Grupo Comercial Chedraui SAB de CV
BMV:CHDRAUIB
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Grupo Comercial Chedraui SAB de CV
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Good day, ladies and gentlemen, and thank you for your patience. You've joined the Chedraui Second Quarter 2018 Results Conference Call [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. [ Diego Matas ]. Sir, you may begin.
Good morning, and thank you for joining. Welcome to Chedraui's Second Quarter 2018 Results Conference Call. Today with us, we have Mr. Antonio Chedraui, CEO of the company; Mr. Humberto Tafolla, CFO; Mr. Carlos Smith, CEO of Bodega Latina; and Mr. Arturo Velázquez, Investor Relations Officer.
Before proceeding, let me mention that forward-looking statements are being made, which are based on the belief and assumptions of Chedraui's management and any information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or not may occur.
Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Chedraui and could also cause results to differ materially from those expressed in such forward-looking statements.
Now I will turn the conference over to Mr. Antonio Chedraui, CEO of the company. Antonio, you may begin your conference call.
Thank you, [ Diego ]. Good morning, and thank you for joining us for this conference to discuss Chedraui's results for the second quarter of 2018. The sales in the second quarter of 2018 was challenging due to the negative effect of the timing of Easter week. In 2017, Easter week was in April. While in 2018, it was in March. However, the results of all 3 segments was satisfactory, and we were committed to accomplishing even better results in the second half of the year.
It is important to note that during this quarter, we acquired Fiesta Mart, which is a 63-store supermarket chain located in the U.S. State of Texas. With this acquisition, we are the largest retail grocer in the United States that focuses on the Hispanic community.
I will start with the highlights. Consolidated sales growth of 21%. Same store sales growth in Mexico of 1.8%. Consolidated EBITDA growth before nonrecurring charges of 10.2%. Net profit growth before nonrecurring charges of 10%. Invested CapEx of MXN 1,283,000,000 in all 2018. The acquisition, as I said, of Fiesta Mart in Texas, which impacts the result of 2 of the 3 months of the period. And then same store growth of 16.9% in the last 12 months, of which 197,000 square meters come from the acquisition of Fiesta Mart in the U.S.
I will discuss the second quarter financial results, starting with the sales. During this quarter, our sales in Mexico were negatively impacted by a calendar effect, which is the shift of the Easter week. Same store sales growth was limited to 1.8%, while total increased 2.5% to reach MXN 16,709,000,000. The same-store sales increase was driven primarily by higher ticket.
We have a good presence in Mexico in areas that are affected by vacation season. Easter is very important in Mexico, and we suffered this effect of shift of the Easter week. But if you just consider the Metropolitan area of Mexico City, we have experienced a very important growth in the Metropolitan area of Mexico City. So the effect is very clear in Riviera Maya, Cancun and the Northwest region of Cabo.
On the other hand, our real estate division continues to obtain good results in Q2, increasing 8.7% to prior and reaching MXN 239 million. This growth is the result of higher revenues from lease renewal rates that are tied to inflation and the addition of 17,877 square meters of leasable area in the last 12 months.
Gross profit. Continuing with the implemented strategy during the first quarter, we increased our sales promotions management without reducing commercial aggressiveness. This has allowed us to increase our growth margin versus the previous year to offer the best prices to our customers. During the second quarter of 2018, we achieved consolidated gross profit of MXN 6,105,000,000, which is 25.3% higher versus last year. Gross profit as a percent of sales was 21.8%, which represents a 75 basis point increase to prior year.
Operating expenses. For operating expenses, while we continue to control cost across all of our segments, total expense grew 25.2% versus prior to MXN 4,567,000,000 and 16.4% of sales. This increase was due primarily to the increased operating expenses of recently opened and acquired stores that have not yet reached maturity and a higher expense structure in the U.S. and nonrecurring charges associated with the Fiesta Mart acquisition.
It is important again to note that MXN 110 million nonrecurring charge resulting from the Fiesta Mart acquisition in the U.S. was recognized in this quarter.
Depreciation. We experienced an increase of 15.2% versus prior. This was due to the opening of current new stores over the last 12 months, the acquisition of the 63 Fiesta stores in Q2 as well as the investment in IT.
