Grupo Comercial Chedraui SAB de CV
BMV:CHDRAUIB
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Grupo Comercial Chedraui SAB de CV
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Welcome to the Chedraui conference call for the results of the third quarter of 2021. With us are Mr. Antonio Chedraui Eguía CEO of Grupo Chedraui; Mr. Carlos Smith Matas, CEO of Bodega Latina; Mr. Humberto Tafolla Nunez, CFO of Grupo Chedraui and Mr. Arturo Velázquez, Head of Investor Relations of Grupo Chedraui. As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in Grupo Chedraui's most recent annual report. At this time, I will now turn the conference over to Mr. Antonio Chedraui Eguía. Please go ahead.
Thank you. Good morning. It is my pleasure to be with you today. in this conference call regarding Grupo Chedraui's Third Quarter 2021 results. Thanks to our operational discipline and our ability to execute we closed the third quarter with great results in both of our markets. In Mexico, we continue to grow above market levels by leveraging on our competitive advantages meeting the profitability objective that we defined and communicated at the beginning of the year and achieving growth in our banners despite the high comparable basis.
In the U.S., we closed the acquisition of Smart & Final during the third quarter, and we see that the operation has hit the ground running due to solid foundations. With this, we approached the last quarter of the year with enthusiasm, determined to continue creating value for Grupo Chedraui and its shareholders.
Now if you allow me, we will review the results for the third quarter of 2021, starting with the highlights of the quarter, and then we will review the financial results. In this call, I will be mentioning reported and comparable figures. The latter refers to figures that exclude the consolidation impact of Smart & Final within Grupo Chedraui's results.
This quarter, we achieved 9.1% same-store sales growth in Mexico, exceeding the 5.4% increase reported by ANTAD. 7.5% consolidated EBITDA margin at 46.5% year-on-year increase in reported figures, and an 11.7% increase on a comparable basis. A 40% increase in consolidated net income and net debt-to-EBITDA pro forma ratio of 0.91x in Q3 '21.
As I mentioned earlier, I want to emphasize that on July 28, we closed the acquisition of Smart & Final. And as of that date, the results is to be consolidated into Grupo Chedraui. We are delighted to have the operation within Grupo Chedraui, and this allow us to reach a new customer base due to the strong complement it has with our existing banners.
Now we will continue with the financial results, starting with the top line. In the third quarter of the year, we registered consolidated sales of MXN 52,473 million, equivalent of a growth of 48.2% year-on-year. Excluding the consolidation of Smart & Final operation, we achieved comparable sales of 3.9%. This quarter, we had a negative 9.3% exchange rate impact on the revenues of the U.S. division.
For Retail Mexico, we achieved a 9.1% increase in same-store sales growth, which exceeds the 5.4% results reported by ANTAD for the same period. Sales for this division reached MXN 21,950 million, with double-digit growth in the South and Southeast, highlighting strong performance in the tourist areas and a moderate increase in sales in the center and the metropolitan regions of Mexico City.
I would like to highlight the great results we obtained in the omnichannel operations, which achieved a 4% share of Mexico's total sales in the quarter. This is due to the growth in both internal and third-party channels. Total Mexico sales grew 12.5%. In this quarter, we added 4 stores, raising net operations to 19 in the last 12 months, equivalent to a 1.2% increase in the sales floor for this particular division. Regarding the real estate division, revenue grew 27.1% to MXN 250 million for the third quarter of 2021. In relation to the leasable area, it increased 7.8% year-on-year.
Gross profit and operating expenses. On a consolidated level, gross profit reached MXN 11,835 million in the quarter. This represented a gross margin of 22.6%, which is a slight year-over-year contraction due to the competitive pressure in the grocery and traditional categories.
In relation to the operating expenses, we continue to maintain strict control across all business lines. However, this quarter, we had onetime transaction expenses of MXN 283 million related to the acquisition of Smart & Final. These expenses are nonoperating and nonrecurring and fully accounted for -- in this quarter. With that said, in the quarter, we recorded expenses of MXN 7,912 million which represented 15.1% of consolidated sales.
