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Good morning, everyone, and welcome to Grupo Herdez Second Quarter 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. [Operator Instructions]
At this time, I would like to turn it over to Mr. Gerardo Canavati, CFO of the Frozen division. Please go ahead, sir.
Thank you, [indiscernible]. Good morning, everyone, and thank you for joining us on today's call. The second quarter was marked by the COVID-19 crisis hitting our country, and the full impact of lockdown was felt in our retail business. As stated in our last call, we established 2 simple and difficult objectives, to protect the health of our employees and to assure the continuity of our operations. We feel very proud of the commitment and the results that our associates have achieved throughout the company. Employees in our corporate offices have been working from home since late March, and our plants, distribution centers and sales force are working under additional strict safety measures. We have also experienced great collaboration from our suppliers and had minimal disruptions of our supply chain.
Having said that, as usual, Andrea Amozurrutia will walk you through the results for the quarter, and we will take your questions at the end. Andrea?
[Technical Difficulty] Okay. Sorry about that. We had a technical issue with Andrea and their lines. So Guillermo Perez Tinoco will take it from here.
Go ahead, Guillermo.
Thank you, Gerardo. Good morning, everyone. Net sales increased 7.6% on the quarter and 8.9% for the first half of the year. Growth was mainly driven by volume in our Preserves segment due to the lockdown. In fact, more than 2/3 of our portfolio grew at double-digit rates in the quarter. However, our Frozen and Retail business was affected by the closure of Cielito, Lavazza, Perisur, and Moyo stores as of April 1. And an unfavorable sales mix at the [indiscernible].
As mentioned in the press release, [indiscernible] this quarter, we consolidated the results of Cielito for the first 6 months of the year that was in the Retail segment. The implementation of several programs such as the detox campaigns encourage the consumption of [ tea ] [ Barilla ][indiscernible] pasta recipes and the [indiscernible] to promote cooking with the families, products help trigger demand in our Preserves segment. It is difficult times have an opportunity to connect in different ways with consumers.
In the Frozen division, we had several product launches such as Baileys and KitKat sticks. In exports, net sales increased 60.2% in the quarter, 36.3% on a cumulative basis, hitting a record of MXN 619 million and MXN 998 million, respectively. Net sales improved due to a combination of a weaker currency against the U.S. dollar and a double-digit increase in net sales in [ Maginase, Molly ] and [indiscernible]. Consolidated gross margin in the quarter was 37.6%, 60 basis points throughout the second quarter of 2019. Benefit of cost absorption in our Preserves portfolio practically offset the effects of lower sales from our Frozen and Retail segments.
In exports, consolidated gross margin increased 11.6 percentage points for the quarter. On a cumulative basis, gross margin was 37.7%, 40 basis points under the previous year due to the Frozen and Retail margin erosion of [520] basis points. Consolidated SG&A in the quarter was 26.8% of net sales, 1.1 percentage points higher than in the same period in 2019. In the Frozen segment, SG&A increased 14.7% as expected due to the consolidation of Cielito and the impact of the closure of stores. For the first half of the year, SG&A represented 26.5% of net sales, 70 basis points higher than last year, mainly due to the aforementioned.
Consolidated EBIT before other income decreased 7.4% in the quarter as a result of an operating loss in Frozen of MXN 219 million that fully offset the margin increase in Preserves. For the first half of the year, it remained in line with last year's at MXN 1.3 billion, thanks to a 24.3% jump at Preserves. In the quarter, we registered net extraordinary COVID-related expenses of MXN 9 million. EBIT decreased 12.2% for the quarter. Meanwhile, EBITDA remained in line with the previous year, while the margin stood at 10.6% and 15.4%, respectively. On a cumulative basis, EBIT and EBITDA increased 9.6% and 12.8%, representing 12.7% and 16.8% of net sales, respectively.
In the quarter, income from unconsolidated companies was MXN 208 million, 1.7% higher than in 2019 and in cumulative figures it was MXN 345 million, 20.4% lower than last year due to the weaker results of MegaMex. Consolidated net income for the quarter was MXN 493 million, which was 14.2% lower than the previous year. In cumulative figures, consolidated net income was MXN 1.2 billion, 6.2% higher than previous year. Majority net income dropped 56.2% and 29.1% during the quarter and year-to-date, respectively, mainly due to the performance of the Frozen and Retail segments.
