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Good morning, everyone, and welcome to Grupo Herdez' Third Quarter 2019 Results Conference Call.
Before we begin, I would like to remind you that this call is being recorded and that 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, CFO and CEO of the Frozen division. Please go ahead, sir.
Thank you, Savi. Good morning, everyone. Thank you for joining us on today's call.
In a lackluster economic environment, we managed to grow our top line for the quarter at a 7% rate, surpassing industry dynamics. This growth was based on pricing. Our sales mix helped the gross margin expansion, and despite extraordinary expenses, we gained 60 basis points at the EBIT level.
As usual, I will now turn the call over to Andrea to discuss quarterly results, and we will take your questions at the end. Andrea?
Thank you, Gerardo. Good morning, everyone. Year-on-year, net sales increased 7% during the quarter and almost 9% year-to-date. Growth resulted from the combined effect of price increases that we gradually implemented over the past 12 months, and to a lesser extent, volume growth across all segments.
Net sales in the Preserves segment were MXN 4.3 billion, which was 6% higher than in the third quarter of last year. Over the 9 months of the year, however, growth was even better at 9%. Net sales in the Frozen segment increased by 5% during the quarter and 8% for the first 9 months. Net sales growth was negatively impacted by a rainy season in several parts of the country and more importantly due to less promotions. However, at Nutrisa, this was offset to some extent by higher average ticket.
In Exports, net sales increased 23% in the quarter and 6% for the first 9 months. The driver behind these was a double-digit increase in sales to MegaMex, especially in homestyle salsa and mole categories.
Consolidated gross margin in the quarter was 39.6%, which is 1 percentage point higher than in the third quarter of 2018. For the first 9 months, the margin dropped almost 1 percentage point to 38.6%. This contraction can be explained by the higher sales of tuna recorded in the second quarter.
As part of the consolidated gross margin mix, Preserves increased 0.7% in the quarter and contracted 1.5% -- 1.4% for the first 9 months. In Frozen, it expanded by 3.2% in the quarter and more than 1% for the first 9 months. While in Exports, it increased 4.2% for the quarter and almost flat for the accumulated figure.
Consolidated SG&A in the quarter was 26.8% of net sales, resulting in a slight increase of 0.6% over the same period in 2018. This can be explained by higher freight costs in Mexico and investment in transport and freezers for replacement in the Frozen division.
EBIT during the quarter was MXN 750 million, 11.6% higher than last year. In the accumulated figure, it was MXN 2.1 billion with a margin 0.8% lower than in 2018, resulting in 12.9%. As a one-off, we recognized MXN 38 million in other income as a net of the sale of one tuna vessel and a provision of accounts receivable on the review for Frozen.
Excluding other income and the effect of IFRS 16, EBIT for the quarter would have been stable when compared to the same period of last year, up 13.4%.
In the third quarter, our participation or the equity investment in associated companies was MXN 98 million, which continues to be considerably lower than in 2018. For the first 9 months, the drop was 27%. These results are due mainly to higher avocado prices that deteriorated MegaMex' growth margin. In this sense, it is important to remember that in the third quarter of last year, we also recorded extraordinary profits for MegaMex. So we are comparing with a very tough base. Consolidated net income in the quarter was MXN 461 million, which was almost 10% lower than the previous year. For the first 9 months, the drop was 6.7% to MXN 1.5 billion. Consolidated net margin, however, was 8.3% and 9.4% for the quarter and year-to-date. These are losses of 1.5% and 1.6% from the previous year. We again attribute these contractions to MegaMex' performance.
As of September 30, consolidated cash was MXN 2.1 billion and is basically flat when compared to the end of last year. Our cash generation remained strong, since -- despite MXN 647 million in share buybacks since last December, we kept our cash balance stable. Our leverage ratios improved quarter-to-quarter, since our net debt-to-EBITDA ratio decreased from 1.5 to 1.2x. At the end of September, we have MXN 6.6 billion in debt with an average life of 4.4 years and an average cost of 8.5%.
With that, I will now turn the call over to Gerardo.
Thank you, Andrea. For the Frozen segment, what we did was favor profitability rather than growth. We are shifting our portfolio towards more value-added products driven by innovation. As well, due to its nature and complexity, after the extraordinary provision that we recorded this quarter, we have strengthened internal controls that also have slowed down our growth.
