Grupo Herdez B de C : EARNINGS CALL TRANSCRIPT 2Q21

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GRUPO HERDEZ

SECOND QUARTER 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

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Felipe Ucros, Scotiabank

Emiliano Hernández, GBM

Álvaro García, BTG

PRESENTATION

Operator:

Good morning, everyone, and welcome to Grupo Herdez' Second Quarter 2021 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 the conference over to Mr. Gerardo Canavati, Chief Financial Officer. Please go ahead, sir.

Gerardo Canavati Miguel:
Thank you, Lupine. Good morning, everyone. Welcome to Grupo Herdez' Second Quarter 2021 Earnings
Conference Call. Once again, I hope you and your families are doing well.
The second quarter of last year will be remembered as the time when the COVID crisis impacted our country
the most, due to the full consequences of the extreme lockdown, which were felt, obviously, in our retail
business. On the other hand, volume on our Preserves and Export segments were extraordinary, translating
into double-digit growth in sales for both. Today, the coin flipped and the performance in our two main
segments reflect the opposite, as we adapt to the new conditions of the market, including higher inflation
and more normalized demand.
As usual, Andrea will now walk you through the results for the quarter, and we will take your questions at
the end. Andrea?
Andrea Amozurrutia Casillas:
Thank you, Gerardo. Good morning, everyone.
Just as a reminder, 2021 results are not fully comparable versus the previous year, for several reasons.
First, the divestment of the tuna business and the Nair brand; furthermore, we ended the distribution
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agreement with Ocean Spray effective 2021; and starting in April of this year, we began the distribution of
the General Mills brands.
Consolidated net sales decreased 1.2% in the quarter and were practically flat considering the first six
months of the year. The decrease in net sales for the quarter came mainly as a result of lower volume in
the Preserves and Export segments, due to a very challenging comparison base. On the other hand, the
Frozen segment recovered somewhat due to the reopening of stores and a return in traffic.
Sales in the Preserves Division decreased 2.2% on the quarter and were flattish on a cumulative basis, as
a result of lower volume due to the high comparison base and was offset by the price increases
implemented in the last 12 months. Frozen increased 36.2% on the quarter and 10% on a cumulative basis,
due to the reopening of stores and improved traffic metrics. In Exports, net sales decreased almost 35% in
the quarter and 13.7% on a cumulative basis, due to the combination of a stronger currency against the
U.S. dollar and a decrease in volume of mayonnaise and home-style salsas, compared to the same quarter
of last year.
Consolidated gross margin in the quarter was 37.3%, 30 basis points below the second quarter of last year.
This was mainly as a result of the 110-basis-point impact on Preserves due to higher input costs, as well

as a decrease of 940 basis points in the Exports segment. For the first six months, gross margin was 37.4%, 30 basis points lower than the previous year, due to the gradual recovery of the Frozen margin and the impact on the Exports front.

Consolidated SG&A was 27.1% and 26.9% of net sales, 30 and 40 basis points higher for the quarter and for the first half of the year. SG&A in Preserves was slightly higher on the quarter, mainly due to the reconditioning of our distribution center in Mexico and the digital transformation project.

Consolidated EBIT before other income decreased 7.0% in the quarter as a result of a 14.0% decrease in Preserves and a MXN $136 million recovery in Frozen operating loss, compared to the previous year. For the first half, EBIT before other income decreased to MXN $1.2 billion, which is 5.6% lower than last year, mainly due to the results of Exports as Preserves remained flattish, compared to 2020.

In the quarter, we registered other expenses of MXN $70 million, which are mainly COVID related among others accruals, which compare unfavorably with last year, when we registered other income from the divestiture of the tuna business.

EBIT and EBITDA margins decreased 16.5% and 18.1% in the quarter, while margins decreased 160 and

270 basis points, respectively. On a cumulative basis, they decreased 21.3% and 17.6%, with margins of 3 10% and 13.8% of net sales, respectively.

In the quarter, income from unconsolidated companies was MXN $173 million, 17.0% lower than in 2020, mainly due to a double-digit depreciation of the U.S. dollar against the Mexican peso. In cumulative figures, it was MXN $460 million, 20.6% higher than last year, due to stronger results at MegaMex.

Consolidated net income for the quarter was MXN $391 million, which was 20.7% lower than the previous year. In cumulative figures, consolidated net income was MXN $933 million, almost 20% lower than last year. Majority net income decreased 6.0% and 19.5% during the quarter and year to date, respectively, mainly due to the operating performance of the Frozen and Retail segment.

As of June, consolidated cash amounted to MXN $2.7 billion, down MXN $1.3 billion from the first quarter, after buying back 8.9 million shares, net Capex of MXN $130 million, hedges and inventory buildup including General Mills.

Interest-bearing liabilities remain at MXN $9.5 million, with an average life of 5.6 years and an average cost of 7.41%.