Regarding EBITDA, in the third quarter of 2021, we achieved a 46.5% growth on our consolidated results, reaching MXN 3,933 million, which represents 7.5% of sales. This growth was primarily driven by the consolidation of Smart & Final. Excluding extraordinary nonoperating expenses, the result amounted to MXN 4,206 million with a margin of 8% for the whole group.
On the other hand, on a comparable basis, EBITDA increased 11.7% to MXN 2,991 million with a margin on sales of 8.1%, resulting in an expansion of 60 basis points year-on-year.
In Mexico, EBITDA grew 15.9% to MXN 1,759 million and represented 8% of sales. The result is 24 basis points higher than the prior year and is in line with the full year profitability target.
In the Real Estate division, EBITDA showed a growth of 40% -- 40.2% actually, to reach MXN 175 million in the quarter, with the margin on sales of 69.8%. This result was due to the progressive normalization in the operation of this division.
Now Carlos, if you may please comment on results obtained in the U.S.
Yes. Thank you, Antonio. Good morning, everyone. Just as a quick reminder, like Antonio mentioned, the acquisition of Smart & Final closed on July 28. So the results presented here account for only 2 months of operation of this banner in the quarter.
During the quarter, total sales in dollar terms for the retail U.S. business grew 112% after the consolidation of the Smart & Final operation. Despite a high comparative base, total and comparative sales grew 2.3% and 2.7%, respectively. This strong result continues the strong momentum we experienced in previous months. In pesos, total sales grew 92.5% year-over-year, accounting for MXN 30,307 million. And this result includes an impact due to depreciation of the exchange rate in the period of 9.3% versus last year. Regarding EBITDA, the division's result which is inclusive of the Smart & Final acquisition, EBITDA grew 92.1% to almost MXN 2,000 million in the quarter. The total operation, the reported margin was 6.6% of sales. On a comparable basis, EBITDA grew 2.1%. However, the increase in dollar terms was 12.7%.
By format, El Super continues to demonstrate its resilience by expanding its margin 62 basis points to 8.7% of sales in the period. On Fiesta side, the EBITDA margin increased 74 basis points, up to 5.2% of sales and in line with our long-term profitability expansion plan.
For Smart & Final, it is appropriate to distinguish an operating EBITDA margin from the reported bond given that we had, as Antonio mentioned, onetime transaction expenses resulting from the acquisition. Operationally, the result in these 2 consolidated months was MXN 1,215 million with EBITDA representing 7.7% of sales. We believe that this margin is structural and sustainable and does not include potential synergies. After accounting for the nonrecurring expense, EBITDA margin represented 5.9% of sales. Thank you, Antonio.
Thank you, Carlos. Going over the financial expenses during the third quarter of 2021. The financial expenses reached an amount of MXN 1,207 million, resulting in an increase of 61.1% compared to the same period of previous year. This is explained by the increasing debt factor of the incorporation of Smart & Final and the cost of its operating leases accounted under IFRS 16 after the consolidation.
Net income. Consolidated net income for the quarter grew 40% compared to that achieved in the same period of 2020, reaching MXN 896 million representing 1.7% of sales. This amount includes transaction expenses related to the acquisition of Smart & Final. Excluding these nonrecurring expenses, net income grew almost 70% year-on-year and 261% in the last 2 years. That's numbers compared to 2019, demonstrating the company's ability to improve its profitability.
Financing and capital expenditures. Regarding leverage, the company recorded net debt of MXN 15,366 million, the pro forma net debt-to-EBITDA ratio, which includes estimating 12 months of Smart & Final results closed at 0.91x, while the report figures close to 1.26x.
Finally, the accumulated invested CapEx, including the investment in the purchase of Smart & Final amounted to MXN 15,224 million. Now if you allow me, we will move on the Q&A section, please.
Antonio. I'm sorry, I'm back on. I got disconnected.
Thank you, Carlos. Well, I explained the financial -- the financing and the net income and if it's okay with you, we will move to Q&A section.
I apologize. I don't know what happened. Thank you.
Thank you.
[Operator Instructions] The first question is from Mr. Bob Ford from Bank of America.
