Grupo Herdez SAB de CV

BMV:HERDEZ

Q2-2025 Earnings Call

[Operator]

Good afternoon, everyone. My name is [ Lunov ] and I will be your conference operator. Welcome to Grupo Herdez Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that 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 Canavati, Chief Financial and Information Officer.

[Gerardo Miguel, executive]

Thank you, [ Lunov ]. Good morning, everyone. And thank you for joining us today to discuss Grupo Herdez second quarter and first half 2025 results. In a tougher consumer environment, coupled with difficult comps, we managed to grow market share in 2/3 of our portfolio. Traditionally, the start of a new federal government in Mexico is slow together with geopolitical uncertainties, keeps investments in the sidelines in the general business and consumption environment weak.

Particularly during the second quarter, we saw major clients reduce inventory significantly. And despite being a one-off, sales performance was weaker than expected having a significant impact on our working capital. We do not put much attention on quarterly results based on external short-term adjustments, difficult comps and seasonality. Lately, our quarterly results have been volatile. We rather focus on the long-term trend that looks stable. Thank you. I will now turn the call over to Andrea for a detailed review of our financial and operational performance. Andrea?

[Andrea Casillas, executive]

Thank you, Gerardo. In the second quarter of 2025, Grupo Herdez net sales increased 4.4% year-over-year, reaching MXN 9.7 billion. For the first half of the year, sales grew almost 7% to MXN 19.4 billion. The Preserves segment was a key growth driver, increasing 4.7% in the quarter and 7.5% for the first 6 months of the year, reaching MXN 7.4 billion and MXN 15.1 billion, respectively. This momentum reflects the success of our promotional strategies which delivered strong results in the mayonnaise and spices categories and allowed us to gain market share in vegetables.

The export segment grew 12% for the quarter and almost 10% year-to-date, volume being the main driver. These results reflect continued expansion efforts, including the transition to a new distribution partner in Canada, the launch of Barilla in El Salvador and the growing demand for Herdez salsas in Europe and Latin America. On the other hand, the Impulse segment faced challenges with sales declining 0.6% in the quarter, primarily due to heavy rainfall in June that affected Helados Nestlé performance. This was partially offset by an increase in average ticket driven by effective commercial strategies that sustained value without relying on price increases for the retail segment.

Year-to-date, Impulse sales grew 1.7%, reaching MXN 2.8 billion. Moving to profitability. Consolidated gross margin for the quarter was 39.6%, a contraction of 0.8 percentage points, mainly due to higher raw material costs in Preserves and Impulse, particularly for [ egg yolk ] coffee and certain packaging inputs. Year-to-date, the gross margin improved 0.3 percentage points to 40.2%. The export segment gross margin was 17.9% an increase of almost 7 percentage points, driven by cost efficiencies in Chunky salsa. Consolidated SG&A as a percentage of net sales reached 27% in the quarter and 26.6% for the first 6 months, higher than last year's mainly explained by increased promotions aimed at stimulating demand, especially in the Impulse segment.

In this segment, expenses alone increased by MXN 77 million year-to-date, mainly coming from Helados Nestlé. Consolidated operating income for the quarter totaled MXN 1.3 billion, down 1.1% with an operating margin of 13.1%. Consolidated EBITDA for the quarter reached MXN 1.6 billion, with a margin of 16.2%. The slight decline is largely attributed to the Impulse segment, which posted an operating loss of MXN 34 million. Despite these short-term pressures, our year-to-date performance remains solid. Operating profits grew 7.8% to MXN 2.8 billion, with margins stable at 14.1%. EBITDA rose almost 6% to MXN 3.3 billion with a stable margin, too.

Turning to our equity investments. Contribution from associated companies delivered strong results, reaching MXN 149 million this quarter, a 47.4% year-over-year increase. Cumulatively, this contribution grew MXN 356 million, almost 60% up from last year's challenging performance. These results were driven by MegaMex, which posted sales of MXN 4.6 million, up 21% quarter-over-quarter and 7% in dollar terms. Within MegaMex, Wholly Guacamole saw a 10% volume recovery, driven by seasonal demand during football season in the first quarter and the Cinco de Mayo festivities in the second quarter. Furthermore, in December, Don Miguel successfully expanded its mini taco distribution to Sam's Club in Canada, contributing to a 4.9% increase year-to-date volume which climbed to MXN 8.8 billion compared to 2024, strengthening performance in convenience stores and price clubs. The gross margin at MegaMex for the quarter was 26.4% down 70 basis points compared to last year, reflecting continued pressure from avocado prices, which rose 4.6% in the first half of the year compared to last year.

Encouragingly, we began to see a downward trend in avocado prices in June, which we expect will continue in the coming months. Finally, returning to the consolidated net income, it increased 23.6% to MXN 269 million in the quarter, and 46.1% year-to-date to reach MXN 681 billion. This improvement was driven by a reduction in our comprehensive financing costs as well as the increased contribution from MegaMex particularly. Our financial position remains solid. Cash on hand totaled MXN 2.6 billion in June down 31% compared to the previous quarter, mainly due to the strategic buildup of inventories explained in the press release and the extraordinary dividend paid in May. Our net debt-to-EBITDA ratio stood at 1.2x. I will now turn the call over to Gerardo for additional remarks.

