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Equity Research
GRUPO HERDEZ, S.A.B. DE C.V.
Food & Beverages
March 11, 2015
Buy
Herdez: an attractive play in a defensive industry, at a discounted price.
Change in Recommendation
Change in T.P.
HERDEZ Medium Liquidity
Change in Estimates
Last Price:
Quarterly Review
 Other
P$ 39.58
Figures in millions of pesos
2013
Price Target 2015: P$ 45.50 Return 15%
 We are initiating coverage of Herdez, one of Mexico’s leading processed food
companies, with a BUY recommendation and a 2015 PT of MP 45.5. We regard
Herdez as an attractive mid-cap stock in a defensive industry best suited for
mid and long-term investment horizons, while timing-wise, the stock’s
underperformance for the past 12 months has generated an attractive discount
to its peers.
 Organic and acquisition-driven expansions, an easy comparison base for 2014,
and an awakening in consumer trends will aid for better performance in Herdez
throughout 2015 and beyond, making it our favorite mid-cap stock.
 Herdez’ main business is conducted through 4 JV´s on which the company
exerts operating control, allied with industry-leading international players.
Besides, there’s its 100% share of Nutrisa, its frozen yogurt division, plus a
recent addition of Nestlé’s Ice cream unit acquired just a few days ago.
 We consider Herdez’ risk profile as adequate, while financial improvement
based on internal cash flow should generate a fast recovery following its two
strategic acquisitions—Nutrisa and Nestle.
We are initiating coverage of Herdez with a BUY recommendation. We regard
Herdez as an attractive opportunity in the mid cap sector as it trades at a significant
discount to its peers, but has the potential to outperform both comparable stocks and the
domestic large-cap universe as the company rides the consumption recovery in coming
quarters and additionally harvests results from the 2013 acquisition of Nutrisa.
Furthermore, Nutrisa’s strategic value should be fully recognized by the market as
improved performance following its 2014 restructure will be heightened by the
incorporation of Nestlé’s Ice Cream unit —a transaction just finalized earlier this month.
Leading partners, leading brands, leading market shares. Though most of its
business is conducted through 4 JV’s, with this scheme Herdez has attained marketleading positions in its two key markets, Mexico and the US, along most of its product
portfolio as it leverages proven know-how, widely-known brands, and effective
production/distribution schemes. Herdez partners with Barilla for its Pasta unit, with
Hormel in processed foods, with McCormick in dressings, and with Kuo for its domestic
Herdez/Del Fuerte processed food unit. The downside to this structure is that a
significant portion of net income (usually 45%) is normally shared with its partners,
notably diluting from the operating front’s size that is apparent on a first sight.
Let´s take the consumption ride for the first half of the year...and beyond. We
anticipate positive numbers in consumption-related indicators for 2015, specially in the
first half of the year as we have already seen with Walmex and Antad’s SSS Jan/Feb
figures. Yes, much of this has to do with the low comparison base posed by a 1H14 that
was hit by fiscal changes and eroded consumer confidence, but we make the point for a
rebound in consumption that should extend afterwards and even gain further traction on
the back of better employment figures, tame inflation, advances in average wages, the
bounce in the value of dollar-linked remittances and a resurgence in consumer
confidence. All of these have already confirmed the start of a better trend, but their sideeffects on consumer spending are yet not that clear; they shall be.
Double play: the US recovery also backs a positive outlook. Herdez has consistently
shown one of the strongest sales growth rates in the industry (mid to high single digit),
but in the case of the US it has achieved double-digit rates that we expect to continue as
the appeal from Mexican food extends beyond its natural Hispanic target. With a
scenario that supports renewed spending growth among US consumers, we believe nontraditional items such as Herdez’ products will continue to gain popularity, driving their
current 8% share of revenues consistently up in coming quarters.
Placing some of the eggs on the ice-cream cone. Grupo Herdez recently concluded
the acquisition of Nestlé´s ice-cream division in Mexico. At MP 1,000 mn, this unit
strenghtens the aggressive expansion plan for frozen yogurt and ice-cream divisions at
the time significant synergies are to be had given the similar production processes.
Moreover, this unit is bringing a new twist to Herdez’ business model: a significant chain
of points of sale (Nutrisa) and a self-controlled distribution network (Nestle).
2014
2015e 2016e
Sales
EBITDA
Margin
Growth YoY
Net Profit
Margin
Growth YoY
13,180
2,050
15.6%
11.3%
608
4.6%
-23.1%
14,319
2,415
16.9%
17.8%
771
5.4%
26.9%
16,487
2,756
16.7%
14.1%
878
5.3%
13.9%
18,169
3,042
16.7%
10.3%
909
5.0%
3.5%
Total Assets
Cash
20,713
905
22,911
2,451
25,857
2,610
27,886
3,226
Total Liabilities
Debt
Equity
Majority
8,583
5,969
12,130
5,665
9,735
6,860
13,176
6,309
10,875
7,529
14,982
6,742
10,974
7,322
16,912
7,611
2.2x
14.0x
28.1x
2.0x
11.7x
22.2x
1.8x
11.0x
19.5x
1.7x
10.0x
18.8x
24.8%
6.6%
2.5x
6.3%
24.8%
6.9%
1.8x
1.0%
26.5%
6.8%
1.8x
1.5%
24.5%
6.6%
1.3x
1.6%
Multiples
EV/Sales
EV/EBITDA
P/E
ROE
ROA
Net Debt/ EBITDA
Dividend Yield
Market Data:
Mkt. Cap (mn)
17,097
Firm Value (mn
28,374
1yr. High—low
(32.52 - 40.29)
Float
25%
HERDEZ vs. IPC (March 2014 = 100)
120.
110.
100.
90.
Mar 14
May 14
Jul 14 Sep 14 Nov 14
HERDEZ
IPC
Jan 15
Carlos Hermosillo Bernal
Food, Retail, Beverages
 [email protected]
 +52 (55) 1103 6600 x 4134
José Antonio Cebeira González
Food, Retail, Beverages
 [email protected]
 +52 (55) 1103 6600 x 1394
Actinver
Corporate Headquarters
Guillermo González Camarena 1200
11th Floor, Centro Ciudad Santa Fe
México, D.F. 01210
1
Mar 15
CONTENT
3
Investment thesis…..………..…………….………………….
Positives…………………….…..…………………………………….
3
Risks…………………….…..…………………………………..
5
Valuation…………………………………………....……………...…
7
Discounted cash flow ……..……………………………………....….
7
Relative valuation………………………………………...……….….
8
Financial results…………………..……....………………………..
9
Financial projections………………………………………………
10
Industry Overview ………………………………………….............
12
Industry in Mexico…………………….………………….………..…
13
Company description……………………………….………….....
18
Management and Board of Directors…………..……….…………....
23
Shareholders structure………….…….………………...……………..
25
2
Market share in the Mexican market
Market
15%
Mole
85%
Market
28%
Mayonn
aise
72%
Market
34%
Frozen
yogurt
66%
We are initiating coverage of Herdez with a BUY rating based on a TP of MP 45.50 and an
implied potential return of 15%, plus an expected 2015 dividend yield in the range of 1.4%.
Our target is mostly derived from a DCF exercise, but also implies market ratios that would be
trading at a significant discount to those of similar global companies, while ratios that
incorporate growth expectations such as PEG show an even more advantageous position.
Likewise, profitability indicators place Herdez as one of most interesting companies in the
sector, adding to its dynamic expansion plan and flexible operations not only in Mexico’s
processed food market, but also as its US operations are set to increase their weight even
further through the expected upside of demand for Mexican food by non-Hispanics.
Additionally, the acquisition of the frozen yogurt unit in 2013 (Nutrisa) and the ice-cream
business from Nestlé a few days ago are key value drivers that we feel are not yet fully
appreciated by the market. This latest acquisition will deploy an issuance of another MP1,000
million bonds, increasing the company’s leverage temporarily. Currently before taking into
account the issuance of bonds to finance the Nestlé acquisition, net debt to EBITDA closed at
1.8x in 2014 and we are expecting to close 2015 at the same level even with the emission of
the MP 1,000 million bonds, after just 10 months of consolidation of the new assets. We
regard this as a manageable leverage and expect it to decline quickly during 2016 to 1.3x,
2017 to 0.9x and 2018 to 0.5x. Another key value driver is the US market, as Mexican food is
8th in the ranking of most consumed food by US citizens, and is expected to increase
popularity: hamburgers are the most eaten item in the USA, the mix of tacos and burritos
comes in second place, even over hot dogs.
Market Leadership. Though most of its business is conducted through 4 JV’s, with this
scheme Herdez has attained market-leading positions in its two key markets, Mexico and the
US, along most of its product portfolio as the company leverages on proven know-how, widelyknown brands, and effective production/distribution schemes. Herdez partners with Barilla for its
Pasta unit, with Hormel in processed foods, with McCormick in dressings, and with Kuo for its
domestic Herdez/Del Fuerte processed food unit.
Despite having a very tough competition in Mexico due to a vast array of regional brands,
Herdez commands a leadership position within the Mexican market based on its 14 plants, 9
distributions centers, 7 tuna vessels, 414 points of sale. The company’s products are also
present in 11 countries around the world, but only a couple production facilities are located
outside of Mexico: one production plant in USA and another in Chile, with 1 distribution center
for the US market.
Market
36%
Tomato
puree
64%
Sauces
37%
Market
63%
Pasta
27%
Market
73%
Investment thesis
As mentioned before, the company is a market leader in many of its key products/brands,
including premium products like mole sold under the Doña María brand with 85% of market
share, mayonnaise by McCormick with 72% of market share, frozen yogurt by Nutrisa with
66% of market share, tomato puree by Herdez-Del Fuerte with 64% of market share, sauces
by Herdez with 37% and pasta with the world-wide known Barilla with a 27% share. In the US
market Herdez also has a number of premium products such as guacamole by Wholly
Guacamole with 42% of market share, peppers by Chi-Chi´s with 6% of market share, sauces
with 9% of market share and frozen primary foods by HERDEZ with 5% of market share.
Portfolio diversification, acquisition power and added value strategy. With a product
portfolio comprised of 25 brands, 40 categories and 1,500 SKUs, the company has a wide
product diversification that allows it to reach out to the entire socioeconomic spectrum. As a
consequence, Herdez has the ability to capitalize from several growth possibilities, starting
with natural population growth, shifts in economic trends, new products and categories, or
entry into new markets.
Adding up to its organic model, the relatively recent Nutrisa acquisition, in 2013, provided the
company with its first hands-on point-of-sale experience —414 stores are operated currently
under the Nutrisa brand—, and while most of 2014 was spent implementing much-needed
changes in the business model such as the optimization of product variety (SKU’s were
reduced from 1,000 to 400 in a year) and even the closing of unprofitable locations, iwe
expected that the changes will start to pay off during 2015. For starters, the extraordinary
expenses that were recurrent through 2014 will not be present anymore. The main target of
3
the aggressive plan of expansion for Nutrisa is to double the number of stores by 20182019, reaching above 820 stores.
The latest incorporation of Nestlé’s Ice Cream unit brings further abilities to Herdez,
including a self-controlled distribution network that reaches over 40,000 points of sale in
the traditional retail channel, but also the possibility of merging production facilities to a
centralized production location for both Nutrisa and Nestlé’s frozen products, which would
be a more efficient method for both product lines. Besides this, the expectation is for the
company to make small but effective changes over at Nestlé too, in the end driving
synergies of sizable impact for the company in the mid term. No major
expenses/adjustments are foreseen, contrary to what was the case with Nutrisa.