Congratulations on the quarter. You seem to be making some very good progress in Texas. That said, there's still a pretty good gap with other divisions in terms of EBITDA margin. And I was wondering how we should think about that. Is Texas just a tougher and lower margin market structurally? Or are there still mix and other opportunities that you can develop? And I think the margin improvement that you have more broadly in the context of what appears to be a very difficult labor market is even more impressive. And I was wondering if you could just comment generally on the labor market in the Southwest of the U.S. and your expectations going forward? And then lastly, Carlos, you made a mention of synergies, right? And [Technical Difficulty] you've had a little bit more -- sorry. And then lastly, Carlos, I think I got cut off. But now that you've had a little bit more time with the asset, you made a reference to synergies. And I was wondering what your synergy expectations are? If you could just help us to mention kind of the scope and the magnitude of the opportunities that you see across the banners?
Yes. So a couple of things on the Texas market in terms of margin. Our cost of goods aren't where we want them to be. So we know what we need to do in terms of addressing that delta between the El Super banner and Fiesta. And it's part of the built-in strategic plan we have for that asset. We knew it was going to take us a little bit of time, but we have clarity as to what our strategic plan is. And I think we're going to be able to execute that in the next 24 months or so. So I'm comfortable about that side.
One of the issues that we've had is that we still don't have the perishable mix where we want it to be. And a lot of that is due to the drops in traffic that we've seen post COVID. So that's been a category that's had a more difficult time ramping up.
Now having said that, certainly, Texas is different from California. There's a lot more prevalence of Walmart and H-E-B, and it's -- you're kind of stuck in the middle of the sofa that those 2 guys are in. So that's always a challenge. But we feel very good about the investments that we've made in the asset. We continue to bring up that fleet up to standard. Remember, there hasn't been a lot of CapEx there since the late '70s. So that was part of our plan as well as we commented.
So we feel good about where we are and where we're going, and we're very aware of how we're going to bridge that gap, but we think that there's great profitability potential there.
The labor market is still tight. And I would say that's in the Pacific -- in the West Coast as well as the Southwest. There has been a little bit of relief in the Texas market as some of these unemployment benefits have faded away. However, structurally, we've got higher labor costs across all the banners same for our competition, same for our vendor partners. So a lot of these price increases that we've been able to pass along to consumers, I think many of them are here to stay.
On the synergy side, in the new banner Smart & Final, lots of work to do. We believe that there is tremendous opportunity in the procurement side. We've got some benefits that go both ways. I mean Smart & Final has synergies for the old Super banner and Fiesta banner and these other 2 banners have synergies for them, particularly on operations side. And we're slowly identifying more and more opportunities on the corporate side, insurance, all of the -- in the operations side, all of the non-merchandise categories like supplies, bags, security, all of these other expenses that are important on the P&L.
We underwrote our plan with $25 million of synergies, and I think they are more than achievable.
That's very encouraging. And do you see any cost to achieve those? Or is that net of expenses?
I think that -- no, I don't think that we have a lot of costs associated with achieving those synergies.
Great to hear. Again, congratulations.
Yes. Thank you, we've got a very exciting platform here in the U.S.
[Operator Instructions] Our next question is from Mr. Rodrigo Alcantara from UBS.
I guess 1 in the U.S. and 1 in Mexico, if I may. In the U.S., Carlos, what I just was wondering, if you could walk us to the integration process or the plans in the -- over the next few months with the Smart & Final, right? I mean at some point, but to some extent, it will be a different process than in Fiesta, right? So just curious about what should we expect about your plans in terms of synergy creation, commercial initiatives at -- to Smart & Final? That would be my first question.
The question in Mexico would be related to the promotional and competitive environment. I mean how do you see the consumer reacted to inflation? Are you seeing some slowdown in terms of volume? Just curious if you can comment a bit about that [ forces ] of Mexico perhaps performance by region? That would be helpful.
Maybe you can start with the U.S. and then I take Mexico. Thank you, Rodrigo.
Sure, yes. So as we've said, as we've commented in previous calls. The -- unlike previous acquisitions that we've made, the Smart & Final acquisition is one that's very interesting and was very attractive to us because it is a company that's operating very, very well with a very strong management team. And we don't want to interrupt all of the momentum that they have. Our plan of integrating that is we will be running 2 distinct banners, right? We've got the Smart & Final banner that intersects the traditional supermarket with the club. And then you've got the Hispanic division of the El Super and Fiesta Mart banner, everything is related to operations to merchandising to HR, all of that to logistics, all of those pieces stay within the banner. We see tremendous opportunity in some -- consolidating some back-office activities such as IT, such as real estate, finance and accounting, those activities can be consolidated and they provide a platform for future acquisitions where you can plug and play. So that is our plan. I think we're going to be moving forward with some corporate consolidation steps, let's call it, Phase 1 here at the beginning of 2022, which we're very excited about.