As of June 30, 2020, consolidated cash was MXN 3.5 billion, down MXN 700 million from first quarter after buying back 9.9 million shares and net CapEx of MXN 63 million during the quarter. Interest and liabilities totaled MXN 9.5 million with an average life of 4 years and an average cost of 7.72%. Leverage ratios remain comfortable, and net debt to consolidated EBITDA was 1.7x. Debt to consolidated stockholders' equity ratio was 0.38x. As you may be aware, we recently announced a macro bond offering for up to MXN 3.5 billion in the following weeks. The proceeds will be used to refinance debt that will be maturing in the next 2 years. So our costs are expected to be in line with outstanding.
With that, I will now turn the call over to Gerardo.
Thank you, Guillermo. Regarding our Retail business, as we speak, we have reopened more than 75% of our stores. Sales have been around 40% and 25% of 2019 sales for frozen yogurt and coffee, respectively. During the quarter, all of our store associates remained safely at home, getting the online trading and customer service, COVID issues and product portfolio. They all went back to work following strict health protocols. We expect to gradually increase sales throughout the second half of the year. But we do not expect to reach 2019 sales level in a while.
Reviewing 4-wall profitability is an ongoing practice. And considering these times, this might lead us to close more stores than planned if we do not get the economics right. At Helados Nestle, DSD was down as mom and pops reduced nonessential inventory. However, sales at supermarket and clubs skyrocketed due to horizontal and vertical distribution. We reached record share of market. This great performance came at a steep price. Gross margin contracted because of this sales mix which is fine, but we need to adjust SG&A going forward.
As if COVID and the recession were not enough, we face another challenge. The new packaging guidelines that will be required in the fourth quarter. Adding stickers and destroying excess packaging material will cost us around 40 basis points of annual sales. In the quarter, we sold the remaining vessels of our tuna fleet. We expect to divest the rest of the assets in the next 5 months. We still see a very uncertain second half of the year. Whatever forecast we build is mere speculation.
For Preserves, we expect flattish volume, coupled with mid- single-digit sales growth. Too early to tell if we will experience a permanent change in consumption habits about cooking at home, but the signs that we are seeing are encouraging. As I mentioned earlier, retail will be down for the rest of the year, and we will ramp up our omnichannel strategy.
Consolidated EBIT and EBITDA should be flattish versus 2019, considering the extraordinary income from the tuna divestitures. Regarding CapEx, we have finally signed an update of our ERP. This project will take 24 months, and it will be the basis for our digital transformation. This investment will represent between 60 to 100 basis points of annual sales.
That concludes our prepared remarks and are open for your questions. [indiscernible] Please go ahead.
[Operator Instructions] The first question comes from Miguel Tortolero from GBM.
My first question is on the Export division, both the top line and EBITDA performance was quite impressive even in dollar terms. Could you give further color on the dynamics you're seeing in this division? And the second one is on MegaMex. We have seen other U.S. food companies benefiting from current trends with retail channel completely offsetting the weakness in food service and even in those with relevant exposure to the food service. So my question is, if we exclude the effect from the [ Don Miguel ] plant during the quarter, you say that it is also the case for MegaMex. It would be very helpful if you could comment generally on the dynamics you're seeing here.
Miguel, I would need you to repeat your 2 questions. I know that the second one is on Don Miguel. What was your first question, please?
Yes. The first question is on the Export division, given the top line EBITDA growth, just if you could give further color on the dynamics you're seeing in this division.
Honestly, I don't understand top line and EBITDA. So do you want us to talk about top line or EBITDA? I am having trouble with the question you probably raised.
Sure. If you could give further color on the dynamics you see in the export division that drove the topline and EBITDA growth in that level.
Okay. In the Export business. Okay. So the Export top line grew as all the lockdown in the U.S. drove volume growth. So we saw extraordinary growth in Moyo, in [indiscernible] across the board through the retail environment. Now obviously, those dynamics will come down as people return to normality. But we also think that in the U.S., there's also a trend that could be emerging about cooking at home. Now as same as in Mexico, it is early to tell if this is going to be permanent or not.
In terms of food away from home, obviously, that was extremely down. We believe that this trend will continue. We are recovering some sales, but we don't see food service recovering to pre-COVID levels until the next 18 months. And that would be the same situation with Mexico. Here, our Foodservice division sales dropped nearly 40% in the quarter. And that will be a very, very slow recovery.
