Grupo Comercial Chedraui SAB de CV
BMV:CHDRAUIB
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Grupo Comercial Chedraui SAB de CV
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Ladies and gentlemen, thank you for standing by, and welcome to the Chedraui Third Quarter 2019 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Andrés Ortiz. Please go ahead, sir.
Good morning, and thank you for joining. Welcome to Chedraui's Third Quarter 2019 Results Conference Call. Today with us, we have Mr. Antonio Chedraui, CEO of Chedraui; 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 beliefs and assumptions of Chedraui's management and in the 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 may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the results of Chedraui and could cause results to differ materially from those expressed in such forward-looking statements.
Now I'll turn the conference over to Mr. Antonio Chedraui, CEO of the company. Antonio, you may begin your conference call.
Thank you, Andrés. Good morning, everyone. It is a pleasure to be here with you today as I present the Chedraui's results corresponding to the third quarter of 2019.
During the third quarter, we are impacted by a deterioration in consumer spending in Mexico, which has slowed our sales growth in the United States. El Super maintained its year-to-date sales growth, while Fiesta was still negative in the quarter, posted a slight sales improvement versus Q1 and Q2. At Fiesta, our [profit's process] consistent situations continue, and we are closer to our goal of implementing the same operating procedures and standards we have in place at El Super.
Now I will go through the results related to the third quarter 2019 starting with the volume impact. Consolidated sales growth of 5.4%; same-store sales growth at El Super of 1.8% in dollars; consolidated EBITDA growth of 0.9%; opening 2 Chedraui stores and 3 Super Chedraui stores in Mexico, that is 5; our invested CapEx in 2019, MXN 3,167 million.
I will proceed with the financial results of the quarter. Total consolidated sales increased 5.4% to MXN 31,901 million, while same-store sales in Mexico increased 0.5%. As I previously mentioned, quarterly sales growth in Mexico slowed, but fortunately, we're seeing an important recovery in our sales in October. In Mexico and the U.S., during the last 12 months, we incorporated 23 openings. These new stores, our sales grew by 0.7%.
Our Real Estate division continued its momentum during the third quarter of 2019 with total income growing 13.9% to MXN 267 million. This growth is the result of lease agreement by a tighter inflation and the addition of 14,404 square meters of leasable area in the last 12 months. This additional leasable area represented a surplus growth of 4%.
Gross profit. Despite a very competitive environment in Mexico, we were able to maintain our aggressive pricing strategy without deteriorating the gross margin. In the U.S., El Super continued to improve its margin, while at Fiesta, we decided to invest in projects to promote sales, which led a reduction in the gross margin. During this third quarter, we achieved a consolidated gross profit of MXN 7,020 million, which is 6.4% higher than the prior comparative quarter. Gross margin as a percent of sales was 23%.
Operating expenses. In Mexico, we continue with the strict control of operating expenses. However, higher expenses in electricity and operating expenses associated with the 22 stores opened in the last 12 months, together with the greater participation of the United States business, which operates with the higher expense sale ratio, made this item to grow 9.1% to MXN 4.8 billion and accounted for 15% of consolidated sales.
Depreciation and amortization. The incorporation of 21 stores in Mexico and one in the U.S. during the last 12 months grew this segment by 20.8% in relation to the same quarter in the previous year.
Regarding EBITDA. In retail stores in Mexico, we managed to generate MXN 1,478 million and which represents 8% of sales. The Real Estate segment obtained an EBITDA of MXN 185 million, which is 9% higher in relation to the previous year.
Regarding retail stores in the U.S., the obtained EBITDA was MXN 557 million, which is a 5% decrease versus the previous year and represents 12.2% of sales. More detail about the composition of EBITDA will be explained in the results of each segment.
Finally, at the consolidated level, we achieved an EBITDA of MXN 2,220 million, which represents growth of 0.9% in relation to the previous year and 7% of sales.
Financing costs. During the third quarter, financing costs grew 16.4% to MXN 788 million. The increase reflects the increased debt associated with the purchase of Fiesta and the impact of implementing IFRS 16, which is the new lease accounting standard that we use at the moment. The biggest impact in this segment originated from a lower foreign currency exchange gain in Mexico of MXN 13 million plus higher interest expense of MXN 95 million associated with the additional short-term loans. These additional loans are in place now since we have almost normalized previously delayed payments to our suppliers that have problems using proper and accounted billing last year. We believe that these 2 impacts to be temporary and less impactful during the fourth quarter.
Net profit. With the obtained results for business, the consolidated net profit generated was MXN 301 million, which represented 0.9% of sales.
Carlos, can you please talk about the obtained retail results in the U.S. division?