But in general terms, the divisions will operate independently. Now when I say independently, that doesn't mean that the purchasing teams from each banner, they're sitting down together evaluating best practices and sharing on those best practices to obtain some of these synergies. So for instance, we have our purchasing teams from the Smart & Final banner and from the El Super and Fiesta Mart banner sitting with Coca-Cola, Pepsi and all these important vendors together, right? But they execute independently. And that goes to -- that's exactly the process that we're following in operations, loss prevention, IT and in many cases, we're doing it together with the Chedraui. So I'm very happy to report that the way the teams have been working, and the progress that we're making, we're very, very encouraged by.
Thanks, Carlos, that's very clear.
Thank you, Carlos. Well, thank you, Rodrigo. Look in Mexico as well as in the U.S., we continue to have tailwinds. In the U.S., we were able to grow same-store sales in dollars by 2.7%. In Mexico, same-store sales 9.1%. We have been able to beat their competition on a nationwide basis, but region by region as well. We have tailwinds on particular regions like the tourist areas such as the Southwest, for example, growing double digits. The Northwest, which is Cabo and La Paz growing double digits, and we are benefiting from that.
We are -- about the inflation, we are happy to report that our customer base is returning to our stores. We have been able to grow on transactions, 9.2% in the quarter. The customers continue to return to our stores as well as sustaining our online sales on a 4% basis. So tailwinds keep flowing and we are happy to report that.
October looks very, very good with higher numbers than what we had in the quarter. So we expect that the tailwinds should continue for the fourth quarter of the year.
That's great. And just a final question here. Are you experiencing any material -- or do you foresee any material disruption here coming from the ongoing supply chain crisis that we are experiencing? Is it difficult?
Yes, we are in all of our imports coming from abroad. And some of our vendors are struggling, for example, on the electronics and the TVs, for example, on the telephones, on the cell phones, some hard goods, we're struggling to get the products we need to reach the demand that we're seeing. We're struggling on that. On the general merchandise side inputs that are coming from China. For example, we are struggling a little bit with that. But we're being able to substitute some of these and still hold our sales growth that we're showing at the banner. But yes, we are seeing some problems to get the products we need to meet the demand that we have in Mexico.
Our next question is from Kai Creed from Barclays.
Congrats again. I guess, for us, we are wondering maybe more numbers or growth or the store openings for the U.S. operations, especially with Smart & Final? And maybe any CapEx plans for U.S. operations again?
Yes. Good morning. Yes, we're currently in our budgeting process across all banners. But yes, typically, we've been looking at 2 to 3 stores on the El Super side. As you know, we've halted that growth as we integrated the Fiesta banner, but we're back on track. We are aggressively looking for new sites. We have several in the pipeline. Unfortunately, the lead times for equipment and construction material is quite long. So we're already building in our pipelines through '23 and '24. And we're doing the same thing for opportunities on the Fiesta side as well as opportunities on the Smart & Final. Smart & Final has been in the nongrowth stage for a few years, and I'm happy to report to the team that we're already including 2 new sites for 2022 and restarting or remodel program has been Smart & Final as well with a little bit more aggressive growth plans for '23 and '24.
Okay. Great. Great. And I just -- and do you have any like projections for CapEx maybe in either region?
Well typically our typical CapEx is -- ranges from 1% to 2%. So I think you'll get more guidance here in the coming months as we finalize our plans for 2022. But that's where it's currently at.
Our next question is from Rodrigo Echagaray from Scotiabank.
Just a couple of questions from my end. Can you talk about the breakdown of online sales between third-party and internal channels, both in Mexico and the U.S.? And the second question is related to the low liquidity in the shares and the fact that the U.S. is now over half of EBITDA, would you consider listing shares in the U.S. as a means to increase liquidity and perhaps attract a different sort of investors in your business mix?
