Management’s Discussion & Analysis of Results
All audited figures contained in this report are expressed in millions of Mexican pesos and prepared in accordance with International Financial Reporting Standards (IFRS).
OVERVIEW OF PERFORMANCE IN THE YEAR
Grupo Herdez overcame a number of challenges in 2014 to outpace the industry’s performance in sales and EBIT. The following factors notably influenced the Company’s operating and financial results during the year:
- In Mexico, investments in commercial strategies helped boost volume growth, particularly in the second half of the year, which offset a slower than expected pace of economic recovery.
- In the United States, MegaMex experienced a significant increase in the price of avocado, along with a very challenging competitive environment in the Mexican food category.
- At Nutrisa, as part of the integration process to the Group, we performed a comprehensive streamlining of the portfolio, which resulted in the elimination of SKU‘s, closing underper forming stores and reorganizing the management team.
NET SALES
Net sales totaled Ps. 14,319 in 2014, an 8.6% increase from the 2013 figure. In Mexico core, net sales grew 5.5% to Ps. 12,197 due to the Company’s initiatives to drive volume growth, particularly in the second half of the year; while exports grew 13.9%. At Nutrisa, sales on a comparable (12 months) basis declined 5.3% because of the portfolio rationalization that started in the second quarter of the year and sluggish traffic resulting from the weakness in the consumption environment.
GROSS PROFIT
Gross margin in 2014 was 39.0%, 3.8 percentage points higher than 2013. This expansion is primarily the result of: i) lower prices for key raw materials such as soybean oil and wheat; ii) a better sales mix, particularly at Mexico core and Nutrisa; and iii) the positive effect of the Company’s hedging strategy that limited the impact of a stronger US dollar towards the end of the year.
OPERATING EXPENSES
Operating expenses as a percentage of net sales were 23.8%, compared to 22.1% in 2013. This increase is explained by: i) low absorption of fixed expenses at Nutrisa as a result of the decline in sales; ii) extraordinary expenses of Ps. 33 at Nutrisa related to the restructuring; and iii) higher distribution expenses in Mexico core due to fuel cost inflation.
EARNINGS BEFORE INTEREST, TAXES, OTHER INCOME & EXPENSES (EBIT Before Other Income and Expenses)
EBIT Before Other Expenses rose 26.3% to Ps. 2,177, while the margin expanded 2.1 percentage points to 15.2%. This performance is attributable to gross margin expansion at Mexico core, which more than offset weak operating performance at Nutrisa.
OTHER INCOME & EXPENSES
The Company registered Ps. 65 of other net expenses in the year. These resulted mainly from the consolidation of manufacturing facilities in Sinaloa, Mexico, and to a lesser extent, one-time charges at Nutrisa related to the closing of certain stores that were not reaching operating and/or profitability metrics.
EBIT (Earnings Before Interest and Taxes)
EBIT totaled Ps. 2,113, a 20.2% increase when compared to 2013; while the margin expanded 1.5 percentage points to 14.8%. This expansion is explained by a strong performance at Mexico core, which more than offset the aforementioned extraordinary expenses and weak performance at Nutrisa.
COMPREHENSIVE FINANCIAL RESULT
The Company registered a net financing cost of Ps. 258 in 2014, almost unchanged from 2013, with an exchange gain of Ps. 120 originated from intercompany transactions offsetting a higher interest expense.
EQUITY INVESTMENT IN ASSOCIATES
Equity investment in associates primarily comprised of the 50% of MegaMex pre-tax income, totaled Ps. 414 in 2014, compared to Ps. 186 in 2013. This increase is explained by the earn-out registered at MegaMex in the previous year. Excluding the extraordinary effect, equity investment in associates would have declined 6.2% year on year due to extraordinary charges at Don Miguel and higher prices of avocado that affected the profitability of the guacamole category.
CONSOLIDATED NET INCOME
Consolidated net income rose 31.1% to Ps. 1,504, while the margin rose 1.8 percentage points to 10.5%, mainly as a result of solid top line growth, gross margin expansion and the increase in the equity investment in associates.
Majority net income totaled Ps. 771, with an expansion of 0.8 percentage points in the margin to 5.4%.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATION (EBITDA)
EBITDA totaled Ps. 2,415, while the margin was 16.9%, 1.3 percentage points higher than in 2013. This reflected strong top line and operating performance at Mexico core, which more than offset extraordinary expenses derived from the consolidation of the plants in Mexico and one-time charges at Nutrisa.
CAPITAL EXPENDITURES (CAPEX)
Net CAPEX in the year totaled Ps. 574, with the majority of funds allocated to the consolidation of production capacity in Sinaloa, Mexico, as well as to the opening of 53 Nutrisa stores.
FINANCIAL STRUCTURE
At December 31, 2014, the Company’s cash and equivalents totaled Ps. 2,451. Consolidated debt totaled Ps. 5,800, which included Ps. 1 billion of local bonds issued in November 2014 and used for refinancing debt due at the beginning of 2015.
Leverage ratios remain solid at 1.4x net debt to consolidated EBITDA and 0.4x net debt to stockholder’s equity, reflecting a strong cash flow generation throughout the year.
CASH FLOW
Cash flow from operations totaled Ps. 1,970 mainly due to the 31.1% increase in net income; while net investment resources amounted to Ps. 479. As a result, free cash flow for 2014 was Ps. 1,491.