Population evolution, not just growth, a first building block for Herdez. Data from
CONAPO (Mexican Agency of Population Projections), shows the population in Mexico will
grow to 150 million by 2050, implying CAGR will be 0.69% for the coming years.
Population growth is therefore not expected to be a notable volume driver for consumptionrelated companies. Nonetheless, the expected shift in the population’s economic
distribution, which should be moving up and creating a larger middle class, and changes
within the consumption patterns, moving towards urban-type ready-to-use products such
as processed food, should indeed create growing demand right within Herdez’s market.
High growth potential in fruit and vegetables. In Mexico the consumption of fruit and
vegetables has doubled its level from 2006 to 2012, reaching 235 grs per capita per day,
even though the World Health Organization (WHO) suggests people should eat per year
88 kgs of vegetables and 59 kgs of fruit, the addition gives us 408 grams per day, we are
almost halfway to reach WHO’s recommendation. Interesting data: the average Mexican
consumes per year a total of 9 kg of sauce that can come from 40 different types of
peppers and the foreign demand for sauces has increased 12% during 2013.
Organic growth programs underway. During its 4Q14 conference call the company
announced a 2015 Capex program for MP 2,000 mn, 181% greater than the last year. The
main points for this Capex are: MP 1,000 mn for the acquisition of Nestlé ice-cream
division, a new tuna vessel, a new distribution center in Los Mochis, investment in IT and
Nutrisa’s new store openings (60 stores for 2015), plus few store revamps. We would
expect a Capex reduction in the coming years, even considering that the company is
traditionally active in acquisitions and organic investments, always trying to find new
synergies as we will surely see in the ice-cream division.
Favorable perception as a healthy product. Besides the positive outlook that derives
from Mexico’s economic perspective and demographic composition, it should be stressed
that the general perception of processed foods in Mexico is notably positive in healthrelated terms, specially in basic varieties such as Herdez’s key products. Regarding
exports and the US operation, the company adjusts part of the composition in order to
reduce the spicy nature of Mexican recipes and fit within the local taste, whenever the case
calls for.
The convenience edge. Canned versions of different kinds of food can be a good
alternative for consumers if fresh produce isn't available or isn't of adequate quality. In
terms of nutritional value, canned fruits and vegetables compare well to fresh varieties,
though the ingredients, such as salt or sugar, that are often added to canned produce drive
down the nutritional value somewhat. Canned produce is still a nutritious option, however.
In practical terms, there isn't a lot of difference between the nutrition properties offered by
fresh and canned varieties, according to Kansas State University Research and Extension.
Third party distribution network. Herdez does not have its own distribution network for
its processed food business, so distribution is done through third parties that are usually
contracted on a long term basis. With the acquisition of Nestlé’s ice-cream division, the
company will have its first wholly-owned distribution network, yet its suitability will be
limited to the frozen channel (Nestlé, of course, but also usable for Nutrisa). Today the
company reaches several points of distribution including 414 points of sale operated by
Nutrisa, over 40,000 customers from Nestlé’s ice cream division, plus 8 distribution centers
in Mexico and one in U.S.A).
4
Control in most of the value chain of processed food, We regard this as one of the
key value elements of Herdez; the speed in which the company selects produce,
transforms it, packages and delivers to a final point of sale with an assured quality control
makes for an important differentiator. The most important step of vegetable and fruit
products is the timeframe that the company takes between the recollection of produce and
freezing the item before sending it to the plant, choosing which ones are subject to be sold
to the final consumer after many processes that are detailed in the process scheme
section of this report. Overall, we consider that Herdez’ control of the whole production
process —and even distribution—, when it is not necessarily done directly by the company,
is an important competitive advantage not only in terms of barriers of entry, cost control, or
quality assurance, but mostly as the means to assure the value is preserved all along the
way.
Herdez — Sales mix by channel in Mexico
Source: Herdez.
Herdez — Sales mix by channel in US
Source: Herdez.
Points of Sale. Following the acquisition of Nestlé and the restructure of Nutrisa
throughout 2014, the company has over 40,000 points just by the acquisition of Nestlé, on
top of the already mentioned 414 points of sale of Nutrisa, yet these are exclusively used
for this specific business line. We believe that the company will need a small Capex
allocated towards freezers in the coming five years in order to support the traditional
channel, assuming that it will be able to boost Nestlé’s business by increasing its presence
in the Mexican market. This would be only a small modification in the day to day practices
currently in place, and we do not believe that the company will make an extensive
modification to Nestlé’s business practices —like it did in Nutrisa—, yet we have no doubt
that Herdez will find the room to improve some things in Nestlé.
Nestlé’s ice-cream division is only the second business line with 100% ownership,
in contrast to the old structure of JV´s. However, we do not expect any further
acquisition in the short or medium term after the Nestlé acquisition has just been
completed and the company should focus on reducing debt afterwards. Herdez currently
has adequate leverage (1.8x Net Debt to EBITDA) that should remain at a similar level by
year end, by our calculations, yet in the immediate future we expect the issuance of
another MP1,000 million in bonds to pay for Nestlé’s ice-cream division might bring this
indicator to a peak of 2.3x in 2Q15. Nonetheless, we expect the company will be able to
bring down this ratio to a healthier level, below 1.3x Net debt to EBITDA, by the end of
2016.
Flexibility in sales channels adjusting to consumers preference. Herdez has a mix of
sales channels that vary depending on the country and even by region. Mexico´s sales mix
has a higher percentage of Wholesalers and Retail Chains, each with a 38% share, which
jointly make the bulk of the company’s sales. Other channels have a much smaller
participation, including Nutrisa with 8% (of course, this one is an entirely different channel
and not even the same products), clubs 9%, food services 6% and finally convenience
stores with a marginal 1%. On the other hand, we have the company’s second market in
terms of sales, the US market, that has a very different structure: retail has 62%, C-Stores
19%, clubs 13% and food services the remaining 6%.
Grupo Herdez has the size to participate in the IPC. The company has made many
considerable efforts to reach the IPC spectrum even if it is not a key target for the
administration. And although management will not implement or spend in new strategies to
reach IPC-eligibility, the size and visibility gained after the incorporation of Nestlé´s icecream division will increase such probability. Notwithstanding, there are some 5-7
companies with higher probabilities of becoming part of the IPC sample before Herdez,
and some of them do have an active strategy aimed at this goal. As a result, we regard
the probability of Herdez being selected as part of the IPC in the upcoming revision (the
sample is revised every September) as a rather low figure, and we would not count with
such a trading-volume driver as one of its value-enhancing drivers, at least for the time
being.
The negative performance of the stock during 2014 reflects several one-offs that
were recorded during the year due to adjustments made to Nutrisa (store closings,
inventory write-offs, severance, etc.). While it is expected that 4Q14 figures have included
the final adjustments from such changes, there can be no assurance that the upcoming
incorporation of Nestlé will be free of such additional expenses—even if it is expected to be
5
Sales Breakdown by the end of 2009.
Category
%
Sauces and dressings
51%
Pasta
12%
Vegetables
12%
Meat
9%
Fruit, juices and desserts
7%
Others
1%
Domestic
Foreign
91%
9%
Source: Herdez.
Estimates Sales Breakdown (2014) — before
Nestle´s acquisition.
Category
%
Sauces and dressings
49%
Fruits, juices and deserts
12%
Meat
10%
Pasta
12%
Vegetables
1%
Others
0%
Domestic
84%
Frozen yogurt (only Nutrisa)
8%
Foreign
8%
Source: Actinver´s estimates.
that way—; the market might show a wait-and-see attitude before confirming otherwise.
We must remind Nutrisa’s restructure was a significant departure from its usual way of
doing business, and included the elimination of almost 600 SKU´s from a base of 1,000
and some products that were not in line with the company’s strategic vision (makeup,
shampoo and nutritional supplements). In the process, the company had to scale back its
expansion program, the original plan was to increase Nutrisa´s business by 40 stores and
what really happened is that they closed 25 stores as these were not profitable. Now, we
believe that following these extensive adjustments the company is ready to start the
aggressive plan of expansion (double the company size in 4-5 years); coupled with nonaffected results at Nutrisa and a smooth integration of Nestlé’s ice cream unit, we believe
we are just be about to witness the start of a more consistent, operating performance.
Main risks
Low pricing power in Mexico, with minimum possibilities to change in the future. Given
that most of its clients are concentrated in the lower spectrum of the socioeconomic
pyramid (unsurprisingly, it mimics the distribution of the country), price sensibility is quite
an issue as the majority of products have a high price elasticity, meaning that a small
increase in price generates a relatively large and adverse response in volume, but not
necessarily the other way around. As such, price policy is usually determined by
movements in key raw materials that all competitors have to reflect eventually, while price
leadership is also a prime variable used to defend market share.
Sensibility to changes under economic conditions and disposable income. Even
when all of the products of the company have an outstanding reputation as healthsupporting inputs and are perceived as a high quality brand within the Mexican population,
eventual changes in consumer confidence, employment rates, salary level and other
economic-linked factors that have direct effect over household disposable income usually
have an incidence in demand. Herdez has a full range of products that fit within almost all
price levels, but even so, at the lower segments of the economic pyramid, customers not
only trade down, but also cut off completely in some of the higher added-value products.
Price volatility of raw materials, its main input. As an industry standard, Herdez’s
volume and price negotiation over raw materials is usually done with a short-term scope
(between 3 to 4 months), and dealings with crops owners are non-exclusive. The smooth
running on the supply side of its key raw material (we estimate oil is 34% of the cost
structure) is largely done on a customary basis and could be subject to disruptions in the
event of unexpected changes on crops. Changes in the price of key inputs are not easily
translated into final-consumer pricing, so unexpected shifts in the costs of some raw
materials (or many other inputs, for that matter) could have adverse effects in midterm as
the company has its complete necessity of oil covered until June 2015. Changes in the
price of its most important raw materials like wheat, tuna, aluminum, glass, tomato paste
and most importantly soybean and vegetable oil, can create an important movement in the
company´s margins as long as the volatility continues. The company uses future contracts
in a very few and select of these raw materials, and even then, the time frame usually
contemplated does not extend beyond half a year.
Regulatory changes. Some of the company’s products are subject to sanitary regulation
that could eventually change, becoming stricter and requiring further quality controls that
translate into higher costs, constitute a temporary disruption of supply, or otherwise limit
Herdez´ ability to conduct business at current levels. Also, roughly 5% of the company’s
product portfolio has been subject to a calorie-derived excise tax since the beginning of
2014, yet there is no assurance that this won’t change adversely in the future, hitting a
larger portion of Herdez´ portfolio. It has been a long time since price controls were applied
by the Mexican Government —some vegetables like tomato—, yet there is no guarantee
that price limitations could be enforced in the eventuality of eroded economics.
High competition. The most significant competition in Mexico consists of large domestic
players that have a considerable tradition in the industry, but the market has also some
international players with well-known brands. Nevertheless, most of them are small players
yet all are a direct competition. The segment in which Herdez has a bigger number of
competitors is canned food and sauces, although the typical player has a very limited
production capacity and financial backing. As such, it is only the main competitors that
6
have the size and financial backing in order to enforce price-based competition and
organize significant marketing campaigns should market conditions turn negative.
Enhanced third-party competition looking for increases in market share has also become
usual in recent years, and even some foreign players are in the market promoting typical
Mexican food.
