you know. Impulse margins have been recovering nicely, you know, ever since we went through the pandemic. And as we think of the division well into the future, are mid-team levels still a sustainable EBITDA margin that we can hold in our minds, or has that target moved through time?

No, I think we can keep in our minds the mid-teams, but we have to also keep in our minds a lot of patience because we are reconstructing portfolios and we are reconstructing the business models. So let me explain a little bit more of that. When you think about impulse, we are experiencing a lot of competition, not in our categories, but there's a competition of share of wallet in the consumer environment. If we think, for example, at supplements, now you can find supplements across the board in a lot of channels, in supermarkets, in clubs, et cetera. So we need to think about the portfolio that we are trying to sell. I'm talking about retail, obviously. And reinvesting and increasing our capex in order to remodel, refurnish the stores is very important. Bringing some fresh baked bread to Cielito Querido is very important. Changing the menus, increasing the salads offering, increasing empanadas offering, et cetera. So what we are working is in the portfolio and refurging the stores, and that will help us get it on track with more traffic in order to get to that multiple. I wouldn't expect that, not that multiple, that margin. I wouldn't expect that margin this year. Obviously, this year we're going to be in the low, double digits as this quarter, but we're working on that. In terms of , we have a lot of traction in the last two quarters. We have invested in changing the portfolio. Now we have a very good portfolio in terms of profitability. We have segmented the channels. We are increasing market share in modern channels. And also, we have invested in great operating discipline. So I think we're going to capitalize this year in Laos Nestlé.

That's very clear. Thanks, Harder. And now that you mentioned Laos Nestlé, I know at some point you explored the possibility of switching that into pre-serves and kind of realigning the segments. Is that possible? something that you still think about or you foresee that staying in impulse?

Switching that to preserves? Yeah. I'm not following you, Philippe.

No, I think at some point you thought about redistributing the segments a little bit. Um, so that, so, so, so that impulse would be more focused on, on, on retail stores, kind of like the coffee shops and the ice cream shops. But I think it was something you explored and maybe you put pause on it. Just wondering if that's still something that the company.

What I can tell you is that that division now is called frozen and refrigerated division inside our company. Okay. So what we are doing is we are increasing our capabilities to transform this business in multi-temperature. That gives us the ability to have other distributions inside and outside our company. For example, all the portfolio of Intervelli Livanius that is refrigerated, so now we can create some synergies across our different businesses. And we have the possibility to add some external distributions in order to maximize our distribution, our traditional distribution, mom and pops, that we now nearly touch 80,000 points of sale. So probably that will answer a little bit more of your question Yeah, that's very clear. Thanks a lot for the call. Thank you.

Thank you. We go next now to Martin Lara with Miranda Global Research.

Good morning, and thank you for the call. I have two questions. The first one is, where do you see the raw material cost going forward? And the second one is, what can we expect in terms of M&A activity?

Thank you, Martin. So what we expect going forward in soft commodities, I think that the trends are very clear and very favorable. I think that despite this spike in energy prices over the last two weeks, energy was very stable and soft commodities, particularly soybean oil, is more a proxy of but for biofuels. So together with good harvests in US and South America, the outlook for soft commodities is stable. We are not expecting to continue to go down significantly, but we think that they can be in a bound range of current prices plus or minus 10%. Obviously, exchange rate has been very favorable also. And the rest of our commodities, we have seen some challenges in fresh fruit and vegetables. I think that's a big challenge because that is that is very volatile depending on weather. And that would be the answer for commodities. Obviously we have seen inflation in the service and in the labor part of our business. I think that's very clear for all the companies. And we try to offset that with more efficiencies across the board. And in terms of M&A, The only thing I can say is that we continue to explore opportunities, but our plate is empty for now. Okay. Okay, thank you very much.

Thank you. And just a reminder, ladies and gentlemen, star one, please, for any questions this afternoon. We'll go next now to Rodolfo Ramos at Berdesco BBI.

Thank you. Good afternoon, Gerardo. Thanks for taking my question. Just a couple. The first one is more of a high-level view of Mexico's consumer. Given the current juncture that we're in, elections, I'm just surprised to see the flattish performance on the preserves. side during the quarters. I just wanted to get your take on the state of the Mexican consumer. That would be my first question and then a second one on some of the costs that you mentioned.

Hello, Rodolfo. We need to keep in mind that our sell-in to our customers is not the same as the sell-out the market so for the first quarter the market our categories major markets are up single digits low single digits obviously the difference between both is the inventory that our clients move so particularly the consumer environment we see it very I wouldn't say strong but firm is growing okay and we have a lot of things to that particularly inflation is stabilizing disposable income is increasing salaries have doubled in the last four years so We think it's a very positive environment, and that should move to our shell end, okay? That's why our forecast is in the low single digits in terms of volume.

Okay. Thank you. And then a second one, if I may. You mentioned during the previous question, inflation in services, labor. Just wanted to get your sense on what the impact is of what you're seeing with these new minimum wages, if you see any impact at all. And what could be, you know, the impact as well from a reduction in the work week, which seems almost like, you know, it's not going to be perhaps in this legislative period, but it's probably something that it's just a matter of time before we're there.

Right. What I'm going to tell you is on the second part of your question is my opinion, okay? The labor inflation is most seen or it affects us most in retail because people isn't that great. So the higher inflation in labor has diminished our margins in retail. And it's not only for us, it's for everybody in retail. So we try to mitigate that with with volume, with promotions, et cetera. And in terms of the week that... Now, in preserves, there's also an impact, okay? But it's most just to adjust, not because they are in lower wages, because all the brackets are shrinking. So we have to be ahead of the market. And your second piece of the question, I think that when you reduce the shifts, it sounds very, very good, but from an operating standpoint, from a logistic standpoint of your work shift, it's very hard to do because you have to cut your shifts and you have to leave production undone. So we expect if this goes through that we would be paying for extra hours in order to complete the shifts and not have these disruptions in making some batches. I hope I explained myself.

Yes, Gerardo. Thank you.

Thank you. And Mr. Canavati, it appears we have no further questions today. I'd like to turn the conference back to you for any closing comments.

And thank you for your participation in the call today. We look forward to speaking with you again next quarter. And please do not hesitate to contact us in the interim. Thank you, both.

Thank you, Mr. Kanavati. Ladies and gentlemen, that will conclude the Group Oherdez first quarter 2024 earnings call. Again, we'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.