Thank you, Rodrigo, for your question. Well in Mexico, we have around 50% of our sales come -- our online sales come from third-party platforms, such as Cornershop, Rappi. And Carlos, can you comment at the U.S., which is basically a Smart & Final and that has close to 12% online sales as well and then Super and Fiesta with very limited online participation.
Got it. And in terms of the listing of shares in the U.S. given your business mix? Any thoughts on that?
That's a real possibility that we might pursue in the future. At the moment, we are concentrated in the integration of our U.S. operation and obtaining the synergies that we projected and we believe we're going to be able to reach a higher number than the MXN 21 million that Carlos just spoke about and that we projected at the beginning. So we are concentrating on that. And also taking advantage of growth opportunities in Mexico. We're seeing opportunities at the moment to grow in Mexico, not only organically, but maybe by the acquisitions that are -- there's something on the table that we're looking at. So we're more focused on that. But of course, we have thought of that possibility to be able to add liquidity and increase the price of our stocking. That's the opportunity that we're seeing. We're considering that, but it's not something that we will do in the very short term. In the very short term, we're focusing on what I just spoke about earlier. Thank you very much for your questions.
Our next question is from Anabel Lopez from GBM.
I have some questions regarding the performance in Mexico, if I may. When it comes to omni channel, what was the driver of the huge growth in e-commerce penetration? And regarding same-store sales in Mexico and the margin expansion, are those sustainable? That would be -- those would be my question and congratulations on a great result.
Thank you, Anabel. I'll start with the same-store sales in Mexico. We have been able to sustain our -- not only to sustain, but to increase the EBITDA margin and compared to what we achieved last year, we believe that it's sustainable. We think we are seeing some more opportunities to increase that margin. So in the end, we expect to be even over our projected guidance that we projected at the beginning of the year. So yes, the answer is we can sustain same-store sales if the tailwinds continue like that and be able to achieve even more margin -- EBITDA margin that we've been projected.
On the e-commerce side, I think that the strategy -- our strategy has been able to produce good results, not only with the own platform but with a third party. But that connected to our CRM program, which is our customer base that we have where we know our customer, we know how to reach them. We know what they are buying. So we are starting to do particular promotions to groups of customers and that is producing an increase of sales. That's why we have been able, even with very, very high comparable basis to last year because of the pandemic, but to sustain the participation in sales of e-commerce. And that, I think, makes something very particular about Chedraui, which is our CRM program.
And again, congrats on the results.
Our next question is from Miguel Ulloa from BBVA.
I have a couple of those. The first one would be regarding the joint venture with Smart & Final in Mexico. Could you provide some color on the plans on [ progress ] so far of what you're planning to do in the short term? And the second one would be regarding the potential impact of the energy reform in Mexico. Do you have calculated any numbers on that?
Thank you, Miguel. Well, about the joint venture. Yes, we have a joint venture with the [indiscernible], 16 stores in the Northwest. We are very happy with that joint venture. We plan to continue. Actually, we're opening 1 more store at the beginning of next year. And we believe there's a huge growth opportunity for this format in many cities in Mexico, not just in the Northwest, where we have presence at the moment. It's a huge opportunity. And we believe we will pursue that opportunity that there is in the market. About the energy reform, we're still doing numbers about it. We believe there is a possibility that we are going to be able to sustain what we have in our base, a little over of 70% of the energy that we use in our stores in Mexico. It's green energy coming from [indiscernible] energy. So we believe we will be able to sustain even that even with the reform. If that changes, we are doing numbers about that. And for sure, we will be affected. But we don't know exactly what the number will be. That depends a lot on the particularities of the reform. We still -- I'm not sure how the reform will end up. But yes, we will suffer probably some marginal effects that probably reached to maybe 2 to 3 basis points on the EBITDA margin.
That was the last question. I will now hand over to Mr. Antonio Chedraui Eguía for final comments.
Well, I just want to thank everyone for joining, and we were happy to report, I think, excellent numbers, and we think that the tailwinds will continue for the fourth quarter. Thank you, and I hope to be talking to you again at the beginning of next year. Please stay safe. Thank you.
All conference hosts have hung up. This conference is over. Thank you.