Poor disclosure / Earnings visibility. We believe the company’s earnings visibility is
hindered by the unusually high amount of minority interest, which is a natural consequence
of its basic structure of 4 JV´s as the core business. Also, for an enterprise that sells over
1,500 SKUs under an umbrella of more than 25 brands and 40 categories, breaking down
sales in merely three segments (domestic, foreign and ice-cream) without information
about price of volume behavior seems rather insufficient. Cost structure is also
undisclosed, so keeping track of potential incidences is complicated. Likewise, installed
capacity is not disclosed quarter by quarter on the basis of a variable-output capacity due
to the factories’ flexibility, yet some indication of a range would be widely helpful.
Low trading volume. In the past year the company has made some important efforts to
increase the company’s visibility, appearing in conferences in Mexico, and even carried out
its first Investor Day. Currently we estimate that the real float of the company is close to
25%, but we believe a non-controlling shareholder could continue to sell shares in the
market and increase the float of the company— trading volume increased the 4th of July
2013 (40x), as one of the most important stakeholders sold company shares.
Valuation
We are initiating coverage of Grupo Herdez, with a BUY recommendation and target
price of MP 45.5 per share for 2015. Our price is based on a discounted cash flow
valuation which assumes a WACC of 9.2%; we are conservatively using a beta of 1.0 even
if consumer industry has an average of 0.9 because of lower trading averages. We have
already incorporated the Nestlé acquisition, which will be consolidated starting March.
HERDEZ
Discounted Cash Flow Model (2015-2019E)
Millions of Pesos
EBIT
Effective Tax rate
2015E
2016E
2017E
2018E
2019E
2020E
2,349
2,573
2,788
3,022
3,249
3,509
Perp.
3,667
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
Tax Effect On EBIT
(719)
(752)
(850)
(910)
(999)
(1,088)
(1,114)
NOPLAT
1,630
1,821
1,938
2,112
2,250
2,421
2,553
407
469
529
596
672
684
714
(232)
(222)
(192)
(207)
(199)
(209)
(217)
Depreciation
Working Capital Changes
CAPEX
FCFE
(2,018)
(797)
(898)
(1,013)
(1,142)
(1,182)
(1,219)
(213)
1,271
1,377
1,488
1,581
1,715
1,832
Perpetuity Grow th Rate
4.5%
Present Value of Explicit Period (2016-2020E)
5,684
Perpetuity Value
39,335
Present Value of Perpetuity Value
25,381
Theoretical Firm Value
31,065
Net Debt
4,410
Minority Interest
6,867
Theoretical Market Value
19,788
Number of Shares (Mn)
435
Theoretical Price / Share
$
45.49
Current Market Price
$
39.58
Potential Return
14.9%
Average Cost of Debt
8.2%
Long Term Tax Rate
32.0%
After-Tax Cost of Debt
5.6%
Cost of Capital
10.9%
Market Risk Premium
5.5%
Risk Free Rate + Country Risk
5.5%
Beta
1.0
% Total Debt
33%
% Capital
67%
WACC
9.2%
So urce: A ctinver
7
Relative Valuation
Herdez offers an attractive valuation when compared to its relative peers, which we have
grouped in pure processed food companies and also trying to incorporate companies with
ice-cream divisions.
The current P/E ratio is 22.3x, a significant discount against its comparables universe,
primarily affected by the weak momentum of the Mexican consumer due to the fiscal
reform during 2014 and the aforementioned effects of the Nutrisa restructure. However,
considering 2015 expectations, the stock still trades at a discount vs well-known names
like: JM Smuker, Kraft, among others. We regard the forward-looking ratios to be more
comparable as both specific and industry-wide disruptions are expected to abate in 2015.
The consumption environment is gaining traction in México and the consumer has mostly
digested the negative effects of the fiscal reform following one-year cycle since their
application; we now have better visibility on the economic and politic front. We believe that
it is a matter of time —and a small time frame at that— for the company to show better
performance that will translate into a decline of all of its valuation variables (like just
happened in 4Q14). When incorporating growth expectations for 2015 the PEG ratio offers
a significant discount (73%) and in fact places Herdez as the cheapest option in our
universe, under this parameter. In terms of EV/EBITDA Herdez trades in line to its peers
on a 12m basis, but again, looking at 2015 figures the comparison turns to a significant
discount of 8%, which shows the yet-to-be recognized evolution of projects and
acquisitions for coming quarters. And last, but not least, it is important to note the
company actually has a higher ROE and ROA when compared to the sample, so we could
even argue for a premium.
Herdez — Relative Valuation
Name
Mkt Cap USD
mn
P/E
current
21.8
P/E
2015
P/E
2016
21.0
19.2
EV/EBITDA
current
11.7
EV/EBITDA
2015
12.1
EV/EBITDA
2016
11.6
P/B
4.7
ROE
23.8
ROA
PEG
2015
PEG
2016
9.2
2.7
2.6
Average
$
10,508
GRUPO HERDEZ SAB-SERIES *
$
998
24.3
19.5
18.8
11.7
11.0
10.0
2.7
24.8
7%
0.8
4.0
CAMPBELL SOUP CO
$
14,987
18.6
19.5
18.5
11.9
11.7
12.2
9.3
59.3
14.9
4.0
4.0
JM SMUCKER CO/THE
$
11,328
19.2
20.0
18.8
10.3
10.9
11.3
2.2
10.8
N/A
4.0
3.9
HORMEL FOODS CORP
$
14,218
24.1
21.2
19.6
12.0
13.4
12.0
3.9
17.4
15.9
3.6
3.6
J & J SNACK FOODS CORP
$
1,859
26.3
25.1
23.5
N/A
12.4
11.5
3.3
13.0
12.4
3.0
2.9
MCCORMICK & CO-NON VTG SHRS
$
9,486
22.0
20.9
19.4
14.7
14.7
14.8
5.3
23.5
15.0
2.9
2.9
FLOWERS FOODS INC
$
4,108
21.9
22.2
20.7
11.1
11.6
11.0
3.5
17.2
9.5
2.8
2.6
PINNACLE FOODS INC
$
4,217
22.0
20.7
18.8
12.1
12.6
12.0
2.4
16.4
8.6
2.6
2.4
KRAFT FOODS GROUP INC
$
38,315
16.1
20.8
19.4
12.7
13.0
12.5
6.9
45.4
N/A
2.6
2.5
LANCASTER COLONY CORP
$
2,482
26.1
25.3
22.8
N/A
12.0
12.7
4.4
12.1
N/A
2.5
2.3
HERSHEY CO/THE
$
23,450
26.6
24.4
22.2
14.2
15.1
14.1
15.7
54.2
24.3
2.5
2.5
GENERAL MILLS INC
$
32,095
20.0
18.8
17.6
11.9
11.8
12.3
4.8
21.2
N/A
2.5
2.4
SNYDERS-LANCE INC
$
2,122
31.5
27.7
24.8
12.4
12.9
12.0
2.0
19.4
N/A
2.3
2.1
TREEHOUSE FOODS INC
$
3,756
27.9
24.2
21.3
11.3
13.8
11.4
2.2
5.3
4.8
1.9
1.7
INVENTURE FOODS INC
$
201
23.7
20.4
17.9
10.1
11.1
10.3
3.0
14.7
N/A
1.3
1.1
B&G FOODS INC
$
1,619
21.9
19.6
17.9
12.5
13.2
12.5
4.6
13.8
N/A
N/A
N/A
GRUPO KUO SAB DE CV-SER B
$
755
13.0
14.1
13.9
9.6
5.4
4.9
1.4
11.7
-22.0
N/A
N/A
KELLOGG CO
$
23,539
12.2
17.0
16.5
11.1
11.5
11.3
7.0
56.1
8.3
N/A
N/A
HIGH LINER FOODS INC
$
599
18.9
16.3
12.6
9.8
11.6
9.8
3.2
17.4
9.1
N/A
N/A
Source: Bloomberg and Actinver´s estimates
8
HERDEZ — Quarterly Financials
4Q13
YoY
1Q14
YoY
2Q14
YoY
3,780
2,504
839
24
460
8.2%
7.7%
19.8%
-41.7%
-9.3%
3,251
2,032
784
(8)
427
9.4%
3.8%
27.9%
-730.7%
6.0%
3,318
2,015
828
(28)
447
5.5%
0.6%
19.0%
-509.5%
-1.7%
3Q14
YoY
4Q14
YoY
2013
2014
14/13
3,653
11.3%
2,267
9.1%
853
11.2%
(16) -1898.0%
517
18.0%
4,096
2,423
940
(12)
721
8.3%
-3.2%
12.0%
-152.0%
56.6%
13,180
8,541
2,915
(33)
1,757
14,319
8,737
3,405
65
2,113
8.6%
2.3%
16.8%
-297.8%
20.2%
14.2%
17.6%
13.3%
14.8%
2,050
2,415
15.6%
16.9%
Income Statement
Revenues
Cost of Sales
Operating Expenses
Other Income (Expense)
Operating Profit
Margin
12.2%
EBITDA
582
Margin
15.4%
13.1%
5.1%
502
13.5%
11.5%
15.4%
525
2.7%
15.8%
602
18.9%
16.5%
786
35.0%
19.2%
17.8%
Net Financial Expenses
Financial Income
Interest Gain
Financial Expenses
Interest Paid
(94)
155
14
249
100
96.3%
1063.3%
2.7%
305.6%
89.6%
(94)
134
11
228
102
58.2%
-46.5%
-37.7%
-26.3%
72.8%
(89)
151
8
241
102
198.9%
-48.7%
-48.3%
-25.9%
19.2%
(71)
165
2
236
98
-6.5%
-31.2%
-90.0%
-25.3%
0.5%
(4)
441
3
446
98
-95.5%
185.5%
-78.2%
78.9%
-1.7%
(259)
939
62
1,198
342
(258)
98
23
1,150
400
-0.4%
-89.6%
-62.3%
-4.1%
17.1%
Results form JVs
Profit Before Taxes
Taxes
Profit from Continuing Operations
Minority Participation
Net Profit
(36)
329
154
176
102
73
-137.3%
-40.9%
26.7%
-59.7%
-46.5%
-70.1%
97
430
114
316
143
173
0.4%
-2.3%
7.9%
-5.6%
-6.0%
-5.2%
104
462
131
330
153
178
27.7%
-8.9%
-16.0%
-5.7%
-1.4%
-9.1%
89
536
164
372
177
195
99.5%
31.5%
35.8%
29.7%
36.2%
24.4%
124
841
355
485
260
225
-440.3%
155.2%
130.8%
176.5%
153.8%
208.3%
186
1,684
536
1,148
540
608
414
2,268
764
1,504
733
771
122.4%
34.7%
42.5%
31.1%
35.8%
26.9%
4.6%
5.4%
Margin
1.9%
5.3%
5.4%
5.3%
5.5%
Source: Company and Actinver
Recent Financial Results
Herdez — Profitability Indicators
20.0%
2500
2000
1500
15.0%
1000
500
10.0%
0
2010
Exports
2011
2012
2013
Mexico
Last 12M
EBITDA Margin
Source: Company
Herdez — ROE and ROIC Evolution
20%
15%
ROE
10%
ROIC
5%
0%
2012
Source: Bloomberg.
