Grupo Herdez B de C : EARNINGS CALL TRANSCRIPT 4Q20

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GRUPO HERDEZ

FOURTH QUARTER AND FULL YEAR 2020 CONFERENCE CALL TRANSCRIPT

CORPORATE PARTICIPANTS

Gerardo Canavati Miguel, Chief Financial Officer

Andrea Amozurrutia Casilla, Deputy Director, Finance

Guillermo Pérez Tinoco, Manager, Investor Relations

CORPORATE PARTICIPANTS

Miguel Tortolero, GBM

Álvaro García, BTG

Felipe Ucros, Scotiabank

Emiliano Hernández, GBM

PRESENTATION

Operator:

Good morning, everyone, and welcome to Grupo Herdez Fourth Quarter and Full Year 2020 Results 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 it over to Mr. Gerardo Canavati, Chief Financial Officer. Please go ahead, sir.

Gerardo Canavati Miguel:

Thank you, Anastasia. Good morning, everyone. Thank you for joining us on today's call.

2020 will be remembered as a tragedy for humanity but as a year of learning and transformation from everyone as well as for companies. We focused at Grupo Herdez on keeping our people safe and satisfying our customers' needs, which was a hard thing to achieve considering the unprecedented demand we faced.

Once again, I would like to recognize the passion and hard work of all our 10,000 employees as well as the commitment of our partners, suppliers and clients.

I will now turn the call over to Andrea to discuss 2020 results. As usual, we will take your questions at the end. Andrea?

Andrea Amozurrutia Casillas:

Thank you, Gerardo. Good morning, everyone.

During the quarter, the trend in home consumption caused by the global pandemic continued. The Preserves segment increased net sales at double-digit rates, offsetting the weak performance of the Frozen segment. Although during the quarter, most shops were open, decreased traffic due to mobility restrictions imposed in November had a negative impact on our retail business at the time that the traditional channel for Helados Nestle continued to be depressed.

Net sales in the Frozen segment decreased by 18.4% during the quarter and 19.2% for the full year. On the positive side, Helados Nestle sales continued to experience strong performance in modern trade and club stores, offsetting the significant drop in mom-and-pop's performance.

In exports, net sales increased 5.6% in the quarter and 23.0% for the year. These increases are explained by higher volumes and a stronger U.S. dollar throughout the year.

Consolidated gross margin in the quarter was 36.8%, 150 basis points below the fourth quarter of 2019. The margin was mainly impacted by the expenses related to the adoption of the new labeling regulation

(NOM-051), a strong performance of Helados in modern trade, which resulted in lower gross margin, and of course, the lower traffic at our retail stores.

On a cumulative basis, gross margin was 37.4%, 110 basis points lower than in 2019, mainly due to the new labeling regulation.

Consolidated SG&A in the quarter was 23.3% of net sales, 150 basis points lower than in the same period of 2019 due to the postponement of marketing and promotions expenses at the Preserves segment. Over the year, SG&A represented 25.5% of net sales, practically flat compared to the previous year.

Consolidated EBIT before other income increased 6.8% in the quarter and remained flat for the full year. This is the result of double-digit growth in Preserves during the quarter and for the year, which fully offset the operating loss registered in Frozen.

For the quarter, we registered an extraordinary income of MXN 238 million related to the last part of the divestiture of the tuna business, as well as a profit from the sale of a private equity fund related to Hispanic food companies in the U.S. During the year, other income totaled MXN 408 million explained by the same transactions mentioned previously.

Consolidated EBIT increased 27.0% in the quarter, while for the year, the increase was close to 9.0% to

MXN 3.3 billion. The above resulted from the extraordinary performance seen at the Preserves segment and other income.

EBITDA increased 24.1% in the fourth quarter, while the margin increased 300 basis points to 21.0%. On a cumulative basis, the EBITDA increased 10.0%, representing 17.5% of net sales.

In the quarter, income from unconsolidated Company was MXN 267 million, 9.4% higher than in 2019, mainly due to the appreciation of the dollar and a sequential improvement at MegaMex. For the year, income totaled MXN 757 million to 2.4% lower than last year, mainly as a result of the challenges in the foodservice as well as Don Miguel underperformance.

Consolidated net income for the quarter was MXN 826 million, while for the full year, totaled MXN 2.4 billion.

Free cash flow, excluding the divestiture of the tuna business reached MXN 1.3 billion, 5.5% and 7.4% of net sales and stockholders' equity, respectively.

Our financial position at year-end remained strong, cash stood at MXN 3.7 billion, and interest-bearing liabilities were at MXN 9.5 billion, MXN 1.5 billion higher than in 2019 as a result of additional debt coming from the local bond issue made in August.

With that, I will turn back the call over to Gerardo.

Gerardo Canavati Miguel:

Thank you, Andrea.

We definitely are turning into a better Company as we adapted quickly under our own capacity restrictions.

Our relationship with landlords is strong, and we are embracing technology in a faster way with the best partner for this: Google.

Our long-term vision for our retail business remains unchanged as we have a strong brand portfolio with huge opportunities. Sales at mom-and-pops remain weak, which encourages us to keep on strengthening our omnichannel strategy for all brands.

For 2021, Preserves sales growth will be flattish as we divested the tuna business, and we come from a pandemic-driven demand. Despite this, we still see robust demand in certain categories. We expect a strong rebound in Frozen for the back half of the year, which will drive the consolidated growth to mid-single digits.

One of our challenges we face is input costs. We feel humbled as we significantly underestimated the commodities run-up as the global economy enters a recovery cycle. Our hedges will expire in the second quarter, where we will know the state of the new U.S. crop. We expect to take pricing actions in categories where raw and packaging materials have increased significantly. Thus, we expect gross margins in Preserves to be flattish versus 2020.

EBIT and EBITDA without other income will also be flattish. We are increasing our Capex to MXN 1.5 billion from MXN 600 million in 2020. In this amount, we include new capacity for tomato puree, vegetables, salsa and shortcut pasta. We are also starting to build a facility for organic chicken for Aires de Campo. In the IT front, we will start updating our ERP with M3 by Infor.

So, this concludes our prepared remarks, and we will take your questions. Anastasia, please go ahead.