Great. Great. And the second item, if you got the second one?
The -- okay. Miguel, repeat the question on [indiscernible].
Sure. We have seen some U.S. food companies benefiting from current trends in the U.S. with retail outperforming foodservice even in the company with high exposure to foodservice. So the question is, if we exclude the effects from Miguel, would you say that it is also a case for MegaMex talking about the trends [ between ] retail foodservice.
In foodservice, particularly -- so sorry about the communications. But today, we have some issues. You're saying you see positive trends in the U.S. foodservice companies?
No, no, no. I'm saying that U.S. food companies, even with those with exposure to the foodservice, retail has outperformed the food service. With a positive trend [indiscernible]
No, no, no. That is definitely, that's the trend in both businesses. So Retail, supermarkets and clubs in the United States is doing very good. So we have strong growth even in Wholly Guacamole, that is a fresh product. And we started with slow demand because of the storage issue about fresh products. But the trends in Retail in MegaMex are really good. Retail, meaning supermarkets and clubs.
Food away from home, that is food service, is struggling. And we believe that this -- there could be an emerging trend about cooking at home in the U.S. and in Mexico. But we believe it is very early to tell because we still have seen growth in some categories that even though they are small, but they are a very good thermometer of this trend, for example, spices. We've never seen spices grow so significantly than in the last 4 months.
[Operator Instructions] The next question comes from Álvaro García from BPG.
My question is in your prepared remarks, and on that you mentioned on the CapEx front, finally seeing these sort of deeper ERP investments over the next 24 months. So my first question is if you could clarify whether that meant the 60 to 100 basis points of sales. Do you mean that some form of SG&A investment we'll see related to this ERP investment, one? And two, how much CapEx there’d be? And more importantly, just sort of from a broader perspective, what are some of the advantages that you expect to get from this new ERP platform?
Sure. Okay. First of all, this is going to be a combination of capitalized assets. The license, particularly the license and some of the other components of the project. So I would expect that this amount of the 60 to 100 would be capitalized. Probably from that, let's say, about 70% would be capitalized and the rest would be SG&A. Now going forward, well, I think that the benefits that we will see is to have a more integrated platform between technology, systems and people because today, we have a lot of applications on top of our ERP that are connected between the ERP. So this would be more integrated.
I think that considering today's technology challenges, the value-added that we are looking is more about our platforms that we built on top of the ERP, [ needing ] some applications. For example, today, we have very good applications on social media, social listening, growth hacking, et cetera. So this would be more about having a more robust system underneath of the platforms that we are building on top of this.
The benefit would be to have more connected data, more accurate to make further decisions. Today, it's very early to tell if we will have permanent increase in SG&A, and it's early to tell because, obviously, we will turn down some legacy systems that will have some benefits in terms of cost. So I honestly would expect that there's no big issue in terms of the structural SG&A going forward, but we need to do some deep work on those implementations.
That's encouraging news. And then just 1 second question, a clarification on -- you mentioned that 75% of your stores were reopened and if you could just repeat the 40% and 25%, what was that exactly? Is that how much sales are down or is that sales?
So let's say that on average, we are selling about 40% of what we did on a weekly basis of what we did last year. Now, obviously, there are some encouraging signs that this 40% is moving upward. I can say that we have seen an improvement on a weekly basis, except 2 weeks ago, where we had very bad weather where it was cold, it was rain, et cetera. So we are doing approximately 40%, and in the coffee shops, we're doing about 25%.
Our next question comes from Felipe Ucros from Scotiabank.
So I just wanted to ask a quick question on Wholly Guacamole. Since COVID came around, we haven't talked too much about it. But towards the end of last year, you were facing a little more competition on the retail front with products that were not necessarily organic. So you were exploring the possibility of relaunch -- not exploring the pos -- you're actually doing it, relaunching with new packaging that underline the good characteristics of your product to be able to better compete. I was wondering how that has come along and how you guys have been doing against those competing products?
Sure, Felipe. I think that we were very slow -- we had a very slow reaction at the beginning, but in the last 4 weeks, we have seen encouraging signs in terms of SOM about the new packaging. And obviously, the organic is doing very good because we also have an organic product. So trends are looking very good. We started a little bit slow with the lockdown, but now we are on a better trend, and we think that will continue in terms of Wholly in retail.