2013
2014e
Declining profitability had been a constant theme in the past few years for Herdez,
examining recent years the company has reported the following EBITDA margins: 19.7%
for 2010, 17.2% for 2011, 15.3% for 2012, and 15.6% for 2013. Finally, in 2014 Herdez
reported a significant recovery to 16.9%, and while we currently project a slightly lower
16.7% for 2015, it is worth noting that management believes a normalized, sustainable rate
should be in the range of 16% to 17%—this fits right within our projections. Years like 2012
and 2013 were affected by the increase in some of the most important raw materials like
soybean oil, wheat flour and packing materials, while the recovery we saw just last year
was evidence on the contrary effect, even on top of non-recurring expenses at Nutrisa. On
top of that cost-driven effects, the political environment that Mexico was facing at that time
had a negative impact in consumer trends —the return of long-time ruling party PRI was
almost imminent and people did not know what to expect, so consumers slowed down in
an unclear future. The raw material with a highest incidence in margins is soybean, which
we believe has a 34% weight in Herdez’ cost structure. Also, the foreign division has not
taken off as we would have imagined in spite of the increased popularity of Mexican food
and the appealing gain in the US market; it seems there is a gap in popularity between
ready-to-eat/restaurants to self-cooking with Mexican ingredients that has yet to catch up.
Encouraging signs in spite of a rough 2014. In the past twelve months revenues have
consistently reported high single-digit growth rates boosted by foreign sales that achieved
growth at a double digit rate during most quarters of 2014, while domestic sales reported a
positive but lower increase than exports/foreign. Despite this, we have to stress the fact
that at the beginning of 2014 Mexican costumers suffered from diminished purchasing
power and high uncertainty as a consequence of fiscal changes enacted for 2014, and in
fact January and February of that year marked a 4-year low point in Consumer
Confidence. In hard numbers, higher income taxes, the homologation of VAT in border
cities, and excise taxes in sugary drinks and high-calorie food produced a negative impact
in the population’s disposable income. While core domestic sales took off 2014 largely flat,
2H14 figures seem to have shown the light at the end of the tunnel with double digit growth
in the domestic market (11.6% YoY).
We have to remind Herdez’ prime strategy to defend market share is usually price-based
coupled with intensive promotional activity, even if in short term periods this does tend to
sacrifice margins a bit. During the years 2011 and 2012, even though the economic
situation in Mexico looked promising, Mexican citizens were cautious to see what could
happen during the transition period in the government.
With the acquisition of Nutrisa we have seen higher extraordinary costs not expected by
the company as the old Nutrisa had many products that were not in line with Herdez’
9
vision, and some negative effects took place with the closure of 25 stores and the
elimination of some brands with unprofitable results. As a consequence, Nutrisa’s sales
were off 10% in 2H14 (making up 7% of consolidated revenues), its first comparable period
available yet. Finally, during the last quarter of the year the company disclosed the
expansion plan for Nutrisa which is to double the number of sales for 2018-2019; having
now finished the unit’s restructure we expect to see positive figures as soon as this very
1Q15 .
What will the effect of Nestlé’s ice-cream division be? We were expecting the green
light to this transaction in the first half of the year but just happened the 2 nd of March, so
good news are coming early this year. We have incorporated Nestlé into our projections
assuming similar margins to Nutrisa and 20% less sales than Nutrisa. With those
assumptions, we would expect the ice-cream division’s weight to increase to 15% net sales
within the next twelve months. As part of our assumptions we also have incorporated a
Capex program of MP 100 million for the coming five years that would be applied to buy
new freezers in an effort to expand the Nutrisa/Nestlé geographic footprint, but we have to
remember that the Capex for 2015 for the company is MP 1 billion (~US 67 million) as they
commented during the 4Q14 conference call. As such, the incremental expenses are really
modest in the overall picture.
Financial projections
Herdez — Sales Breakdown (MP mn)
2014
2015e
2016e
Domestic
Exports/Foreign
Nutrisa (Ice Cream)
Total
12,251
955
1,113
14,319
13,287
1,066
2,135
16,487
14,483
1,108
2,578
18,169
Distribution:
Domestic
Exports/Foreign
Nutrisa (Ice Cream)
85.6%
6.7%
7.8%
80.6%
6.5%
12.9%
79.7%
6.1%
14.2%
Source: Company, Actinver Estimates.
14/13
15/14
16/15
6.0% 8.5% 9.0%
13.8% 11.6% 3.9%
42.1% 91.9% 20.8%
8.6% 15.1% 10.2%
Strong economy to the end of 2015, our basic expectations around consumer-linked
companies are in the same line with the economist consensus in which the Mexican
economy will track faster during the second half of the year, and even if statistically
speaking, the first half of the year might also show significant growth, we regard this as
mostly a comparison-base effect. The real uptick will only be felt by the second half of the
year, and this effect will translate in more consumption not only in quantity also in quality,
yielding better margins form the start, but also finally opening the possibility for the
company to increase prices in an effort to recover 2014’s lag. In our projections, we have
only assumed inflation-level adjustments, so incremental revenue in real terms will have to
be bolstered by higher volume.
Key value drivers for the company, as we have commented over the document, we
believe a recovery in the consumption sector for 2015 and beyond is beginning to take
shape even if for the first signs a statistic factor still plays an important role. For example,
the most recent data from WALMEX´ and ANTAD’s Same-Store-Sales both point to a
robust start for the year, yet we have to stress that a year ago Consumer Confidence was
at its 4-year low. For the domestic market the better performance of the economy, and the
faster than expected dilution of the fiscal reform from the consumer, having completed its
full one-year cycle just now, should help boost consumption this year. For the foreign sales
we are also positive due to the faster and stronger recovery of the US market and we hope
this will continue showing strength for a couple of years. At the moment we are also
positive in the frozen yogurt and ice-cream categories, Herdez’ newest business lines,
since growth should come in hand of the Mexican economy recovery, but also as a higher
penetration is achieved amid a growing middle class.
Less extra cost for 2015, during 2014 the company began operations in a new
Mayonnaise plant for in the State of Mexico, replacing the old one in Mexico city with a
significant increase of 50% in production capacity (120 thousands tones) afte a MP 560 mn
investment. The new plant also has 4 lines to manufacture its own plastic bottles and the
location is right next to the most important distribution center of the company, so it has
reduced the cost of transportation by 6%, yet it has not reflected its benefits on a full year.
We also do not expect further extraordinary costs due to the resizing of Nutrisa; during
2014 the company spent MP 51 millions to normalize its business platform, and we now
expect to see results starting in this 1Q15 upcoming report.
Our estimates for 2015-2019 show strong growth rates specially in the first years,
but are going to slow down afterwards as the cumulative lag in consumer trends from the
2014 hit is recovered. As we have seen the National Retail Association (ANTAD) already
published strong sales growth during the first couple of months of the year, while and
WALMEX also reported a solid performance with an increase of 5.4% in SSS in a
comparable retail calendar, while Chedraui commented a 5% rate was seen at their stores’
SSS. We believe that these positive figures were supported by three main reasons, I) the
low comparison base of 2014, II) price pass-through in many basic products and III) less
10
fear of the consumer to buy as the Mexican economy starts taking baby steps to a
sustained recovery. We are currently projecting net sales will reach a CARG rate of 7.2%
for the 2015-2019 period. We have to remember that sales are divided in 3 categories:
domestic, foreign and ice-cream; Nutrisa and Nestlé will be reported under a single name
as the ice-cream division. Based on 2014 figures: domestic sales represent 86%, foreign
7% and Nutrisa 8%. Within this sales breakdown, we expect CARG of 5.4% for domestic
market, 4.6% for foreign (our current estimates actually assume a strengthening of the
peso in the next few years) and 19.0% for ice-cream during 2015-2019.
Margins should advance gradually over the next few years, starting with a EBITDA
margin of 16.7% expected for the close of 2015, we foresee modest increases that should
end up reaching a flat 17.1% by 2019, with an average 16.9% in our projected range.
Within these figures, we expect a constant EBITDA margin of 18.6% for domestic
HERDEZ — Financials
2012
2013
2014
2015 E
2016 E
2017 E
2018 E
2019 E
12/11
13/12
14/13
15/14
12,042
8,079
2,375
(47)
1,635
13,180
8,541
2,915
(33)
1,757
14,319
8,737
3,405
65
2,113
16,487
9,736
4,390
(12)
2,349
18,169
10,651
4,945
0
2,573
19,682
11,500
5,394
0
2,788
21,335
12,427
5,885
0
3,022
22,964
13,331
6,384
0
3,249
24.2%
31.3%
17.8%
-416.7%
8.1%
9.5%
5.7%
22.7%
-30.9%
7.5%
8.6%
2.3%
16.8%
-297.8%
20.2%
15.1%
11.4%
28.9%
-118.6%
11.2%
10.7%
11.3%
17.8%
14.1%
Income Statement
Revenues
Cost of Sales
Operating Expenses
Other Income (Expense)
Operating Profit
Margin
13.6%
13.3%
14.8%
14.2%
14.2%
14.2%
14.2%
14.1%
EBITDA
1,843
2,050
2,415
2,756
3,042
3,317
3,618
3,921
Margin
15.3%
15.6%
16.9%
16.7%
16.7%
16.9%
17.0%
17.1%
Net Financial Expenses
Financial Income
Interest Gain
Financial Expenses
Interest Paid
(195)
53
53
248
207
(259)
939
62
1,198
342
(258)
98
23
1,150
400
(306)
127
69
492
492
(437)
126
96
553
540
(338)
132
146
581
581
(387)
127
208
635
613
(333)
138
273
611
611
2866.3%
-66.2%
-31.3%
51.8%
n.a.
33.1%
1673.5%
17.3%
383.5%
65.6%
-0.4%
-89.6%
-62.3%
-4.1%
17.1%
18.2%
29.1%
194.6%
-57.2%
23.0%
Results form JVs
Profit Before Taxes
Taxes
Profit from Continuing Operations
Minority Participation
Net Profit
413
1,853
423
1,429
639
790
186
1,684
536
1,148
540
608
414
2,268
764
1,504
733
771
435
2,479
768
1,710
832
878
457
2,592
804
1,789
880
909
480
2,929
908
2,021
992
1,029
504
3,139
973
2,166
1,065
1,101
529
3,445
1,068
2,377
1,168
1,209
1263.9%
20.6%
-11.8%
35.4%
124.3%
2.9%
-54.9%
-9.1%
26.7%
-19.7%
-15.6%
-23.1%
122.4%
34.7%
42.5%
31.1%
35.8%
26.9%
5.0%
9.3%
0.5%
13.7%
13.5%
13.9%
6.6%
4.6%
5.4%
5.3%
5.0%
5.2%
5.2%
5.3%
17,452
5,388
1,311
1,780
484
1,659
12,064
4,697
3,313
5,399
1,320
0
0
942
4,079
990
1,200
12,053
5,784
6,269
20,713
5,367
905
1,648
767
1,986
15,347
4,599
4,111
8,583
1,638
0
0
1,094
6,945
800
4,200
12,130
5,665
6,465
22,911
6,769
2,451
1,597
700
1,939
16,142
5,227
4,246
9,735
2,944
100
800
992
6,291
0
4,400
13,176
6,309
6,867
25,857
7,541
2,610
1,858
814
2,182
18,316
5,384
6,264
10,875
3,116
98
581
1,247
7,263
0
5,359
14,982
6,742
8,240
27,886
8,611
3,226
2,045
897
2,358
19,275
5,545
7,061
10,974
3,147
97
381
1,365
7,331
0
5,356
16,912
11,416
9,302
30,062
9,729
3,936
2,214
971
2,515
20,333
5,712
7,960
10,952
3,152
95
173
1,474
11,819
0
5,313
19,110
12,557
10,232
32,557
11,050
4,815
2,398
1,053
2,684
21,506
5,883
8,973
11,050
3,184
95
(27)
1,592
7,374
0
5,305
21,507
13,813
11,255
35,773
12,966
6,303
2,580
1,133
2,842
22,808
6,059
10,114
11,361
3,412
95
(27)
1,708
7,458
0
5,302
24,412
15,195
12,381
-16.7%
1.3%
47.9%
8.1%
-32.6%
-16.5%
-22.8%
2.1%
-21.4%
-38.7%
-22.0%
n.a.
n.a.