[Gerardo Miguel, executive]

Thank you, Andrea. Despite the current environment, we expect a more upbeat second half of the year. Regarding our guidance, we still see sales growing in line. In preserves, we see sales growing in high single digits. We're lowering impulse due to our second quarter. We're going to grow in the low double-digit range. Exports will be down due to softness in 2 of our major categories and the exchange rate effect, while EBIT will grow in the low single -- in the high single digit. Regarding Impulse, retail, particularly, we are expecting to increase our EBIT margin as we rein in SG&A ramp up our stores and we're focusing more on same-store sales due to improved offerings.

In terms of EBITDA, we are expecting Preserves to grow in the single-digit range. Impulse will increase north of 40%, and export will increase in the mid-single digits. We are expecting income from MegaMex to grow in the low 40s. And lastly, net consolidated income will grow in the mid-double digits and majority net income north of 30%. Regarding CapEx, we are going to be in our guided range in the middle of the range, about MXN 1,600 million. Talking about other topics of the company in this quarter, we successfully implemented ERP in one of our smallest subsidiary, where we have 3/4 of our operating processes. We are preparing a full rollout for the first quarter of 2026.

Also, we are still expecting to concluding the separation of Grupo Nutrisa before the end of this quarter. And after that, we can now turn the call back over to your questions.

[Operator]

Thank you. We will now conduct a Q&A session. [Operator Instructions] Our first question comes from the line of [indiscernible]. Please state your company name and ask your question.

[Unknown Analyst]

I'm from [indiscernible]. I have 3 questions. The first one is, given volumes rose this quarter, how are you thinking about the balance between pricing and volume for the second half of 2025.

[Gerardo Miguel, executive]

Is going to be half and half. So volume, we are expecting for the second half that will be in the low single digits, and the rest will come from pricing.

[Unknown Analyst]

Perfect. Can I go on with my second question.

[Gerardo Miguel, executive]

Sure, Maria.

[Unknown Analyst]

With recent tariffs and trade tensions, how will you manage avocado price volatility in the second half?

[Gerardo Miguel, executive]

Well, that's a really important question. As long as we are -- all our products that we export to the U.S. are in the current trade agreement. As long as we are going to -- our products are there, we are not subject to tariffs. But obviously, that can change going forward. And if by any reason that changes, we are prepared to increasing prices, passing some of these effects. And the other one absorbing in the short term, some of those pressures. So far, we haven't been in the need of moving our pricing strategy.

[Unknown Analyst]

And my last question is free cash flow turned negative this quarter. Was the inventory build mainly precautionary or tied to promotional strategies and should we expect a reversal and normalization in the third quarter?

[Gerardo Miguel, executive]

Well, I think it's a combination of a few things. It's a combination of our -- the lower sales that we were not agile enough to adjust our inventory. But we are expecting to end the year, not the third quarter, the whole year with better working capital probably the need of working capital would be in the MXN 200 billion or MXN 300 million from a year. That fourth quarter is our best quarter. So there's a seasonality that's going to draw down inventory.

[Operator]

[Operator Instructions] We will now pass for further questions. Our next question comes from the telephone line ending in 6863, please state your full name and company name before asking your question. [Operator Instructions]

[Felipe Ucros Nunez, analyst]

All right. Can you guys hear me. Sorry about that. It's Felipe from Scotiabank. Thanks for the space for questions. Really a quick one, Gerardo, on what your views are on the consumer in Mexico. It seems that there's a few reports this quarter with some companies typically things that are engaged in liquids or in coal distribution like your case in some of the Impulse brands? And also traffic where weather was a very important factor. We've heard that from a number of companies. But it has also seen that things that are not very reliant on weather at a very okay performance. Would that be your -- still your assessment? I mean, implying from your numbers, that's the case, but I just wanted to hear your thoughts on a more -- on the less objectives side and more the subjective side of things of what you're seeing on the ground?

[Gerardo Miguel, executive]

Thank you, Felipe. So well, when you think about weather, well, we got hit in our ice cream business, both. So we saw traffic in DSD going down. And I think that in convenience across the board was the same issue. So there was definitely lower traffic on our street clients on the mom and pops, convenience, et cetera. There is also very -- a lot of segmentation across the country. So we also, in some part of the countries, we saw some shifts from mom and pops to modern retail. Obviously, that doesn't affect the whole number of consumption, but there are some trends that can emerge from that.

Secondly, when we see our total volume was flat, we grew 1% in volume in the quarter. I can say that there are some categories that have special situations, seasonality like tomato purée where the fresh tomato prices are very low. We had a great crop last year plus the higher supply from exporters competes directly with our tomato purée. So that category is lower, specifically for this issue. But in general terms, I think that consumption, we believe, as a company, that consumption is soft across the board. And comps is very important Felipe because last year, in second quarter of last year, we grew 5% in volume. And obviously, there was another environment over the elections where typically, there's a lot of money in the streets. So I wouldn't make a case on second quarter because of comps. What we really think is that we're going to start growing again, probably tomato purée will take a while until all this excess supply drives but we are confident that consumption will pick up starting in the late third quarter.

[Felipe Ucros Nunez, analyst]

Well, that's very clear and very helpful guys. I think that will do for my questions. Congrats on the performance.

[Gerardo Miguel, executive]

Okay. Thank you Felipe.

[Operator]

[Operator Instructions] We have not received any further questions at this point. So that concludes our question-and-answer session. I would like to hand the call back over to Gerardo for his closing remarks.

[Gerardo Miguel, executive]

This earnings conference call. If you have any questions or comments, don't hesitate to contact us, and we'll see you in the next call. Thank you, Lunov.

[Operator]

Thank you. You may now disconnect.