Regarding the EBITDA. EBITDA retail in Mexico, we maintain the same EBITDA margin as a percent of sales with improved gross margin compensating for improved in operating expenses. Total EBITDA reached MXN 1,089,000,000, which represents 3.5% increase to prior.
The real estate segment increased EBITDA by 7.9% to MXN 176 million. EBITDA as a percent of sales in this segment was 77%.
Regarding retail in the United States. EBITDA obtained before nonrecurring charges was MXN 383 million, which represents a 36.7% growth versus prior with a margin of 3.5%. Included in the nonrecurring charge, the EBITDA result was MXN 273 million. The composition of EBITDA and its increase will be explained in the segment results by Carlos Smith.
Finally, at a consolidated level, we reached EBITDA before nonrecurring charges of MXN 1,647,000,000 with a 10.2% growth versus prior and a margin over sales of 5.9%. The EBITDA, including the nonrecurring charges, was at MXN 1,537,000,000.
Financing costs. Financing costs increased by 8% compared to the same period of the previous year, going from MXN 289 million in 2017 to MXN 313 million in 2018. This increase, although partially offset by lower interest expense associated with 25% lower average debt in Mexico, was driven by 2 months of interest on the debt obtained to purchase Fiesta Mart in the U.S.
Net income. The combination of the results described above boosted the growth in our consolidated net income before nonrecurring charges, which are the nonrecurring charges in the U.S., as I explained before. We grew 10% versus prior. Total net income reached MXN 578 million and represented 2.1% of sales. Consolidated income, including the nonrecurring charges, as explained before, was MXN 505 million.
So those would be the numbers of the consolidated numbers. Carlos, can you please go deeply to the U.S. numbers?
Yes. Good morning, everyone. As Antonio mentioned, we're pleased to announce that during the second quarter, we concluded the purchase of the Fiesta Mart chain. As many of you know, these stores are located entirely in the State of Texas with a significant presence in the Dallas and Houston markets, with 2 stores in the Austin market. With this acquisition, we double our store count and nearly double our total revenue.
For clarity's sake, we will refer to all stores operating before this acquisition as El Super and all stores acquired in the quarter as Fiesta Mart. All stores will be referred to as U.S. Retail.
The El Super sales reached MXN 7,042,000,000 with a growth of 5.7% in peso terms. Same-store sales were similar to last year in dollar terms. And excluding the Fiesta Mart acquisition, there was one store opened during the last 12 months. The 2 months of sales for Fiesta Mart in the quarter reached an amount of MXN 3,882,000,000.
EBITDA at El Super grew 8.8% during the quarter to MXN 305 million. EBITDA, as a percent of sales, at El Super was 4.3%, which is 12 basis points higher than the one obtained in the same period in 2017.
The EBITDA generated in the first 2 months of operation of Fiesta Mart was MXN 78 million with a margin of 2%. As a result of the acquisition, we had MXN 110 million in nonrecurring expenses during the quarter related to M&A and legal fees associated with the transaction.
Total EBITDA generated in the U.S., including the nonrecurring charges, was MXN 273 million, representing 2.5% of sales on a combined basis.
And during this quarter, the exchange rate utilized for the conversion of financial statements was 5% higher than previous year.
Thank you, Antonio.
Thank you, Carlos. Finally, financing and expansion. At the end of June 2018, the ratio of our net bank debt-to-EBITDA ended at 1.3x.
During this quarter, we continued to improve working capital. However, part of this improvement is temporary due to the fact that some suppliers have struggled to adopt new requirement -- new [indiscernible] requirement in Mexico. And therefore, certain suppliers' payables have been delayed. This situation is resolved by our vendors. Pending payments will begin to retail as normal. So we have this benefit, and we don't know when it's going to end.
The invested CapEx during the quarter increased to MXN 1,283,000,000, and our expansion plan for the year is going on, as expected.
So those would be the numbers and the explanations. If you allow me, we can proceed to our Q&A session. Thank you. So operator, we can proceed to Q&A if you will allow me. Thank you.
[Operator Instructions] Our first question comes from the line of Ravi Jain of HSBC.
Could you give us a little bit more color on the weaker same-store sales in El Super, those flat year-over-year? Is it an Easter impact? Is it the comp impact? Or are those the consumer? And also, what do you expect for the back half of the year for El Super specifically? And then on Fiesta Mart, the EBITDA margin was 2% for the 2 months. Is there some seasonality in those margins? Or should we expect it to be around 2% for the second half of the year?