In the case of Nutrisa, we reduced promotional activity, which together with lower SG&A helped us double the EBIT margin when compared to the same quarter of last year. Looking forward to this segment, innovation will continue to drive our top line performance. As well, we will continue to focus on expanding our brand presence and operational efficiencies.
As discussed last quarter, we are pleased with the results of the coffee shops opened so far, and we will continue the opening of stores in third quarter. The dynamics of this segment are very interesting.
Under the macroeconomic situation of our country, we expect consumer dynamics to stay in the same tenor and do not foresee any risk for hitting our guidance for this year. On a positive note, the environment opens the door to several inorganic opportunities that we are analyzing carefully to assure that our strategic path strengthens.
Looking beyond 2019. We are not expecting significant changes in the consumption environment, and thus, our top line growth should remain pretty stable. As always, we will share our guidance for 2020 in our call on February.
Having said that, we now open the call to your questions. Please go ahead, Savi.
[Operator Instructions] Our first question comes from Felipe Ucros with Scotiabank.
So I want to focus on a couple of things. One is on MegaMex and the other one may be on the one-timers that you have. So the first one has to do with the competition in the prepared guacamole category at MegaMex, which you've mentioned in previous calls has been increasing a little, and to a certain degree, they are competing within fewer products. And then -- and you're exploring or implementing a process of rebranding with marketing that emphasizes more adequately of the health benefits of your product versus the competition. So I wanted to ask you how that process is going and how the competitive environment is progressing around that. And then maybe I can do the other follow-up.
Good morning, Felipe. Sure. As we mentioned in the previous quarters, there has been a very tough competitive environment in retail, only in retail at the guacamole category. So a lot of our clients have entered the space through private label, and pricing also has been very challenging. So what we did is we already made the rollout of our new packaging. So we shifted from bowls to clear cups with a new image, and that's going very smoothly. We are in the process of launching another brand in that space for the deli segment of retail.
As you know, in -- our retailers in the United States have 2 places where we have our product, and we compete in both. One is fresh produce and the other one is in deli. So we're launching the product for the deli segment. And so far, this has been in the last weeks and we are pleased to see that our WHOLLY GUACAMOLE market share has increased in the last 4 weeks. So I think that our actions are in the right track, and we expect to continue to regain market share going forward.
Okay. That's very clear. And then the other one I wanted to ask you was around the one-timers. In the quarter, you had the sale of the tuna vessel, but you also had the receivables issue in Frozen. So I was wondering if you could tell us what the EBIT margin would have been without those, like an adjusted EBIT margin, if you will? And also, if you could delve a little deeper into the receivables, the receivables provision section of those one-offs, if you could give us some more details around what happened and what we can expect going forward?
Okay. So we have 3 one-timers. The first one is in -- is not in the other expenses, it's more in the SG&A that would be related to freight. So we changed the way -- we are booking our freights to be very conservative. So now we are seeing -- to put it in a gross way, we are booking approximately 13 months instead of 12 months. So this would be a one-timer that will not be recurring for the next -- for the following years. So that's placed in the SG&A. Second, you have the tuna vessel that is recorded in the other income. And third, we made a provision for bad receivables that we are studying right now, it's a one-timer. And what did this is we're strengthening our internal controls, so that obviously slowed our growth in some segments that are very complex, including DSD, including street sales. So that's also a reason why our growth has slowed a bit compared to what we've been doing. So we'd rather favor some solid sales without any risk of having uncollectibles.
As you know, with the -- with our accounting, we are -- we followed the rules. And when you see a probable uncollect item, you book it. So when we have a probable expense, we record it as simple as the accounting dictates. So that's behind those issues. We feel a little bit comfortable with the changes that we're doing in internal controls, and we don't expect this magnitude going forward. This would represent approximately 3% of year-to-date sales. If we do it annually, it would be about 2%, 2.5%.
If you compare -- for example, if you take out the fleet expense, the extraordinary one, in the Preserves segment, that represents around 1 point of the EBIT margin. So it would have been much, much better than last year.
And the Frozen?
And in the case of Frozen, the margin would have been 9% instead of 2%. So that will also be better than or -- well, at least, 1 percentage point better than last year.
[Operator Instructions] Our next question comes from Álvaro García with BTG.