Leverage ratios remain comfortable and net debt to consolidated EBITDA was 2.0 times.

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

Gerardo Canavati Miguel:

Thank you, Andrea.

Despite overall category declines, we gained share of market (SOM) in 80% of our main categories, while for the other small ones, we still see good dynamics. Regarding our shops, traffic is slowly gaining traction, but, as mentioned previously, we do not expect to reach 2019 levels until 2022. Pricing has helped somewhat. In the next month, we will launch a couple of initiatives that we believe will kick-start performance. Helados Nestlé is doing well in modern trade, but DSD still lags significantly.

As mentioned in the previous quarter, the run up in commodities had been unprecedented. Input costs are rising in the low-double-digits range for the foreseeable future and significant pricing actions are inevitable.

Preserves gross margin erosion will continue this quarter and uptick in the fourth, on a sequential basis. Frozen should continue to improve as mobility restrictions ease and vaccination rates improve, despite the

new Delta variant. Regardless of Preserves gross margin headwinds, we expect second half growth in EBIT 4 before other income to be in the low 20s, helped by Frozen.

For the full year, we expect Preserves and Exports top line to increase in the high-single-digits, while Frozen north of 40%. Total EBIT and EBITDA should have an index of 90, compared to last year, which included extraordinary income, while net income should grow in the mid-teens, driven by Frozen. Talking about MegaMex, pre-tax income should grow in the high-teens on a currency-neutral basis. Expect the same amount of other expenses for the second half, as we are still registering some one-time off accruals.

On an annualized basis, the new labor law will have an impact 4% on our pre-tax earnings, but, more importantly, on an aggregate basis, this will translate into more consumption.

Capex is behind schedule. We expect to complete MXN $700 million on increasing capacity in pastas, vegetables, tomato puree, and build in the new lines to manufacture RedHot brands and French's. Starting next quarter, we are rebranding the Frozen segment name to Impulse, as new categories will be added this year.

That concludes our prepared remarks. We're now open for your questions. Lupine, go ahead.

Gerardo Canavati Miguel:

Thank you for your participation on the call today. We look forward to speaking with you again next quarter. Please do not hesitate to contact us in the interim. Have a nice day.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and

have a pleasant day.

CONTACTS

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ABOUT GRUPO HERDEZ

We are proud to be the oldest Mexican food company in the country. Since 1914, we have been bringing Mexican families the best of our cuisine and the flavors of the world, and taking the most delicious flavors of Mexico to the rest of the globe. We have been listed on the Mexican Stock Exchange since 1991, and our mission is to be a worthy representative of Mexico worldwide.

We are leaders in the processed foods sector, and an important player in the ice cream category in Mexico, in addition to being the fastest- growing company in the Mexican food segment in the United States through Megamex. We are currently present in 99% of Mexican households through our large portfolio of more than 1,500 products, with which we provide solutions to the daily lives of our consumers, offering them variety and convenience for different lifestyles. We participate in the categories of tuna, spices, guacamole, ice cream, frozen yogurt, mayonnaise, marmalades, honey, mole, mustard, pastas, organic products, tomato purée, homemade salsas, ketchup, tea, canned vegetables,

and many more, and we are leaders in several of these categories in Mexico. These products are sold through an exceptional portfolio of 5 brands, including: Aires de Campo, Barilla, Blasón, Búfalo, Cielito Querido Café, Del Fuerte, Doña María, Embasa, Helados Nestlé®, Herdez, McCormick, Moyo, Nutrisa and Yemina.

We are committed to the social and environmental needs of the locations where we operate, and have aligned our sustainability strategy with the United Nations 2030 Agenda. This vision is shared with an exceptional team of more than 9,000 employees, and it is implemented through the solid infrastructure of our 13 production plants, 25 distribution centers, and more than 600 points of sale of our brands: Cielito Querido Café, Lavazza, Moyo and Nutrisa.

For more information, visit grupoherdez.com.mx follow us on: FB: /GrupoHerdezMX TW: @GrupoHerdezMX LI: /Grupo-Herdez

FORWARD-LOOKING STATEMENTS

The information contained herein (the "Information") has been prepared by Grupo Herdez, S.A.B. de C.V., its associates, subsidiaries and/or affiliated companies ("Grupo Herdez"), and may contain forward-looking statements that reflect Grupo Herdez's current expectations and views, which may differ materially due to various factors, risks and uncertainties. Therefore, Grupo Herdez and/or its respective officers, employees or agents, assume no responsibility or liability for any discrepancy in the Information. In particular, but without prejudice to the foregoing, no warranty is given as to the accuracy of the statements or future variations of the Information, or any other written or oral Information issued by Grupo Herdez. The Information has been provided solely for informational purposes. The issuance of this Information shall not be taken as any form of commitment on the part of Grupo Herdez to proceed with any transaction.