Yes. Absolutely. Good morning, everyone. Sales in pesos in the U.S. grew 9.2% at El Super, reaching MXN 7,673 million. This was due to a same-store sales increase of 1.8% in dollar terms plus the incorporation of one store in the last 12 months.
Consolidated sales at Fiesta reached the amount of MXN 5,516 million. Q3 EBITDA at El Super was MXN 522 million, representing 6.8% of sales. Higher gross margin, controlled operating expenses and nonrecurring expenses in last year's base combined to drive a 36.8% growth in [indiscernible] versus the prior [ comparative quarter ].
At Fiesta, EBITDA reached MXN 35 million. This was primarily driven by a decision to increase our pricing aggressiveness, which, in turn, impacted our gross margin. So the impact to margin affected results. We believe that this price investment is important to attracting more customers and stabilizing our top line.
We continue to implement our operational and merchandising processes, which we expect will allow us to maintain our market aggressiveness in a profitable manner. We expect to finalize our primary initiative of mirroring additional El Super processes at Fiesta in early 2020.
Total EBITDA in Retail in the United States was MXN 557 million with a margin on sales of 4.2%. This quarter, the currency exchange rate used for the conversion of the financial statements was MXN 19.61, which is 4.2% higher than the one used last year.
Thank you, Antonio.
Thank you, Carlos. Well, finally, before going to Q&A, our financing and expansion. By the end of September 2019, the ratio of our net bank debt to EBITDA ended at 1.56x. Total net bank debt was MXN 11,032 million. Invested CapEx during this year increased to MXN 3,167 million, which is consistent with our extraordinary payments and expansion plans for the year.
So if you allow me, we will proceed to questions-and-answers section. Thank you.
[Operator Instructions] Our first question comes from Luis Willard of GMB (sic) [ GBM ].
I wanted to ask you about, how do you feel about the competitive environment in Mexico during the fourth quarter, especially in 2020? I mean there's some mentions in this call and in previous ones that things are getting a little bit more aggressive from most participants in order to [ score ] consumption. So how do feel about that in the fourth quarter and maybe 2020?
Thank you, Luis. Third quarter, I think, was very competitive. [ Soriana ] posted a very strong full year with a lot of campaign, probably the best one since they have bought [indiscernible] stores. So that was new. Also, I think that we lack a little bit of aggressiveness to -- compared to what we used to do during this quarter in the past few years. We didn't expect that it's going to be so competitive. We're coming strong for the fourth quarter, and we believe are going to recover sales even though we have seen in most of the regions where we participate in Mexico a slow down in consumption that, regardless, we are coming strong and we're seeing a quite strong month of October. So we believe we will have no problem to reach our sales guidance that we posted at the beginning of the year. So that would be my comment.
I'm sorry, [indiscernible]. You were talking about that you will reach your full year guidance?
I'm sorry. I did not hear the question. Can you repeat it again, please, Luis?
Yes. Sure. I just wanted to understand. You have said that you plan to reach your full year guidance.
Yes. Yes. We are pretty much in line to reach our guidance for the year. We are seeing a very strong sales growth at the beginning of the fourth quarter, and that leads to strong recovery. So we don't see any risk of not being able to reach our guidance at the end of the year guidance. The fourth quarter is coming out strong, and we're very optimistic about it.
[Operator Instructions] And our next question comes from Miguel Ulloa of BBVA.
That would be regarding the U.S. operation, especially in the case of Fiesta. I think Carlos mentioned that you're expecting to remain with the aggressiveness in prices for the rest of the year. That would mean what kind of margins [indiscernible]? And when should we expect the recovery on that?
Yes. Miguel, you are correct. I think we're going to start -- yes, the investment in margin that we made in Q3 was important. We had competitive entries in the marketplace that we're cycling through. We're seeing some internal deflation that we're cycling through. As you recall, we invested quite a bit in pricing. We lowered prices quite a bit in Q3 and Q4 of last year. So I think it's important that we'll be -- that margin investments gets calibrated through Q4 and Q1 as we take a close look at what categories are -- present elasticity in the market -- Texas maybe a little different to what we see in the California market. So I think we're going to start stabilizing that in Q4 towards the end -- middle to end of Q4 into Q1 certainly.
Just a quick follow-up regarding the Fiesta sector sales growth. Is this mainly -- how much traffic? How much is price deflation?
