Management’s Discussion and Analysis

Management’s Discussion and Analysis

The purpose of the following Management’s Discussion and Analysis of Results is to help the reader understand the operations and results of Grupo Herdez.

We are leaders in the processed food industry and an important player in the ice cream category in Mexico, in addition to being the fastest growing company in the Mexican food industry in the United States, through MegaMex. The management of the business is divided into three segments:  Preserves, Frozen and Exports. The results of MegaMex, the association with Hormel in the United States, are recorded in the Equity Investments in Associated Companies in the Income Statement..

The main growth opportunities for all segments of the Company are increasing household penetration, gaining market share, reducing distribution gaps, innovation based on consumer understanding and market segmentation, and increasing traffic in our stores.

As of January 1, 2019, in accordance with International Financial Reporting Standard 16 – Leases, which establishes the principles for recognition, measurement, presentation and disclosure of leases to be now revealed as right-of-use assets, and lease liabilities and, after January 1, 2019, changes in depreciation and financial cost, the financial statements include changes related to the accounting reporting of such items.

In 2020, the consolidated net sales reached a record figure of $24.0 billion, 7.2% higher than the previous year, mainly due to higher volumes as a result of at-home consumption caused by the pandemic.

Net sales in the Preserves segment grew 10.6% to $19.4 billion due to greater at-home consumption caused by the pandemic. During the year, 43% of the portfolio showed double-digit increases. Price club, supermarkets, and wholesale channels exceeded the average growth of the portfolio.

Net sales of the Frozen segment were $2.6 billion, $19.2% lower than in 2019, due to the mobility restrictions that impacted the Cielito Querido Café, Lavazza, Moyo, and Nutrisa stores, as well as lower dynamism of the DSD channel. The aforementioned was partially offset by the good performance of Helados Nestlé in supermarkets and price club channels.

Exports sales reached $2.0 billion, 23.0% higher than in 2019, due to the additional demand generated by at-home consumption in the United States, as well as the revaluation of the US Dollar against the Mexican Peso.

At the end of the year, Preserves represented 81%, Frozen 11% and Exports 8% of total net sales.

Consolidated gross margin in the year was 37.4%, a reduction of 1.1 percentage points compared to the previous year, mainly due to the additional costs derived from the implementation of the new labeling regulation. In the Preserves segment,  margin expanded 0.4 percentage points to 36.5% as a result of the increase in sales volume caused by the pandemic.

In the Frozen segment, gross margin fell by 8.2 percentage points, to 55.9%, while in the Exports segment, gross margin increased 5.9 percentage points to 21.6%.

Consolidated SG&A remained practically in line at 25.5% as a proportion of net sales.

EBIT before other income added up to $2.5 billion, in line with the previous year, while the margin fell 0.9 percentage points to 11.8%.

During the year, the Company recorded other income of $408 million that reflect the net effect of: i) the divestment of the tuna business, and ii) an extraordinary income from the liquidation of an investment fund of Hispanic companies in the United States.

EBIT margin in the year reached 13.5%, 0.2 percentage points higher than in 2019, as a result of an increase in the Preserves margin of 3.1 percentage points derived of higher sales volume and the aforementioned extraordinary income.

Net financing cost was $670 million, 9.4% higher than in the previous year, which is mainly explained by higher interest derived from a $1.5 billion increase in debt compared to the previous year.

Equity Investments in Associated Companies was $757 million in 2020, 2.4% less than in 2019, the foregoing is explained by the result of the impact due to the pandemic in the results of the MegaMex business.

Consolidated net income increased 6.5% to $2.4 billion, while majority net income fell 18.4% to $828 million, as a result of the performance of the Frozen segment.

EBITDA for the year was $4.2 billion, 10.0% higher than the previous year, while the margin increased 0.5 percentage points to 17.5%.

Net CAPEX totaled $255 million due to the income derived from the divestment of the tuna business. Additionally, CAPEX added up to $680 million, and were mainly used for maintenance projects and plant improvements.

Cash flow reached $2.8 billion, $136 million more than in 2019, which allowed us to finance CAPEX for $680 million, fulfillment of financing commitments, pay dividends, and repurchase 31.6 million shares. Considering the last two, the total return to shareholders was 9.3%.

As of December 31, 2020, the cash position reached $3.7 billion, a growth of 59.4% with respect to 2019. Liabilities with cost at the closing of the year were $9.5 billion or $1.5 billion more than in 2019 due to the issue of Local Bonds (Certificados Bursátiles) in August for $3.5 billion with which the balances borrowed in March from the committed credit lines and Local Bonds HERDEZ 17-2 and HERDEZ 18 were settled.

At the closing of the year, the debt was 100% denominated in Mexican Pesos, while 68% was at a fixed rate, including derivative financial instruments.

Consolidated net debt to EBITDA ratio was 1.6, while the consolidated net debt to equity ratio reached 0.38.