-21.3%
-42.7%
23.7%
-71.4%
-0.6%
2.1%
-3.0%
18.7%
-0.4%
-31.0%
-7.5%
58.4%
19.7%
27.2%
-2.1%
24.1%
59.0%
24.2%
n.a.
n.a.
16.2%
70.3%
-19.2%
250.0%
0.6%
-2.1%
3.1%
10.6%
26.1%
170.9%
-3.1%
-8.7%
-2.4%
5.2%
13.7%
3.3%
13.4%
79.7%
n.a.
n.a.
-9.4%
-9.4%
-100.0%
4.8%
8.6%
11.4%
6.2%
12.9%
11.4%
6.5%
16.3%
16.3%
12.6%
13.5%
3.0%
47.5%
11.7%
5.9%
-2.5%
-27.4%
25.8%
15.5%
n.a.
21.8%
13.7%
6.9%
20.0%
Profit Before Taxes
Pre-Tax Cash Flow
Working Capital Changes
Cash Flow from Operations
Cash Flow from Investment
Cash Flow from Financing
Net Incr. (Decr.) in Cash and T.I.
FX Gain (Loss) in Cash and T.I.
1,853
1,829
(919)
910
(137)
(666)
106
0
1,684
2,072
(572)
1,499
(3,271)
1,365
(406)
0
2,268
2,560
(563)
1,996
(479)
29
1,546
0
2,479
3,203
(914)
2,289
(2,224)
108
173
(14)
2,592
3,512
(945)
2,567
(1,010)
(940)
617
(1)
2,929
3,841
(1,016)
2,825
(1,117)
(981)
728
(18)
3,139
4,221
(1,089)
3,132
(1,236)
(1,013)
883
(3)
3,445
4,641
(1,170)
3,471
(1,370)
(611)
1,490
(2)
20.6%
8.0%
4.5%
11.8%
-82.2%
-330.5%
-68.3%
-100.0%
-9.1%
13.3%
-37.7%
64.8%
2288.8%
-304.8%
-482.3%
n.a.
34.7%
23.6%
-1.6%
33.1%
-85.4%
-97.9%
-480.5%
n.a.
9.3%
25.1%
62.2%
14.7%
364.2%
272.7%
-88.8%
n.a.
Outstanding Shares
Total Debt
432
3,154
432
5,969
426
6,860
426
7,529
426
7,322
426
7,008
426
6,787
426
6,780
0.0%
-47.2%
0.0%
89.2%
-1.4%
14.9%
0.0%
9.7%
Margin
Balance Sheet
Total Assets
Current Assets
Cash & Equivalents
Receivables
Other Receivables
Inventories
Long Term Assets
Investment in Associated Companies
Property, Plant & Equipment
Total Liabilities
Current Liabilities
Bank Loans (ST)
Debt Securities (ST)
Suppliers
Long Term Liabilities
Bank Loans (LT)
Debt Securities (LT)
Consolidated Equity
Controlling Interest
Minority Equity
Cash Flow Statement
Source: Company, Actinver Estimates.
11
operations, yet for foreign/exports we project a flat 7%, we are not expecting to increase as
the foreign/export are the channel to sell products to its own company (Herdez del Fuerte)
gains on margins will be reflected in the Herdez del Fuerte JV, which is not disclose by the
company. The most notable improvement, however, should be at Nutrisa with a goal 20%
margin, up from a current 5%. This is the result of a short period in which Herdez has
repositioned the company, and we do not discard even better margins in the future for this
division. The expansion plan is to double Nutrisa’s size in the next 4-5 years and be able to
exploit significant economies of scale. We expect a net margin average of 5.3%, controlling
shareholders’ share. Although these numbers look promising, none of them reaches the
levels recorded in 2010, which was the best year of the company in terms of margins and
growth.
Herdez — Debt profile (as of 4Q14)
Bilion of Mexican pesos
2.0
1.5
1.0
0.5
0.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: Bloomberg.
Sales Performance — Mexico ‘s Processed Food
industry.
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$2013
2014
2015e
2016e
2017e
2018e
2019e
Figures in Billions of Mexican pesos, Source: Global Insight.
Recent production growth by country.
Country
China
USA
Japan
Brazil
Germany
France
Itlay
Mexico
Russia
Spain
Others
Total
Production
2013 (mmd)
1241
719
243
231
171
156
143
135
127
105
1427
4698
Source: Global Insight.
Growth
2012-2013
12.6%
0.8%
-18.3%
0.7%
2.5%
0.3%
2.3%
4.0%
7.7%
1.0%
-4.4%
9.2%
%
26.4%
15.3%
5.2%
4.9%
3.6%
3.3%
3.0%
2.9%
2.7%
2.2%
30.4%
100%
2020e
We believe we have taken a conservative approach in our estimates; Herdez itself gave a
very modest 2015 guidance announced during the 4Q14 conference call. The company
should be able to improve operating profitability as its ice-cream division and foreign sales
are increasing at a faster pace and, being the smaller subsidiaries, are yet to achieve a
higher expenses dilution as seen at the core processed food business. On the other hand
we assume that its most important raw material (soybean oil), which makes up most of the
cost structure (34%), will not increase its price in the long term (or that hikes would be
passed on to customers) so margins could expand further than our assumed levels as a
higher proportion of Capex is dedicated to efficiency and productivity projects.
One of the most aggressive plan of expansion of the company is to double Nutrisa sales
between 2018 and 2019 as we have commented our estimates are conservative so we are
expected to reach that number during the end of 2019, the coming tuna vessel will be the
8th and we expect to increase the sales in tuna by 15%, as we mention the only break
down that the company made in sales is Domestic, Foreign and Ice-cream. The company
just move its plant of McCormick from Mexico city to the Estado de Mexico and this new
plant will have a greater capacity by 50% and is going to be next to the distribution center,
so is going to reduce cost of transportation for about 17% and also have the capacity to
create the bottles for the McCormick products.
On the financial front, our estimates point to a growing cash flow generation even after
considering a 33% payout ratio and a 1.3x Capex/depreciation rate, which we believe are
both conservative estimates. Under these assumptions, we project net debt to EBITDA
ratio to the end of 2015 of 1.8x and expect it to decline quickly reaching 1.3x by the end of
2016 and merely 0.9x in 2017. Following the placement of a MP1,000 million to finance
Nestlé´s ice-cream division (the same way they paid for Nutrisa´s acquisition), we can
expect a short-term increase in the net debt to EBITDA, reaching 2.3x at the end of 1Q15,
but falling quickly each quarter to 2.2x in 2Q, 2.1x in 3Q and finally 1.8x by the end of
2015.
Industry analysis
The industry of processed foods is spread all over the world and is dominated by several
international corporations. The Mexican Secretary of Economy published in a recent paper
an estimated value of US$4,697 billion, for the worldwide industry. Geographically, the
industry is distributed as follows: the largest market is Asia with 43% of the share followed
by Europe with 27%, North America 19%, Latin America 8% and others 2%. This sector
has an annual growth rate projected of 7.6% from 2013-2020, according to Global Insight.
The 10 most important companies worldwide are: Nestle, PepsiCo, Unilever, General Mills,
Bimbo, Mondelez, Danone, Mars, Kellogg´s and Kraft Foods.
The consumption level, class of food and market dynamics depend on the stage of
development in the economy of each country and as a consequence, the level of income
12
per consumer. There are some exceptions such as China and México which are emerging
countries but have a high consumption level of pricier items like meat and cereals, even
Eexpected CARG
though the acquisition power is relatively lower than developed countries. We have to
2013-2018
consider that the consumption pattern of the population changes from towns to large cities
1.2%
0.5%
as the income power has a direct relationship to the kind and type of food that the people
can and like to eat.
1.7%
Breakdown of most popular food in Mexico
Catogories
Bakery
Dairy
Process Food and
dehydrate
Oil and Fats
Salsas, aderezos y
condimentos
Canning food
Sweet snaks and salt
snaks
Grocery
Pasta
Chilled process food
Frozen process food
Ice-cream
Spreds
Baby food
Noodles
RTE foods
Snack bars
Soup
Food supplement
TOTAL
Volume, 2013
(thousands of
tonnes)
16,404
7,011
2013%
57.7%
24.7%
1,079
1,004
3.8%
3.5%
886
540
3.1%
1.9%
2.7%
2.3%
424
377
320
273
143
78
77
73
58
54
40
28
13
1.5%
1.3%
1.1%
1.0%
0.5%
0.3%
0.3%
0.3%
0.2%
0.2%
0.1%
0.1%
0.0%
1.4%
3.4%
0.7%
3.0%
3.8%
2.6%
2.0%
3.6%
1.4%
1.6%
2.6%
9.3%
1.3%
28,424
100.0%
2.9%
2.4%
Source: Global Insight.
Sales ranking by company, 2013
Companies
BIMBO
GRUMA
BACHOCO
LALA
SIGMA
SUKARNE
GANADEROS PLP
HERDEZ
Main Brands
Marinela
Maseca
Bachoco
Lala
San Rafael
SuKarne
Forti leche
Herdez
Sales US million
$
13,460
$
4,140
$
3,040
$
3,162
$
3,721
$
2,015
$
1,010
$
1,009
Source: Global Insight.
If we break down the industry by product class, we can see that the main part of the
market share (68%) is made up of only three product categories: dairy, bread and
dehydrated processed foods, numbers for the global market.
The regions that are expected to experiment greater performance in the coming years
(until 2020) are, in order: Asia, East Europe, Latin America, Middle East and North
America.
When we talk about sales market share around the world we can say that the company
with the largest market share is Nestlé with 3.5%, and the most important Mexican
company with 0.7% of the market share is Grupo Bimbo. Evidently, the market is highly
fragmented among many names, and in most cases local players have a significant portion
of the market.
Evolution of Processed Food methods. For many centuries the humans have been
processing food in many forms, one of the first ways was sun-drying and after that, people
began using salt in meat and fish, also sugar in the case of fruit, to preserve flavor in a
better way. The idea for this technique is to reduce water in food and preserve flavor as
long as possible. The evolution of processed foods didn´t stop in this simple process, right
now many industries made the famous “Functional products” in which the company adds
many nutritional values to foods. As it is widely known, the cooking process of any kind of
food contributes to the loss of some of its nutritional value.
Clarence Birdseye was the inventor of frozen foods in USA in 1925.This man was a fur
trader in Labrador, Texas and realized that the fish fillets which native fish froze quickly
after exposing them to the cold Arctic, translated in a very unique method to retain flavor
and texture of fresh fish better than frozen at lower temperatures. The key for the Birdseye
discovery was the importance of rapid freezing and become a pioneer in the design of
industrial equipment for fast food freezing. Today we know that, combined with an
appropriate treatment, rapid freezing ensures excellent preservation of nutritional value for
a wide range of meat, fruit, vegetables, etc.
Food Processing Basics, evolution throughout history:
Traditional
process (Early stages): Canning, fermentation, freezing, drying
oven, pickled, salted, smoked and sun drying.
Industrial zones of Food Processing in Mexico
Modern
processes (From 1900): Extrusion Cooking, frozen and chilled,
pasteurization and sterilization.
The
technology edge (From 1960): freeze-drying, processing by infrared
irradiation, magnetic fields, microwave processing, modified atmosphere packaging,
ohmic heating, pulsed electric fields, spray drying, ultra-sonification.
