Herdez: an attractive play in a defensive industry, at a
Transcription
Herdez: an attractive play in a defensive industry, at a
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 jponce@actinver,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
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