Carlos, maybe you can help us with the question.
Yes. You bet. You bet. Look, we -- on the El Super side, yes, sales -- comp sales were basically flat during the quarter. Similar to Mexico, we had the Easter shift. That impacted us a little bit. And overall, we just did not have a good Memorial Day weekend, and it certainly happened nationwide. I think the weather impacted us quite a bit. So we also, on the tail end of the quarter, did not get a -- what we would call a traditional pre-4th of July sales push. 4th of July ended up hitting the first week of Q3, but it landed on a Wednesday, which is typically the worst possible day for a 4th of July calendar as folks don't use it as a long weekend. So overall, in the quarter, traffic was down about 1.5%, and ticket was up about 1.5%. So we expect to get back on positive territory for Q3 and Q4. On the Fiesta Mart side, well, as you know, very early. These are 2 months that we've had the stores in operation, and our expectation is for that margin percent to increase over the next 2 quarters.
All right. Perfect. And then one more quick question, if I may, in Mexico. I just wanted to understand on your strategy for e-commerce or the nonfood part of the business. Are you planning to be a little more aggressive like a couple of your competitors and increase the nonfood promotions, et cetera? Or do you prefer just focusing on perishables and groceries? Just want to understand your thoughts on that.
Okay. Thank you, Ravi, for your question. Well, on e-commerce, we're definitely investing. We believe that a certain percentage of the high-end customers will start buying through this channel. We have been quite successful in our launching at the e-commerce platform. This quarter, we reached over 1% of our total sales through our platform, that's mainly, of course, because of the Hot Sale promotion. But despite that, we had the same promotion last year, and it's a completely different number. We're very happy, and we will continue investing in our e-commerce platform. We believe that by the end of the year, we will be reaching close to 1% of the total sales. We projected at the beginning of the year that we would be close to 0.85%, but number will be higher than that. On the other hand, about the nonfood part of our business, we continually grow and invest in those categories. We are gaining market share in nonfood, mainly because some of it comes from the World Cup in soccer, which boost our sales in June at electronic department, basically television and screen. But also, soccer has been blamed, and those particular categories have a higher margin, and we will continue investing in those categories. It's difficult to shift from the food part of our business because we are very intensive in perishables and meat, and those departments are very important for our recurring customers, but we'll keep investing in the nonfood part of our business as well. Thank you, Ravi.
Our next question comes from the line of Luis Willard of GBM.
I've got a couple. The first is regarding Fiesta. I mean, it might be too early to tell, but anything that you could comment would be perfect on what have you so far identified as the most urgent matters to address in the -- regarding Fiesta Mart? That will be my first, and then I have a follow-up.
Carlos?
I think that as I've mentioned before, we -- we're confirming that the Fiesta brand is very strong. Great awareness in the community that it serves. Folks are very loyal to it. But as we've mentioned before, the asset certainly needs to be refreshed, so we're identifying what the CapEx requirements are going to be and how we're going to deploy that capital in terms of priorities. We need to improve our price image. And a lot of what we do both at Chedraui and at El Super is beginning to -- we're setting the foundation for that in terms of identifying what our pricing gaps are with our competitors, in what departments and beginning to lay the foundation so that, that becomes a cultural thing within Fiesta. But certainly, our price image in the community and vis-à-vis our competitors needs to improve. And ultimately, and the final thing that I would say, is we need to shift the culture from a center store-focused retailer to a perishable-dominating retailer, which is exactly how our consumer tends to shop. So I would say those are the initiatives that we're laying the foundation for in order to implement our strategies.
That's very helpful. And if I may have a follow-up that's regarding Mexico. I wanted to talk a little bit more about the performance of margins, both gross margin and the expenses side. I mean, despite the slowdown on same-store sales, you were able to maintain margins at the -- at Mexico subservice level. So would you say, Antonio, that, that was more of a onetime effect due to favorable mix by the end of the quarter, as you mentioned, on -- regarding the World Cup? Or this is something more of a sustainable reaping of benefits in terms of gross margin? Any comment will be perfect.