Okay. That's very clear. And then maybe I was hoping you could give us an idea. You finished selling all of your tuna vessels. And I imagine that getting rid of capital-intensive sites of the business will improve the ROIC. Do you have any idea of what kind of improvements you're expecting on ROIC due to this?
We are doing -- well, definitely, the return on our CapEx is going to be different. But the impact on our P&L is going to be limited because we are not exiting. We are exiting the assets okay. But we are still going to sell our Herdez tuna because we have a very good product there. So in front on the P&L, the benefit on next year's sales is going to be limited at half of the category. So probably about 2% of sales. Now there's definitely going to be a better mix in terms of sales because of the low margin. And we will direct our CapEx on more accreting returns. But today, it's a little bit too early to tell about what will be the return on our invested capital.
Okay. Great. And then the last one I wanted to ask was on debt. It seems you have 3 years where you're going to have a significant amount of maturities coming due. So I wanted to ask you where you guys are on the process of reprofiling this and pushing it out?
Well, we're going to start a road show next week.
Okay. That answers the question.
Yes. That answers the question. So we are aiming to increase our debt profile about 50% in terms of years. And going from -- both from variable to fixed from half and half to 70/30. And we are -- we are hopefully guessing that we're going to be successful on this filing.
And surely, you will get better rates. So yes, great move on that.
Thank you.
[Operator Instructions] The next question comes from Álvaro García from BTG.
My question is on retail again. I was wondering if you think that structurally, a lot of things will change, obviously. Because of COVID, retail is certainly in the eye of the storm. So I'm curious if -- in a post COVID world, if you are sort of reimagining or rethinking your focus on retail or your presence in retail? And whether you might either scale back your projects or look at less M&A candidates as a function of this?
Okay. Thank you, Álvaro. Good question. So definitely, COVID is -- I mean, now we talk about pre COVID and post COVID. So we believe there's going to be definitely some changes in the habits on everything, I think, but mostly on retail. First, our sanitation protocols. So COVID, what brought to companies is higher SG&A in order to keep us safe, employees and clients, first of all. So what you have seen on our expenses, I think we're going to have like -- this is a start, and we can expect to have this structurally. Second, I think that there's going to be definitely an impact on traffic. And if we only imagine that part of the work at home or the home office is here to stay. Well, some part of the traffic is gone. So we need to figure out how are we going to get our customers. Our products, not back to the stores, our products, and we're working on that. It's a little bit difficult because of the natural state of the product, talking about frozen.
So the question would be not if there's going to be a post COVID impact. The question definitely is how much. And I think that people talking about landlords and talking about all the people involved in retail have not imagined or they have not dimensioned the size of this. So this will change, obviously, our economics. So as I mentioned in the prepared remarks, if we don't have the right economics, we will not double think about closing down stores because that's an ongoing practice that we do. So if we had stores that were not making enough money to meet our thresholds and return of investment capital, they are gone, for sure now.
We view our retail business as part of a brand strategy. And I think that's the most important part of our business. We buy brands that have growing value. We buy brands that are relevant to the consumer, whatever channel they are. So our strategy of omnichannel is very important. Today, we see Nutrisa in supermarkets, we see it in convenience stores. We're working on the most newly acquired brand to have some products in clubs by year-end, for example. So if we don't view that as a strategy to have and experience at the retail and to have the product available through digital platforms, probably e-commerce, probably convenient, et cetera, we're making a mistake on our strategy.
So I wouldn't step back on the M&A front, if the target is a valuable brand, definitely. And I think that all the protocols at the store are going to change. And I think that eventually, that should be -- that will lead us to more pricing than we envision. I think that pricing with this recession is out of the question. But in the long term, should be something that we should consider.
Now on the other hand, there's also a lot of opportunity because retail is suffering right now. And we are seeing a lot of well-known brands closing down. So on the other hand, we will probably find better spots with better terms to grow our brands. So we have like a mixed bag, but we see a lot of opportunity there. And so far, we have a list of 10 to 20 stores that are on the line as of today. But again, if we don't find right economics, we will not hesitate to downsize our retail number outlets.
This concludes the question-and-answer session. I would like to turn the conference back over to Gerardo Canavati for any closing remarks.
Thank you, [indiscernible]. Thank you for your participation on the call today. We look forward to speaking with you again next quarter, and please do not hesitate to contact us in the interim. Have a good day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.