Source: INEGI.
Is the world trend shifting to functional products from fresh food? The new trend
becoming common in the world is towards healthier food, regardless of its processed or
not. These are products that offer a higher percentage of nutritional value compared to
similar options, and are already popular in developed economies, but are also present with
a quick evolution in many emerging markets. This trend has been under development for
many years and in the case in Mexico, many of the food companies are changing their
13
Operating cost savings.
production processes to create healthier foods without sacrificing convenience, flavor, or
cost, while at the same time the government is imposing extra taxes on high calorie foods.
Austria
Germany
Italy
USA
The National Market.
France
Japan
Netherland
Canada
UK
Mexico
-10
-8
-6
Mexico
UK
Canada
Netherland
Japan
France
USA
Italy
Germany
Austria
Source: Global Insight.
-4
-2
0
-9.1
-5.1
-3.7
-3
-1
-0.7
0
2
0.7
1.3
2
4
The national production of processed food reached an equivalent of MP 135,293 million in
2013 and is expected to generate a 6.4% CAGR from 2012 to 2020, according to Global
Insight. Our longer-term economic scenario agrees with such potential increase, assuming
that processed food in the aggregate tends to increase at a moderate rate depending
primarily on population growth and afterwards on economic expansion.
In Mexico the production of processed foods has a marked concentration. The most
important element in the Mexican diet are tortillas and bread, and therefore this category
makes up for 57% of the market share in processed foods. In second place we have meat
products with a 24% market share, and in third place are dairy products with 10% of the
market share and finally seeds with the remaining 9%.
Consumption is concentrated in domestic-sourced products with 90%, and the other 10%
coming from a small array of countries like USA, Canada, Spain and France. The reason
of the high percentage of local processed foods is because México has one of the lowest
production costs in the world: The table to the left shows a quick exercise in which US is
the midpoint and every country with a negative number has lower costs compared to the
US market, while a positive number mean have greater cost of production. (Source Insight)
The Secretary of economy states that companies in Mexico are the most profitable in the
industry, but even then, looking at the numbers, Japan in second place is far away from
Mexico’s comparative position.
Herdez within the Processed Food Industry of Mexico.
In the domestic Processed food market, Herdez is the eight company ranked by sales at
the close of 2013, so with the acquisition of Nutrisa and forthcoming Nestlé, the company
might scale one position to reach the 7th position, as the next position (6th), is almost two
times sales and those acquisition are below this potential increase at this moment.
Herdez: main products.
Mole Doña María: The mole is one of the most representative dishes of the Mexican
cuisine, recently the UNESCO (United Nations Educational, Scientific and Cultural
Organization) declare it as cultural heritage of humanity. Over time, all sauce made by
mixing pepers, seeds, tomatoes and spices was generically called mole. Market share of
Mole Doña María is 85%.
McCormick: Mayonaisse has a wide array of presentations and iterations and is the
stelklar product not only of the brand, but for Herdez. The most known version of
mayonaisse in Mexico is the one with lemon, but as a brand McCormick has an extensive
product range including dressings, jams, condiments, jellies, teas of the total kind of
product of McCormick have a market share of 72%, tacking in to account all the products
related to dressings.
Frozen yogurt (Nutrisa): The flagship product of the most recent acquisition of the
company falls within the ice-cream sector, yet with a healthier focus due to a comparatively
lower fat content. At this moment frozen yogurt has a 66% market share and the company
has laid out an aggressive expansion plan for 2018-2019 that includes doubling the
14
number of stores.
Sauces, Herdez: Being one of the most representative processed food product of
Mexico and of course of the company’s portfolio, Herdez commands a 37% share of the
market, owing by the huge competition offered by the vast universe of national and
international brands that operate in the market. This is perhaps one of the most varied
categories within the Processed Food market in Mexico.
Tomato puree, Del Fuerte: This product is distributed by the JV with KUO, at this
moment has a 64% market share and is an iconic product of Herdez due to the small
universe in brands, creating a huge exposure for the brand.
Pasta, Barilla: The company has three big names in this product: Barilla, Vesta and
Yemina, those products are used to made any kind of pasta dish. During 2014 those
products had an estimated market share of 27%.
Company description
A brief history.
The Company initiates in a very complicated environment, during one of the biggest crisis
of the US economy, 1947, despite that complex moment in the world, the company
survived. Even though, such negative effects affected the performance of the Mexican
economy, it began to face serious problems as a result of the severe world crisis.
In 1947, The Company entered into a 50% association with McCormick & Company, Inc.
and formed McCormick de Mexico S.A. de C.V. Important products such as mayonnaise,
mustard and marmalades were born and led to significant growth.
In order to confront these problems, the company developed sales advertising and
promotional programs and implemented a series of projects to create growth. After a
couple of years, facing a better economic environment, the Company began to show
positive results. Mr. Enrique and Mr. Ignacio Hernández-Pons joined, and took control of
sales, production and warehousing in order to favor the continued successful results.
The Company was positioned as one of the strongest business for representation and
distribution in Mexico, managing a wide range of leading brands and products. A plant was
constructed in Mexico for the production, storage and distribution of products.
The loss of the representation rights for certain products relevant to the Company’s sales
led to one of the key decisions in its history: to create its own line of canned food products
under the Herdez brand, including vegetables, fruits, home-style salsas and peppers.
Successful advertising campaigns with the themes “Con toda confianza es Herdez” and
“Póngale lo sabroso” were launched.
A television variety show called “Domingos Herdez” reached the first place in audience
preference polls for many years, making history and consolidating the corporate prestige of
Herdez. The Doña Maria mole factory in San Luis Potosí was acquired. A plant in Los
Robles, Veracruz for processing peppers, pineapples, oranges, mangos and papayas was
purchased. The construction of the distribution center in Mexico led to the merge and
integration of important areas of the Company that allowed greater growth. The path for
exports to the U.S. was opened, leading to additional expansion and business recognition.
The Company suffered two great losses in this decade, the passing away of Mr. Ignacio
Hernández Del Castillo and of his son, Mr. Ignacio Hernández-Pons. Mr. Enrique
Hernández-Pons assumed the position of Chairman and Chief Executive of the Company
and continued on along the path left by both his father and his brother.
Fundación Herdez, A.C. was created with the main goal of conducting research and
diffusion in the food area, contributing with new nutritional options with an excellent price-
15
quality relation. Grupo Herdez, S.A.B. de C.V. was formed in 1991 and then listed on the
Mexican Stock Exchange. Grupo Bufalo, S.A. de C.V. is acquired, with which new products
and innovative salsa packaging in glass jars is introduced. At the facilities on Av. de la Paz
in San Luis Potosí, the new plant started the production of McCormick teas, spices,
mustard and mayonnaise with the most modern processes.
A new export-oriented plant began operations in the city of Ensenada, Baja California for
the processing and canning of salsas and vegetables. Alimentos Deshidratados del Bajio,
S.A. de C.V., a plant for dehydrating various vegetables such as peppers, garlic, onion and
parsley located in the state of Guanajuato, was acquired.
Mr. Enrique Hernández-Pons passed away in mid-2000 and his two sons, Enrique and
Héctor Hernández-Pons, assumed the roles of President and Vice President.
In 2002, the Group entered a 50% strategic alliance with Barilla, GeR Fratelli, S.p.A., a
world leader in pasta, for the production, distribution and marketing of pasta products in
Mexico through Barilla Mexico, S.A. de C.V., which later acquired the Yemina and Vesta
pasta brands.
In 2004, the Board of Directors appointed Mr. Héctor Hernández-Pons Torres as Chairman
and Chief Executive Officer for the Group, undertaking an internal restructure to implement
measures such as expense reduction, product portfolio rationalization and bank debt
reduction. The assets of the personal care products unit were divested, operations at
Herdez Europa, S.A. were suspended due to better distribution alternatives, and two
sardine fishing vessels with low capacity were sold, certain operations were closed related
to fruit harvesting, the “Los Robles” plant in Veracruz was closed and therefore some
production lines were relocated to San Luis Potosí.
In 2005 the new McCormick de México plant was inaugurated in the “Duque de Herdez”
industrial complex. Additionally, a contract was signed with Ocean Spray International, Inc.
for the exclusive distribution of cranberry juice beverages in Mexico.
In 2007 the “Herdez Del Fuerte S.A. de C.V.” alliance was created with Grupo Kuo S.A.B.
de C.V. for the commercialization of food products. Likewise, ending the operational
restructure started in 2004 regarding the centralization of operations and disinvestments,
the “Yavaros Industrial” sardine business was sold and the “Ensenada” plant in Baja
California was closed, relocating production lines to San Luis Potosi.
In 2009 Herdez Del Fuerte and Hormel Foods broadened their association in the United
States by constituting MegaMex Foods LLC, with the purpose of extending some
categories in the Mexican food universe and develop new products to meet the needs of
the major consumers in the market. The product portfolio of MegaMex included at that time
brands such as Herdez®, Del Fuerte®, Doña María®, Embasa®, La Victoria® and ChiChi’s® (salsas and tortillas), which are widely known by hispanic consumers and the US
Mexican fan food.
In 2010, the Innovation and Culinary “Herdez Food Service” Center is opened to better
serve this growing channel.
Also in 2010 Herdez Del Fuerte signs an agreement with Reynolds Foil Inc. to exclusively
distribute their leading line of food packaging, such as aluminum foil, waxed paper,
adhesive paper and re-sealable bags, all under the Reynolds® brand.
MegaMex acquires Don Miguel Foods Inc. Don Miguel produces, commercializes,
distributes and sells frozen and refrigerated food, such as burritos and mini tacos, by
premium brands in the United States. This acquisition included a production plant located
in Dallas, Texas and the Don Miguel® and Gourmet Olé® brands, among others.
16
HERDEZ— Main Production Facilities
Plant
La Planta
Planta de Alimentos,
Deshidratados del Bajío
Location
Chalco, Estado de México)
Product
Frozen yogurt
Dehydration of various chiles, mixing and grinding
Villagrán, Guanajuato
Capacity (ton)
Age (since)
18,742
2010
10,100
1995
Planta Barilla
San Luis Potosi
Pasta
Planta Chiapas
Chiapas, Chiapas
Tuna, protein meal and fish oil
Planta el Duque
San Luis Potosi
Seasonings, spices, syrups, mayonnaise, jams,
miele, mustard and tea.
14.7 million
boxes
3.7 million
boxes
16.5 million
boxes
Planta industrias
San Luis Potosi
Moles, 8 vegetable juice, vinegar, nopales with
peppers, salsas, hot sauces and vinegars
16.1 million
boxes
1980
Planta intercafe
Oaxaca, Oaxaca
Café
3,660
1988
Planta la Corona
Los Mochis Sinaloa
Vegetables sauces
Nueva Planta México
Cuatitlan, Estado de Mexico
Dressing
Planta Mexico
Distrito Federal
Dressing, saucesa and meat
Planta Revolución
Los Mochis, Sinaloa
vegetables
Planta Sabinas
Sabinas, Coahuila
Avocado exports
Planta Santa Rosa
Los Mochis, Sinaloa
Tomato products
Planta Avomex
La Palma, Chile
Avocado
Planta Dallas
Dallas, Texas
Frozen Food
6.1 million
boxes
6.6 million
boxes
18.7 million
boxes
3.0 million
boxes
2002
1997
2005
1973
2013
1955
1981
1993
21.7 million
boxes
11 million
boxes
102 millon
boxes
1981
2009
1996
Source: HERDEZ
Herdez — Production Facilities
In 2011 Herdez Del Fuerte inaugurated the México distribution center to increase its
storage and processing capacity. In addition, to expand the fishing capacity of the
Company, the “Conquista” a tuna vessel was bought, adding up to a 7 tuna vessels fleet.