Thank you for your question, Luis. The benefit that we're seeing on the gross margin side, we think, is sustainable. We have been able to sustain the aggressiveness in pricing, in fact, largely reducing the waste we had with old inventories. For example, we have a better inventory than what we had in the past. We have been able to manage better our promotional activities. So we think the gross margin is sustainable. On the other hand, the -- on the expense side, we had the effect of the shift of the Easter season, as I said, that shifted sales to the first quarter. But we're very happy with what we're seeing in terms of sales without considering the effect of the Easter weak season. If you analyze the numbers even of this second quarter by region, we see, for example, that the Metropolitan area of Mexico City, we were able to grow stronger in the second Q than in the first with the same pricing aggressiveness and promotional activity. That means that we will be able to sustain those numbers. And with the sales growth that we are experiencing in May, June and even in July, we believe that we will have no problem to sustain the EBITDA margin growth that we planned and that we announced in the guidance at the beginning of the year. We believe that, that margin -- EBITDA margin gain is sustainable in the coming months.
Our next question comes from the line of Miguel Ulloa of BBVA.
[indiscernible] regarding Mexico and as a follow-up of what you were speaking before. Could you provide some additional color on your specialty in the second half? And how would you be able to accomplish the guidance of how you foresee the second half of the year?
Miguel, thank you again for your question. We believe that the second part of the year is very promising for our operation in Mexico. We believe same-store sales, we will be able to reach the annual guidance between 4% and 5% growth. That means the second part of the year, we will be able to grow closer to 5%. Our numbers in May, June and even in that worst thing in July are a little bit higher than the 5% that we have seen. So we're very happy with those numbers. About the margins, we will be able to sustain the growth of the EBITDA margin between -- from the 12.2% at the end of the year. We think that our sales growth and the controlled expenses that we are experiencing at the moment, we will be able to reach those numbers without any problem. I think that, of course, that will depend on the new government. But we think that in the future, there are very promising announcements that could happen on the Southern Mexico region that we could be benefited even more than what we projected at the beginning of the year due to the change of the Presidency and that -- the programs that have been already announced in some of the regions where we participate the most. So that, of course, will have to happen, and we believe that could happen by 2019 and so on.
And a second one, if I may, would be looking a little further into 2019, do you think you will be able to sustain the sales floor expansion? Or do you think you will decrease the rate of expansion?
No. We will be able to sustain our expansion. Actually, we are projecting 2019 to be able to grow between 6% and 7% in square meters again, which is the same percentage growth that we are experiencing this year in 2018. So we believe we'll be able to meet those numbers. And we are still open for any consolidation, but this happened either in Mexico and the U.S. But that's something that is not concluded or guaranteed. The expansion growth, we'll be able to reach that 6% by 2019.
[Operator Instructions] Our next question comes from the line of [ Luis Vega ] of GBM.
I have 2 questions. First, could you give us the comparable sales for this quarter? And second, for the acquisition of Fiesta for $265 million, could you disclose how much was equity and how much was debt, please?
About Fiesta, we did not use a disclosure about debt and equity. So excuse us, we're not disclosing that information because of the purchase agreement. The selling part did not allows us to disclose that and that does not allow us disclose anything. So I'm sorry, but we will not seem to be able to show that information.
Okay, perfect. And for the comparable sales for the quarter?
Total sales for the quarter. We reached for the quarter MXN 27,942,000,000, as I said, with the growth of 21% and that is with only 3 months of sales of the Fiesta Mart out of the 3 months, and then the rest that we consolidated. I don't know if that answers your question.
Thank you. And there appear to be no further questions in queue. Are there any closing remarks from management?
Thank you. Well, I just wanted to thank everyone for joining. Again, I think it's important to remark that the numbers show a very positive growth of 10% in EBITDA and in net income before the nonrecurring expenses or charges of the Fiesta Mart acquisition, on one hand. And on the other hand, we think that the acquisition of Fiesta confirms very promising opportunities that will allow us to grow our capital invested -- return of capital invested stronger and faster than what we projected. We projected to be able to grow to 14% in 5 years. We think that we will be -- achieve those numbers even earlier if Fiesta Mart contributes to the numbers that we projected. So we believe that those would be very promising numbers, and I hope to be talking back to you by the end of this quarter -- coming quarter. Thank you, everyone, for joining.
Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation, and have a wonderful day.