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

Good afternoon, everyone, and welcome to Grupo Hernandez's first quarter 2025 earnings conference call. This call is being recorded. Information discussed may include forward-looking statements subject to risks and uncertainties. Please refer to the forward-looking statements disclaimer in our press release. I'll now turn the call over to Gerardo Canaviti, Chief Financial and Information Officer.

Thank you, Darwin.

Good morning, everyone. And thank you for joining us today to discuss Grupo GERDE's first quarter results. We are once pleased with the progress we've made this quarter, demonstrating once again the resilience and strategy, agility of our business in a very dynamic market. As you all are aware, The New World Order is unpredictable. Planning for the future is a hard thing to do. So for now, we hope that reason prevails and we can maintain the favorable outcome for Mexico. After a slow start, we gain traction towards the end of the quarter to deliver good results, which will be highlighted by Andrea. Please go ahead, Andrea.

Thank you, Gerardo. Despite widespread uncertainty, Grupo ERDES delivered outstanding results for the first three months of the year. The company's strong performance was underpinned by innovative promotions and comprehensive commercial strategies that successfully boosted both volume and revenue. Key initiatives including the engaging McCormick Diablo Drop-Off sponsorship the successful Alice in Wonderland tea licensing agreement, and the strategic launch of Frank's Barbecue at Costco, all boosting volume, revenue, and brand visibility. Consolidated net sales grew 9.3%, reaching 9.7 billion pesos. This growth was fueled by substantial increases in sales volumes across key categories, including mayo, vegetables, spices, mole, and tomato puree. Preserves demonstrated robust growth, with net sales of 10.3% to 7.8 billion, driven by combined volume growth of the categories mentioned previously by 11%. Impulse segment net sales grew by 4.7%, supported by a strong multipack sales of helados Nestle, and an increase in the average ticket in stores. primarily due to the introduction of a wider variety of consumer products. Export sales rose by 7%, driven by higher export volume in salsas and vegetables. Consolidated growth margin improved to 40.7%, an increase of 1.3 percentage points. This expansion was mostly driven by a favorable sales mix. EBIT demonstrated a strong growth in the first quarter, reaching 1.5 billion, a 17% increase that drove the operating margin to 15%. This represents an additional 213 million in operating profit, with notable margin expansion in preserves and exports. In contrast, the input segment experienced a contraction in EBIT, reaching an operating loss of 105 million pesos, due to higher prices of cocoa and an unfavorable sales mix. At Megamex, we experienced strong results in the quarter with net sales reaching 4.4 billion pesos, a 25.2% year-over-year increase. In dollar terms, growth was 4.2%. This growth was largely driven by robust sales in Don Miguel and Holy Guacamole. The non-legal business itself saw a strong performance, with net sales growing by 11.6%. On the other hand, despite a competitive environment impacting thousands of brands like La Victoria and Chichi, the gross margin improved to 31.9%, up 2.4 percentage points, benefiting from favorable exchange rates and higher volumes that offset rising avocado costs. Consequently, EBIT and EBITDA margins both expanded by 3.1 percentage points to 10.9 and 12.9%. Net income increased to 412 million pesos, 1.7 times higher than a year ago. Strong operating results in the preserve and export segments fueled a 20.1% increase in net income, which reached 1 billion. Majority net income increased 15.9% in the quarter, representing a 4.4% margin. Regarding CAPEX, as you saw in the press release, the net investments of the quarter totaled 206 million pesos. Key projects during the quarter included the ongoing digital transformation and ERP implementation, the installation of the new pasta line that will be ready in February of next year, the acquisition of freezers for the DSD channel for Relados de Slim, and the continued rollout of a store remodeling for Nutrisa. The first quarter saw free cash flow of 557 million, which represented 5.0% of net sales. Although healthy cash generation, the free cash flow was impacted by the higher than expected sales volume, which led to a significant increase in accounts receivable. Having said that, we want to reiterate our guidance for the year with consolidated top-line growth in the high single digits and EBITDA and EBITDA margins to remain stable versus 2024. I will now turn the call over to Gerardo to further discuss the sales dynamic scenes during the quarter, as well as the key topics addressed yesterday at the annual shareholders meeting.