Two questions from my end. One, on the cost environment looking into 2020, we've seen a much stronger peso, and I was just wondering how you think of that heading into 2020. How much of a tailwind do you think that can be, considering there is a decent portion of your cost that are in dollars? And maybe some comments on soybean oil, specifically in the 2020 as well? That would be my first question. I'll stop there, and take that one first.
I'm going to hand over to Andrea.
We are building the budget with an exchange rate of 20.05. So definitely, we are expecting, and at least it will remain more stable than what we have seen in the past. We haven't taken long-term position in terms of our coverage because precisely it has been more stable than what we expected at least when 2019 was starting. And that will leave some relief for our margin. However, as Gerardo mentioned, we are still building the budget on the details. And the only thing that we have pretty clear is that sales will remain growing at these rates, and it will be very tough to grow even higher than that. So probably keeping a sales growth between probably 5%, 7% is something that seems reasonable.
In terms of margins, obviously, all the extraordinaries that we are reporting this year will make it -- or will give some buffer for next year. But on the organic operation, we think that at least it will be easier or more reasonable to expect that our gross margins will continue to expand, something that we haven't seen in the last years because of the deterioration or the depreciation of the peso.
And in the SG&A, Álvaro, you can see -- you will see some -- also some margin expansion because even though we have one-timers this year, we're going to have some more expenses for next year. But overall, SG&A will be lower. So we don't expect to see the one-timers 100% [ built in ], in our next year or the benefit. And we are also seeing some pricing action probably same as this year, and volume would be between flattish and low single digit.
That's clear. And then my second question, and thanks for that, that was very comprehensive. My second question is going back to MegaMex, we've seen this in the past, right? We've seen this sort of level of profitability in the past. The one thing that I noticed that was different was sort of the level of sales. At least your sales growth in dollar terms is low single digit. And I appreciate the comments that you've been gaining sharing over the last couple of weeks. But with the quarter specifically, would you say that -- were you a little bit more aggressive on pricing in guacamole, specifically? Or did you see steep volume decline? I trust that the salsa category is probably still performing well. I just was wondering if you could share a little bit more color on guacamole specifically.
No. I think those were the dynamics that we have seen, and no -- there was no specific or significant pricing. What you see in terms of profitability, as you mentioned, is that 2018 was an outlier, the whole year. If we compare our numbers, last year, we grew -- we doubled the equity from MegaMex. So we made MXN 72 million in the third quarter of 2017. So if we take out '18, we grew 30% versus '17. So honestly, we are unphased about what's going on in MegaMex and with the avocado. We are more encouraged about gaining share through our innovation than in pricing. And in the quarter, we started operations in our Colombia facility, and that will help to mitigate the volatility of avocado going forward. It's not that big, but some of our actions are going to help to smooth this volatility.
Our next question comes from Felipe Ucros with Scotiabank.
Sorry, it looks like there's nobody else on the queue. So I wanted to see if I could ask another follow-on, which has to do with the coffee shops that you announced last quarter. So I was hoping to see if you could give us a little more color about how that effort is going. And also I wanted to clarify something. I was talking to an investor and somebody had the impression that the move with the espressos were actually separate stores and now selling them that I understood that it was within the ice cream shops. So I wanted to see if you could clarify a little bit that? And then if it is within the stores, how do you at some point explore the possibility of doing actual standalone coffee shops?
Can you repeat the question that the investor told you, please?
Yes. An investor that I talked to had the impression that the coffee shops were standalone, that they were separate from the actual ice cream shops. The way I understood it, it was within the ice cream shops. But maybe you can clarify that.
Your investor or our investor is right. It's a standalone because what we did in one store is that we shared the space of the ice cream shop, but there are 2 separate shops. So there's very little overlap in our Nutrisa footprint to utilize the same space to build another store in the same space. That happened in Samara that's in Santa Fe. But probably we can have 5 of those. We don't -- there is no marketing rationale to put some coffee in an ice cream shop where for the last 40 years, Nutrisa has been ice cream. And that is a strategy that we analyzed and we don't want to follow. That's why the Lavazza stores and all the coffee shops going forward would be standalones under the same corporate structure, but they are standalones. That is correct.
And I imagine part of this strategy with basis that it would be very countercyclical versus the source, right?
Of course, that's the main strategic fit to smooth our seasonality on ice cream. Obviously, right now, we have very few stores, but we like the dynamics going forward.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Gerardo Canavati for any closing remarks.
Thank you, Savi. Thank you for your participation in the call. 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.