Also in 2011 Fresherized Foods Inc., the leading producer of processed avocado and fresh
guacamole commercialized under the Wholly Guacamole® brand, is acquired through
MegaMex. This acquisition included a production plant in Quillota, Chile.
Foreseeing a greater demand for healthy food, Herdez Del Fuerte acquired Aires De
Campo®, leading distributor of organic products in Mexico.
The company was founded in 1914 and is listed on the Mexican Stock Exchange since
1991 under the ticker HERDEZ *.
Production Facilities.
The company has 14 plants (12 in Mexico and one in USA and Chile), 9 Distribution
Centers, 7 tuna vessel (All in Mexico), 414 sell points and sell products in 11 countries
(Mexico, USA, Canada, Costa Rica, Cuba, El Salvador, Guatemala, Honduras, Nicaragua,
Spain and Venezuela.
Business Focus:
Grupo Herdez is a leading company in the processing food sector and in the segment of
frozen yogurt in Mexico, and has a well known name in the category of Mexican food in
17
Herdez —Production Scheme for fruit and vegetables
1-Picking
America. The company participates in a wide range of categories, including tuna, burritos,
ketchup, coffee, spices, guacamole, frozen yogurt, mayonnaise, jam, honey, mini tacos,
chili, mustard, pasta, tomato puree, homemade sauces, tea, vegetables canned and
organic foods, among others. Products are marketed through a unique portfolio of brands,
among which are: Aires del Campo®, Barilla®, Chi-Chi's®, Del Fuerte®, Don Miguel®,
Doña Maria®, Embasa®, HERDEZ®, La Victoria®, McCormick®, Nutrisa®, Wholly
Guacamole® and Yemina®. Additionally, it has distribution agreements in Mexico with
Kikkoman®, Ocean Spray®, Reynolds® and Truvía®.
Product range.
2- Frezze
The aforementioned 1,500 SKUs that the company produces and distributes are marketed
under a range of leading brands that include 25 brands and 40 categories.
Grupo Herdez divide its brands in three different categories:
 Power: Barilla, Yemina, McCormick, Del Fuerte, Doña Maria, Herdez ,Nutrisa and for the
USA market; Chi Chi´s, Wholly Guacamole, La Victoria and Herdez.
3- Transport
 Health: Aires del Campo and Nutrisa
 Tactic: Bufalo, Nair, Blasón, Vesta, Carlota, KIKOMAN, Reynolds, Truvia, 8 Verduras and for
the US market; Doña Maria, Del Fuerte, Bufalo and Embasa .
4- Plant arriving
5-Processing
Production Scheme for fruit and vegetables
The actual process of freezing a food item varies somewhat depending on what is to be
frozen. Fruit in general is the most common frozen item.
6- Selection and canning
1-2-Fruit in general need to be frozen within hours of picking, and if a backlog develops at
the freezing plant, some of the items may deteriorate.
3-If truck transport is necessary; they are cooled with ice water and then packed in ice for
transport.
7-Distribution
4-At the plant, the item are dumped into beds and sprayed with water to remove dust and
dirt. The cleaned fruit is next passed into a vat of boiling water for a few minutes. This kills
enzymes that affect the taste of the fruit, but it does not cook them. After blanching, fruit is
cooled with water and then passed to a specific gravity sorter.
5-The fruit is next sorted. They are immersed in water with a specified salt content.
Tender fruit float to the top of the tank, while items with high starch content sink to the
bottom. The tender are then sprayed with clean water to remove the salt, and they pass to
an inspection area.
6- Packaging may precede freezing, or the item may be individually quick frozen and then
18
Herdez —Production Scheme for frozen yogurt
1
boxed, depending on the processing plant. Freezing could be by any of the standard
methods. If they are frozen before packing, the fruit might pass through a blast tunnel
where ultra-cooled air freezes them. Or they may be loaded on a belt that brings them into
contact with metal plates cooled from below by chilled ammonia. If they are packaged
before freezing, the cans have been loaded into trays. Then workers load the frozen
packages into shipping crates and move them to a cold storage room to await shipping.
7-All further distribution of the frozen food should be carried out at 0° F (- 17.8° C) or
cooler. In other words, trucks or rail cars that carry the pallets should be kept.
Production Scheme for Frozen yogurt
2
1-Liquid and dry ingredients are combined separately. The liquids are poured into a vat,
mixed together, and heated. Next, the dry ingredients are added to the liquids in a
particular order. Meanwhile the batch is stiffed and the temperature gradually increased.
Most ingredients must be incorporated before the mix is heated to 120°F (49°C) so that the
mix does not become lumpy. The mixture must be heated to dissolve and blend the
ingredients.
2-Pasteurizing the batch is necessary to destroy pathogenic bacteria and to help preserve
the finished product. It is also required by law in most regions. Pasteurization is a simple
process that involves quickly bringing the mix to a high temperature for a specified time
and then quickly reducing the temperature to less than 40°F (4°C). These high
temperatures also improve the flavor and help blend ingredients more effectively.
Homogenizing the batch makes it smoother, primarily by decreasing the size of fat
globules to less than two micrometers. Without homogenization fat could rise to the top of
the mixture and create a layer of cream. Homogenization consists of pumping the batch
through a small valve and against an impact ring. Within the bubbles the fat droplets crash
against the vapor walls and disintegrate; thus, the more fat, the more homogenization
required.
3
4
5
Ready to sell
3-While the temperature of the mix is 90°F (32°C), it is inoculated with 1% yogurt culture.
The mix remains at this temperature until it sets and is ready for cooling. After
homogenization, the mixture must be cooled. If it is cooled slowly from about 90°F (32°C)
to about 40°F (4°C), the mix will become more viscous. Once the temperature falls
between 32°F (0°C) and 40°F (4°C), the batch is stored in aging tanks inside coolers. The
mix is aged for up to four hours.
4-The final ingredients are mixed together in a flavor vat. These include sweeteners,
flavorings, and coloring. This mixture is then pumped into the freezer with the rest of the
mixture which is about 20°F (-6°C) to 28°F (-2°C). While the mix is hardening, it is agitated
to incorporate air and create over-run, or excess volume. The addition of air also
smoothest the consistency and creates a more palatable product.
5-After the desired overrun is reached; the mixture is packaged and placed in freezers
where the freezing process continues. The temperature falls quickly, within one or two
minutes, to at least 0°F (-17°C) but ideally -15°F (-26°C). Depending on the type of freezer
and the size and shape of the package, the final hardening takes between 30 minutes to
12 hours. The vehicles are generally mechanically refrigerated at the same temperatures
as in the storage facilities in the factory, about -15°F (-26°C), and not above the
temperature at the retail outlet.
19
Corporate structure
GRUPO
HERDEZ
Grupo Nutrisa
100%
Nestlé
100%
Barilla México
50%
Herdez del
Fuerte
MegaMex
Hormel
Alimentos
50%
50%
50%
McCormick
MÈX ICO
50%
Management and Board of Directors
Board of Directors
HERDEZ currently operates with a 21 members Board of Directors, each being elected on
a yearly basis by the Shareholders Meeting. At this moment the 25% of the board
members are independent Directors
Héctor Hernández-Pons Torres: Mr. Héctor Hernández-Pons Torres serves as the Chief
Executive Officer of Grupo Herdez, and served as its General Director and President. Mr.
Hernández-Pons Torres served as Vice President at Grupo Herdez SA de CV. He serves
as the Chairman of Grupo Herdez, and has been its Director since 1991. Is a Lawyer from
the Anahuac University and holds a MBA from the University of San Diego.
Enrique Hernández-Pons Torres: Mr. Enrique Hernández-Pons serves as Deputy Chief
Executive Officer and International Business Vice President at Grupo Herdez. Mr. Torres
serves as an International Business Director of Grupo Herdez SA de CV and served as its
General and International Business Director. Mr. Torres served as President and General
Director of Grupo Herdez the Chairman of MegaMex Foods LLC. He served as the
Chairman of Grupo Herdez. He serves as Vice Chairman of Grupo Herdez,Sociedad
Anónima Bursátil de Capital Variable and has been its Director since 1991.
Flora Hernández-Pons de Merino: Mrs. Flora Hernández-Pons de Merino served as Vice
Chairman of Grupo Herdez and has been its Director since 2004.
Independent directors:
Carlos Autrey Maza [M] 1991: Mr. Carlos Autrey Maza serves as the President of the
Board of Directors at Corporación Autrey, S.A. de C.V. Mr. Maza has served as the Chief
Executive Officer and chairman of numerous companies, including Transportes Aeromar,
Organización Autrey, Casa Autrey and Casa de Bolsa México. He is Founding president of
Papalote Interactive Children's Museum. He is Founder of the Fundación Mexicana para la
Salud. He is Founding partner, Centro Mexicano para la Filantropía and the Centro Cívico
de Solidaridad. He is Founder of the Nuestros Niños and Enlace Solidario foundations. Mr.
Maza serves as the Chairman of Corporación Autrey, Laboratorios Autrey, Desarrolladora
y Operadora Inmobiliaria Premier and Trilenio. He served as Vice Chairman of Grupo
Financiero Inverlat (currently, Scotiabank Inverlat). He serves as a Director of Grupo
Herdez. Mr. Maza is a member of the board of Globalstar de Mexico and Principia. Mr.
Maza has been an Independent Director of Grupo Herdez,Sociedad Anónima Bursátil de
Capital Variable since 1991. Mr. Maza has been an Independent Director of SanLuis Corp.
SA de CV since 1985. He is a board member of various firms, including: Satélites
Mexicanos, S.A. de C.V., NH Hoteles de México, Enlaces Integra, Globalstar and
Principia. He served as a Director of Satelites Mexicanos S.A. de C.V. since October 1999.
20
He is a Trustee of the Instituto de Estudios Superiores de Tampico and an advisory board
member of MIT's Sloan School of Management.
Enrique Castillo Sánchez Mejorada [M] 1991: Mr. Enrique Castillo Sanchez Mejorada is
a Co-Founder and Partner of Ventura Capital Privado S.A. de C.V. Mr. Castillo Sánchez
Mejorada serves as a Special Adviser at General Atlantic LLC. He works with the Latin
America team to identify business opportunities in Mexico. He serves as a Co-Head of
Wholesale Banking at S.A.B. de C.V. He has over 35 years of experience in the financial
sector. He holds a Bachelor's degree in Business Administration and Management from
Universidad Anahuac. He served as the Chief Executive Officer at Ixe Grupo Financiero
SA de CV since October 2000. He served as a Head of Associaçao Brasileira de
Municípios. He was Partner at Xitus since 1997. He served as General Director of Seguros
América. He serves as the Chairman of Maxcom Telecomunicaciones. He serves as the
Chairman of Ixe Grupo Financiero SA de CV. He served as the Co-Chairman of Grupo
Casa Saba since April 30, 2010. He has been an Independent Director of Grupo Herdez
since 1991. He serves as Director of Grupo Mexicana de Aviación and Grupo Azucarero
Méxicol. He has been a Director of Grupo Embotelladoras Unidas since 2002 and Alfa
since March 2010. He serves as Commisary of Grupo Corvi He serves as a Director of
Médica Sur. He served as an Independent Director of Grupo Aeroportuario del Pacifico
since April 16, 2012. He has been Director of Grupo Financiero Banorte, since July 21,
2011 and Maxcom Telecomunicaciones since October 2013. He has been an Independent
Director of Organización Cultiba since April 2002, Southern Copper Corp. since July 26,
2010 and of Grupo Casa Saba since April 30, 2010. From 1991 to 1996, he served as a
Director of Grupo Financiero Invermexico and Grupo Aeroportuario del Pacifico. He served
as a Director at Banco Nacional de México and Casa de Bolsa Banamex, and Nacional
Financiera until 1984. He served as a Director at Credit Suisse First Boston from 1997 to
2000. He served as a Director of Banco Nacional de Comercio Exterior SNC. From March
2007 to March 2009, Mr. Castillo Sánchez Mejorada served as the President of the
Mexican Banking Association. He holds a Bachelor’s degree in Business Administration
and Management from Universidad Anahuac in Mexico City, Mexico.