Thank you, Andrea. Complementing the results Andrea just presented, I want to highlight our continued focus on strengthening our value proposition through new business initiatives and a commitment to innovation across our portfolio. These efforts are crucial in driving sustainable growth and reinforcing our position as a leading player in the Mexican market. A prime example of this is the successful launch of Manguito's Chamoy in Sam's Club. This new product has achieved an impressive sell-through rate of 76% across 137 clubs. Within our McCormick business, innovation in packaging and accessibility improving to be a significant growth driver. The new resealable sachet presentation for our spices and herbs line has significantly contributed to the brand's growth. together with promotional point-of-sale strategies resulted in volume growth of almost 4% for the category. Elabo Nestlé has proven to be a beacon for innovation. Together with Nestlé Nescafé Sticks, our dual nut and brownie ice cream has become a key product in the specialty segments and a significant contributor to both the category and segment's strong growth. Similarly, our multipack has been highly effective in expanding our presence, particularly in clubs, where this initiative accounted for a substantial portion of a significant volume growth we experienced in the ice cream category during the first quarter. Now, I would like to turn to the key issues addressed yesterday in our annual shareholders meeting. On one hand, shareholders approve an ordinary dividend of 1.5 pesos per share to be paid in two installments, May and October, as well as a payment of an extraordinary dividend of 1 peso per share. Shares in the treasury, which amount to 8 million, will be canceled, and the share by the COLA will be maintained at 2.5 billion pesos. On the other hand, shareholders also authorize the Board of Directors to distribute all shares of Grupo Nutrisa, which operates La Nutrisa, Moyo, Celito Querido, Café, and Chilimba Land Brands, to group other shareholders as a dividend in kind. This transaction, subject to regulatory approval, will result in Grupo Nutrisa becoming an independently listed company on the Mexican Stock Exchange. We firmly believe that this separation will generate significant value for both companies and their shareholders. By allowing Grupo ERDES and Grupo Nutrisa to operate as independent entities, each will be able to focus its strategy, resources, and management on a specific sector. Grupo ERDES will continue to strengthen its leadership and preserves, while Grupo Nutriza will pursue growth in the retail and input segment, leveraging its strong presence in shopping centers and its innovative product offering. This process will provide greater focus on specific needs, operational autonomy, and financial flexibility for both companies. It will enable each management team to tailor its approach to the unique opportunities and challenges of the respective market ultimately enhancing competitiveness and unlocking new growth avenues for shareholders. We are excited about the future of both Grupo Héroes and Grupo Mepliza, and we are committed to executing this transition as efficiently and transparently as possible. We will continue to keep you informed as we move forward with this process. Having said that, we can now turn the call over to your questions.

Darwin?

Certainly. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Felipe Ucros with Scotiabank.

Please go ahead.

Thanks, Operator, and good morning. Gerardo, Andrea, and team, thanks for the space, and congrats on the announcement. So I guess my first question comes around that, around the spinoff, right? I'm wondering, what's the main rationale to go through the spinoff? Because obviously there's positives and there's negatives that you probably weighed internally when thinking about this There's an obvious one, which is unlocking value, and there's another one, which is different businesses require different levels of attention, capex, specialization of teams. So I'm wondering if it was more of an operational decision or a finance decision to unlock value, and then how you weight that against the liquidity considerations for the shares, which will obviously be divided or something close to that. And then maybe I'll ask a couple of follow-ups on the operational side, but hoping we can start with the spinoff.

Good morning, Felipe. I think that you answered your first question perfectly. So talking about the second one, about the liquidity, I think that's a concern in the overall market, and I think that we will – I guess that an independent company will pursue to have some liquidity and I guess that there will be some options going forward to increase that. I think that you answered the rationale question.

So I guess I probably didn't ask it correctly, but was it more operational or was it more financial, meaning was it more about the internal needs of the company or was it more about trying to pursue the higher multiple of one of the businesses? Perhaps it was equal.

I think it's both. I think that we can control the focus in the operational one And we believe that the value would be determined by other forces rather than us.

Very clear.

Thanks for that. And then I guess two other questions. So the first one's on preserves on the operational side. For preserves, you posted a pretty amazing result. Volumes were up in the mid-single digits. for the company as a whole. And when you look at what food and beverage companies have been reporting throughout the quarter, almost without an exception, volumes have been in negative territory. So it seems that there's something special going on in Airdaz. I don't know if it has to do with with having easier comps or if it has to do with the promotional changes that you guys were mentioning in the call. Just wondering how you managed to decouple so far from the rest of the market. It's very rare to see one of the public companies outperforming the rest by so much.

