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

Hello, everyone, and welcome to Grupo ERDE's second 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. At this time, I would like to turn the call over to Andrea Almozarutia, Head of Finance and Sustainability. Please go ahead.

Thank you, Jim. Good morning, everyone. Thank you for joining us on today's call. During the quarter, we continue to witness our brand's recognition among Mexican consumers as sales growth continues to be boosted by volume. as well as by well-executed demand creation strategies across the major categories. This combination has resulted in better than expected growth for the quarter. Our overall sales grew by 6.2% compared to the previous quarter, driven primarily by outstanding performance in the ice cream and mayonnaise categories. In the case of ice cream, sales growth was not only benefited by precedented heat waves across the country, but also by unintended profitable sales mix in supermarkets, provoking top line to soar 36% year on year. In the retail segment, sales increase was driven by a combination of double-digit growth rates in the average ticket and traffic versus the second quarter of last year. Exports top-line growth was primarily driven by the successful introduction of larger presentations of salsa in the U.S. market. This launch was well-received by the food service channel, resulting in increased demand and higher sales volumes. Salsa accounted for around 30% of the incremental sales during the period, while mayo contributed 22%. These two categories continue to play a key role in driving the company's quarterly performance outside Mexico. In line with our 40% growth margin expectation, the margin in the quarter came in at 40.4%. This expansion was driven by improvements in all segments, propelled by a favorable mixed cost-wise and also from the decline in soft commodities, among other inputs. As well, The exchange rate during the quarter was 2.3% lower compared to the second quarter of last year, also favoring our growth margin performance. Expenses during the quarter were higher than in the same period of last year due to trade costs and expenses related to the ERP implementation. EBIT margin expanded 1.6 and 1.5 percentage points in the preserves and export segments respectively. The impulse segment saw a notable expansion of 4.7 percentage points, reaching a single-digit positive margin for the first time since the third quarter of 2019. The profitability improvement in the impulse segment was driven by effective expense management and a strategic focus on products and China's profitability, particularly at the . On the exports front, we took advantage of near-shoring opportunities, leveraging our production capabilities in the Mexican territory by adding more exported portfolio items to our local production operations. Regarding our income from unconsolidated companies, Megamex continues to face challenges with avocado prices, which surged more than 20% during the period and are expected to rise further in the coming months. Our EVA continued its double-digit growth since 2022, expanding almost 20% when compared to the same period of 2023. This increase led to an added dam margin expansion of 1.9 percentage points to 17.2%, as a result of strong results across all segments. In terms of our free cash flow, in anticipation of unfavorable conditions for the harvest of raw materials, we have decided to allocate capital to the construction of inventories. This decision, together with the annulment of taxes, resulted in a negative free cash flow for the period. With that, I will now turn the call over to Gerardo.

Thank you, Andrea. Despite all the challenges, the Mexican economy has shown remarkable strength, with growth exceeding expectations and a resilient labor market. which drove unemployment to a historic two-decade low of 2.6%. This, coupled with a sustained increase in disposable income driven by government social programs, has maintained a firm consumption environment. After the general elections, we expect this momentum to continue somewhat. In light of the limited visibility going forward, Risk management is paramount. We have reduced our input cost viability for the foreseeable future by extending our hedging activities well into 2025, and proactively secured additional raw materials inventory, ensuring uninterrupted supply chains and consistent product availability for our valued consumers. We are adamant about preserving the cultural heritage of Mexican cuisine while adapting to evolving consumer demands and market trends. To achieve this, we continue to differentiate ourselves through innovation, quality, and branding. By leveraging the capabilities acquired with Intervalli and Medamex, we will launch new products in the refrigerated space and strengthen our brands into 2025. Talking about innovation, there is no better place than our impulse segment. We believe it has turned the corner and this momentum will continue into 2025. Now, let's talk about Megamex. Despite the epic volatility, Consumption is improving in guacamole and in the shelf-stable categories as a whole. Food away from home is improving also, and we expect high single volume growth for the next quarters. Also, we have seen good trends in clubs and C-stores that will benefit Don Miguel. Megamex fundamentals are strong. and are built under the following pillars. One, grow retail households. Two, accelerate food away from home. Obtain supply chain efficiencies. Expand gross margin at Don Miguel and reduce avocado price volatility. Regarding our digital transformation project, It aims to strengthen back office processes and operations within our shared services center with industry standards and the highest technology available in ERP, cloud technology, and AI. Regarding our guidance for the rest of the year, we anticipate mid-single-digit sales growth based on low single-digit volume growth for preserves, mid-teens growth in impulse, and low 20s for exports. Speaking about EBIT and EBITDA margins, preserves will have a difficult comp due to non-recurring expenses and higher investments in advertising and promotion. On the other hand, impulse and exports will see margin expansions. We do expect to deploy our CapEx as planned in the 1,200 million pesos. Having said that, the full year guidance will be for consolidated sales in the mid single digits, preserves is going to be in the low single digits, impulse in the mid teens, exports in the low 20s. And margins, we expect consolidated in the low to mid 40s, impulse in the low 60s, and exports in the mid teens. Majority net income will grow in the low to mid double digits. And for Megamex, we expect for the full year of 30% reductions versus 2024. That will end my prepared remarks. We're open for your questions. Jim, go ahead.

Thank you. And to our audience joining today over the phones, if you would like to ask a question, please press star and one on your telephone keypad. Star and one, ladies and gentlemen. And if you find that your question has been asked and you'd like to remove yourself, simply press star and two. Once again, ladies and gentlemen, that is star and one. If you would like to ask a question, and we'll pause for a moment to allow everyone a chance to signal. And once more to our audience, a friendly reminder that if you're joining today on a speakerphone, please return to your handset prior to pressing star and one for your question today. We'll pause for just another moment or so.

We have no questions from our audience. I'll turn it back to leadership for any additional or closing remarks. 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, Jim. Have a nice day.

Ladies and gentlemen, this does conclude today's Airdes Group conference call. You may now disconnect your lines and have a great day.