José Roberto Danel Díaz: Mr. José Roberto Danel Díaz has been an Independent
Director of Grupo Herdez since 2003.
Eduardo Ortiz Tirado Serrano: Mr. Eduardo Ortíz Tirado Serrano has been an
Independent Director of Grupo Herdez since 2003.
Luis Rebollar Corona: Mr. Luis Rebollar Corona serves as Senior Counselor of A.T.
Kearney Mexico. Mr. Corona served as the Chief Executive Officer of Grupo Sidek and
Grupo Situr from July 1996 to January 2003. He served as the Chief Executive Officer of
Alcatel Mexico and Crisoba Paper. He also served as Vice President of Latin America for
Scott Paper and has held numerous senior positions at Dupont. He serves as the
Chairman of Mexico for Sweden's Chamber of Commerce and Chairman of Sandvik de
Mexico. He served as Chairman of Satélites Mexicanos. He served as the Chairman of
Grupo Sidek and Grupo Situr from July 1996 to January 2003. Mr. Corona serves as a
Director of SANLUIS Corporacion. He has been a Director of Satmex since November 30,
2006. He serves as an Independent Director of Grupo Pochteca. He has been
Independent Director of Grupo Herdez since 2004. He serves as a Member of the Advisory
Board of Banamex and Member of the Boards of Grupo Gigante, Herdez and Explorer. Mr.
Corona served as a Director of Satélites Mexicanos since November 30, 2006.
José Manuel Rincón Gallardo: Mr. José Manuel Rincón Gallardo Purón serves as a
Partner and National Director at KPMG Cardenas Dosal. Mr. Rincón Gallardo Purón
serves as Chief Executive Officer of Palmas Rent. He serves as General Manager of
21
Palmas Rent. He served as Statutory Examiner of Grupo Herdez. He was Managing
Partner of KPMG Mexico. He served as a Statutory Examiner at Grupo Herdez. He serves
as the President of the Board of Directors at Sonoco de México. He serves as an
Independent Director of Peña Verde. He has been an Independent Director of Grupo
Herdez since 2005. He serves as a Member of the Advisory Board at WAMEX Private
Equity Management. He serves as a Director of Grupo Financiero Banamex, Grupo
Herdez, General de Seguros City Southern and Laboratorios Sanfer-Hormona. He has
been an Independent Director of CEMEX since 2003. He also has been an Independent
Director of Grupo Herdez since 2002. He served as a Member of the Board of Directors of
KPMG Cárdenas Dosal. He is a Member of the Instituto Mexicano de Contadores
Públicos. He served as an Independent Director of Grupo Aeroportuario del Pacifico S.A.B.
de CV from February 7, 2006 to August 27, 2011. He is a Certified Public Accountant. Mr.
Rincón Gallardo Purón received a degree in accounting from the Universidad Nacional
Autonoma de Mexico and has studied administration and finance at the Wharton School of
the University of Pennsylvania, Stanford University and the University of California at Los
Angeles.
Secretary: Ernesto Ramos Ortiz
AUDIT COMMITTEE
José Roberto Danel Díaz (chairman), Carlos Autrey Maza, Eduardo Ortiz Tirado Serrano and
José Manuel Rincón Gallardo
Management Team
Héctor Hernández-Pons Torres (CEO), Enrique Hernández-Pons Torres (Deputy CEO)
Gerardo Canavati Miguel, CFO: Mr. Gerardo F. Canavati Miguel serves as the Chief
Financial Officer and Planning Vice President of Grupo Herdez and served as its Planning
Director. Mr. Miguel served as Executive Director Finance & Planning at Grupo Herdez
S.A. de C.V., and served as its Director of Financial Planning
Héctor J. Castillo Guerrero (marketing vice president): serves as the Marketing vice
president since 2009 at his short age (38) has won many prices like a EFFIE one of the
most popular trophies in the Marketing industry when he was working for P&G. At this
moment has 6 years in the company and working with brands like McCormick, Barilla and
Carlota with over 1,000 SKUs
Andrea del Rizzo: Mr. Andrea del Rizzo serves as Sales Vice President of Grupo
Herdez,Sociedad Anónima Bursátil de Capital Variable. Mr. del Rizzo served as Sales
Director of Grupo Herdez, Sociedad Anónima Bursátil de Capital Variable and served as
Director of Barilla México.
22
Equity, Economic, Quantitative and Fixed Income Research Departments
Equity Research
Gustavo Terán Durazo,
CFA
Senior Analysts
Martín Lara
Head of EquityResearch
(52) 55 1103-6600 x1193
[email protected]
Telecommunications, Media and
Financials
(52) 55 1103-6600x1840
[email protected]
(52) 55 1103-6600 x4134
[email protected]
Consumption
Carlos Hermosillo Bernal
Pablo Duarte de León
FIBRAs (REITs)
(52) 55 1103-6600 x4334
[email protected]
Ramón Ortiz Reyes
Cement, Construction and Concessions
(52) 55 1103-6600 x1835
[email protected]
Federico Robinson Bours
Carrillo
Energy, Conglomerates, Industrial and
Mining
(52) 55 1103-6600 x4127
[email protected]
Juan Ponce
Telecommunications, Media and
Financials
(52) 55 1103-6600x1693
[email protected],com.mx
Ana Cecilia González
Rodríguez
FIBRAs (REITs)
(52) 55 1103-6600x4130
[email protected]
Enrique Octavio Camargo
Delgado
Energy, Conglomerates, Industrial and
Mining
(52) 55 1103-6600x1836
[email protected]
José Antonio Cebeira
González
Consumption
(52) 55 1103-6600x1394
[email protected]
Junior Analysts
Economic and Quantitative Research
Ismael Capistrán Bolio
Head of Economic and Quantitative
Research
Jaime Ascencio Aguirre
Economy and Markets
Santiago Hernández Morales
Quantitative Research
Roberto Ramírez Ramírez
Análisis Cuantitativo
Roberto Galván González
Technical Research
(52) 55 1103-6600 x1487
(52) 55 1103-6600 x793325
(52) 55 1103-6600 x4133
(52) 55 1103-6600x1672
(52) 55 1103 -66000 x5039
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Fixed Income Research
Araceli Espinosa Elguea
Head of Fixed Income Research
(52) 55 1103 -66000 x6641
[email protected]
Jesús Viveros Hernández
Fixed Income Research
(52) 55 1103 -66000 x6649
[email protected]
(52) 55 1103-6600 x4132
[email protected]
Mauricio Arellano Sampson
Fixed Income Research
23
Disclaimer
Guide for recommendations on investment in the companies under coverage included or not, in the Mexican Stock
Exchange main Price Index (IPC)

StrongBuywith an extraordinary perspective. According to the analyst, in the next twelve months, the valuations of stock
and/or prospects for the sector are EXTREMELY FAVORABLE

Buy. According to the analyst, in the next twelve months, the stock’s valuation and / or prospects for the sector are VERY
FAVORABLE

Neutral. According to the analyst, in the next twelve months, the valuation of stock and / or sector ARE NEUTRAL OR
FAVORABLE but with a similar perspective to the IPC

Belowmarket. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NOT
POSITIVE

Sell. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NEGATIVE, or
likely to worsen

In reviewwith positive outlook

In review with negative or unfavorable perspective
ImportantStatements.
a)
Of theAnalysts:
“The analysts in charge of producing the Analysis Reports:
Jaime Ascencio Aguirre; Mauricio Arellano Sampson; Enrique Octavio Camargo Delgado; Ismael Capistrán Bolio; Pablo Enrique Duarte de
León; Araceli Espinosa Elguea; Roberto Galván González; Ana Cecilia González Rodríguez; Carlos Hermosillo Bernal; Santiago Hernández
Morales; Martín Roberto Lara Poo; Ramón Ortiz Reyes; Juan Enrique Ponce Luiña; Federico Robinson Bours Carrillo; Gustavo Adolfo Terán
Durazo; Jesús Viveros Hernández, declare”:
b)
1.
"All points of view about the issuers under coverage correspond exclusively to the responsible analyst and authentically reflect his vision. All
recommendations made by analysts are prepared independently of any institution, including the institution where the services are provided
or companies belonging to the same financial or business group. The compensation scheme is not based or related, directly or indirectly,
with any specific recommendation and the remunerationis only received from the entity which the analysts provide their services.
2.
"None of the analysts with coverage of the issuers mentioned in this report holds any office, position or commission at issuers underhis
coverage, or any of the people who are part of the Business Group or consortium to which they belong. They have neither held any position
during the twelve months prior to the preparation of this report. "
3.
"Recommendations on issuers, made by the analyst who covers them, are based on public information and there is no guarantee of their
assertiveness regarding the performance that is actually observed in the values object of the recommendation"
4.
"Analysts maintain investments subject to their analysis reports on the following issuers: AC, ALFA, ALPEK, ALSEA, AMX,AZTECA,
CEMEX, CHDRAUI, FEMSA, FIBRAMQ, FINDEP, FUNO, GENTERA, GFREGIO, GRUMA, ICA, IENOVA, KOF, LAB, LIVEPOL,
MEXCHEM, OHLMEX,POCHTEC, TLEVISA,SORIANA, SPORTS, VESTA, WALMEX.
On Actinver Casa de Bolsa, S.A. de C.V. Grupo Financiero Actinver
1.
Actinver Casa de Bolsa, S.A. de C.V. GrupoFinanciero Actinver, under any circumstance shall ensure the sense of the recommendations
contained in the reports of analysis to ensure future business relationship.
2.
All Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver business units can explore and do business with any company mentioned
in documents of analysis. All compensation for services given in the past or in the future, received by Actinver Casa de Bolsa, SA de C.V.
GrupoFinanciero Actinver by any company mentioned in this report has not had and will not have any effect on the compensation paid to
the analysts. However, just like any other employee of Actinver Group and its subsidiaries, the compensation being enjoyed by our analysts
will be affected by the profitability gained by Actinver Group and its subsidiaries.
3.
At the end of each of the previous three months, Actinver Casa de Bolsa, SA de C.V. Actinver Financial Group, has not held any
investments directly or indirectly in securities or financial derivatives, whose underlying are Securities subject of the analysis reports,
representing one percent or more of its portfolio of securities, investment portfolio, outstanding of the Securities or the underlying value of
the question, except for the following: * AEROMEX, BOLSA A, FINN 13, FSHOP 13, SMARTRC14.
4.
Certain directors and officers of Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver occupy a similar position at the following
issuers: AEROMEX, MASECA, AZTECA, ALSEA, FINN, MAXCOM, SPORTS, FSHOP and FUNO.
This report will be distributed to all persons who meet the profile to acquire the type of values that is recommended in its content.
To see our analysts change of recommendationsclick here.
24