As you know, we were down 3%. We are very, very encouraged by our traffic counts. Traffic was only down, I think, 1.55%. So we're very encouraged with what's happening in our traffic. As I mentioned in Q3, we're cycling through a very aggressive opening campaign from a competitor that has a very strong position in Dallas that is doing a market entry in keeping Houston. So our Houston market has been impacted by that -- by those competitive openings. Fortunately, that gets cycled through here shortly. And as I mentioned earlier, we also cycled through our own internal deflation that we caused last year by lowering prices. So very encouraged with traffic. We have to continue to work on getting our assortment correct, some of the tools that we're putting in. We've talked a lot about our systems integration. We are rolling out our perpetual inventory system, which will allow us to really get a handle on our out of stocks and get back in stock quickly. So we're encouraged that some of these tools are going to help us with the additional items in the basket. But one point like I said, encouraged about the traffic counts certainly in Dallas. Austin's been performing nicely since late last year. And once we get through these 2 issues that we've got in Houston, I think things are going to look very nicely.
And our next question comes from Martha Shelton of Santander.
I was hoping you could give some clarity or some color regarding the same-store sales gain of 0.5% during the third quarter. It was a bit surprising to the downside given that food inflation was in the neighborhood of 4.5% during the third quarter. So can you tell me what's happening there? I understand the macro slowdown, but that number was just so low. Can you help me -- give a little bit more color perhaps on what's happening with -- in Mexico with the consumer slowdown? Are you seeing a downgrade? Are you seeing people instead going into -- or customers instead going into the informal market? What's happening there?
Thank you for your question. Well, actually, we had owned a growth of, as I already mentioned, 0.5%. That came basically from ticket. We were able to grow our ticket, but we decreased our customer count. And I think it was particularly because of 2 reasons. One is, yes, we see a deterioration in consumption in certain regions of Mexico for us, particularly the metropolitan area in Mexico City has been affected. Part of it is because some of the growing social spending in the past was done in a close card, where they had to buy directly from the retailers. Now they are being able to turn that money into cash, and for sure, it's going a little bit to the informal market.
To give you some light about this, for example, our Supercito stores, they are the proximity format. We are seeing a very important sales increase in that particular format, and we think it's coming from that government expenditure that was turned into cash and that have been using by the consumer in this particular area. So I would say that less of deceleration. It's the way the consumers' buying problems changing a little bit. But there is also a strong competition where [ Soriana ] had a very strong full year [indiscernible] that affected us, and that's what happened in the third quarter. But we've seen in the fourth quarter, at least in our own sales, October is coming very strong. So we expect a strong fourth quarter of this year.
Very helpful. So just to clarify, the [value of the dispense side], the change in that distribution mechanism for benefits, that was nationwide, right? Or was that only in the Mexico City area?
That was nationwide. But the participation with the previous card that they have, it was the peak card in the past and it was a closed card. They have to use it only at the formal retail establishments. Now it's a premium star card. Well, it's open, and they can [withdraw] cash from that card. So it's a bit different. And the base we had in this peak card in the past was very high in the Metropolitan area Mexico City, and that's where most of the spend is done.
Got it. And then just turning back over to the U.S. I understand that prior to IFRS 16, there was some guidance that you all had given in the neighborhood of, I believe, 3% to 3.5% as a potential EBITDA margin for the Fiesta business. Could you please update that guidance with the effective IFRS? Or do you have an updated number for how we should think about long-term profitability of the Fiesta stores and also the consolidated U.S. business now that IFRS 16 is through?
I'm happy to get back to you with those numbers. I'll do that through Arturo, if that's okay with you.
Cool. I really appreciate that.
And our next question comes Nicole Zaragoza of GMB (sic) [ GBM ].
I was just wondering if you could give us some insights regarding your e-commerce performance, how are sales growing and what's your penetration by today.
Thank you for your question. Well, e-commerce is growing really good in Mexico. We are over our goal. Our goal was reaching at the end of the year, 1.3% of our sales. We already met that goal actually last month. We are over 1.3% of our total sales and growing very strong. As I already mentioned, we are open to our own platform and any third-party platform that offers any door to consumer that want to buy [indiscernible]. We have an alliance with [indiscernible], with [ Mercado Libre ], Cornershop, Uber, and we are going to introduce Plus, our own platform. So we keep growing strong, and we feel it's going to go that way.
I was wondering if you could give us a breakdown in how much a third party start contributing to this growth or how much does this third party represents over the 1.3%?
Yes. Our own platform, it's over 50%, and then the rest comes from third party.
And I am showing no further questions at this time. I would now like to turn it back over to the speakers for any closing remarks.
Well, I want to thank everyone for joining, and have -- I wish happy holidays for everyone, and I hope to be talking to you about the fourth quarter at the beginning of next year. Thank you very much, everyone, for joining. Thank you, Andrés, and thank you, everyone.
So ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect. Speakers, please standby.