I think that it's different factors, Felipe. One would be Well, we have a seasonality effect that makes comps not apples to apples due to length. That's one. Second, we did saw negative environment starting the quarter, but we ended in a very strong note, particularly in March. And the third one, you can recall that in the fourth quarter, We limited some availability in Mayo because of the egg shortages. And that just got regularized or online on the first quarter. So that also has a big component of the performance and volume.

OK, very clear. And then if I can follow up on Megamex, pretty amazing results.

Before you go to Megamex, there was also some comms between channels. I think that last year we saw wholesalers in a very low note. So channel-wise, wholesalers outperformed retail, modern trade, modern store, supermarkets in this quarter.

Very, very interesting. I hadn't noted that in the reports from other companies or in TAT or anything else. Pretty interesting. On Megamex, so where I was going with this one, we talked about it last quarter and you discussed the changes that had been done at Holy, at Don Miguel, and how we should see a recovery throughout the year, probably one or two quarters out. Seems like you're probably moving ahead of that expectation. Pretty great results there. Just wondering if you can give us more color about what worked in the quarter versus your expectation of maybe this taking two quarters more or something like that before we can see the results of the changes.

Well, I think we're seeing the result of the changes because we've been talking of Don Miguel for a while, for the last 12 months, and we made a lot of changes including management and the teams and the focus and we've seen that moving forward. I think that despite the high avocado prices that it seems that this is going to be a new environment for us. Volumes have moved in the right direction even though the consumption is very soft but the dynamics in our category are moving good. There's also other things about launching new products like Vierdes Chunky Salt salsa that is particularly focused on the East Coast. We have increased the distribution on that, and that is an initiative to gain market share in the East. Obviously, on top of this, there's a big change. We have a new CO that comes from inside. and that is also an element that brings some different dynamics to the business. We're very excited what's going on in Metamex for the future.

Great news. Congrats on those changes, and I'll yield back for questions from the rest.

Thank you.

Thank you.

Again, if you have a question, you may please press star then one. Our next question comes from Alvaro Garcia with BTG. Please go ahead.

Hi, Gerardo. Hi, Andrea. I have a couple of questions on Nutrisa. Can you hear me? Hello?

Yes.

Great. A couple of questions on Nutrisa. One, you've historically kept leverage at the Grupo ERDES level, and I'm not sure if this might be, you know, within the document you sent on the transaction itself, but I was just curious of the degree of debt and cash that will be transferred to Nutrisa as part of this transaction. That's my first question.

We in the... In the information we send, there's a pro forma financial statements, and there's no transfer of cash or debt. So it's a debt-free transaction.

So all of the debt at the Grupo Herdez level today that we see at the Herdez level will stay at the Grupo Herdez level, and none will be transferred over to Nutriza. Correct.

Correct.

Okay. And then just on the, my understanding is that the potential liability from the Mexican Tax Authority investigation on VAT at Nutrisa has always been at the Nutrisa company level?

Yes.

It's never been at the Grupo Verde's level. I just wanted to confirm that.

Yes, that is confirmed. It's under the Nutrisa, and we mentioned in the folleto that we have presented in all our instances has been in favor, but we're still waiting on some, I don't know how to call it, some resolutions in court. So that is all public available information. And in some cases, there's some some sentences that are open to the public in the courts. So I think all the information is public right now.

But it's fair to assume that that, let's say, potential liability, Grupo Verdes will no longer see a risk from that. It is fully transferred, let's say, or fully taken on by Nutriza.

In any case, yes.

Okay. And then just as far as timing, I don't know what you can share as far as timing for when the actual dividend takes place.

Well, we are working to do it this year. We're going to depend on the authorities and regulatory, but the plan is it's going to be this year.

Great. And just one last one. Sorry for all the questions. On a pro forma basis, sort of ex-Nutrisa, obviously Nutrisa was a relatively capital intensive business. You know, what's sort of the optimal capital structure for Grupo Herde's ex-Nutrisa? You know, from a leverage standpoint, what's sort of your target leverage, you know, post-Nutrisa? Thank you.

I think that today our capital allocation is, we are under levered practically, and I think that Nutrita or no Nutrita is not a difference in that capital allocation. I think that we have levered in the past to make, to repurchase some shares, and I think that our structure

right now is very flexible to pursue new businesses. Great. Great. Okay. I'll stop there. Thank you.

Thank you. Thank you.

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

Thank you very much for participating in this call. If you have any questions, don't hesitate to contact us.

Have a nice day. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.