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 welcome to the Chedraui 4Q 2017 Results Conference Call. [Operator instructions]
I would now like to introduce your [ host for today's ] conference call, Manuel Melo, Credit Suisse analyst. You may begin.
Good morning, everybody. My name is Manuel Melo from Credit Suisse. Today, we have with us Mr. Antonio Chedraui, CEO of Chedraui; Mr. Carlos Smith, CEO of Bodega Latina; Mr. Humberto Tafolla, CFO; and Mr. Arturo Velazquez, 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 on 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 future results of Chedraui and could 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. Mr. Antonio, you may begin your conference call.
Thank you, Manuel. Good morning, and thank you for joining us for the presentation of Grupo Chedraui's 2017 Fourth Quarter Results. We are pleased to inform you that despite some challenges, we believe we had a successful year in both our Mexican and in the U.S. operations. In Mexico, our stores located in cities with all operations continued their positive trend that started since the third quarter. In the U.S., sales growth continued its solid performance. And for all of 2017, we successfully realized our expansion strategy by adding 29 stores in Mexico and one in the U.S.
I'll start with some of the highlights for the fourth quarter and then spend some time explaining the Mexican results in more detail, and then Carlos will provide U.S. -- details about U.S. operation. And the highlights are consolidated total sales growth of 5%, same-store sales growth in Mexico 4%, consolidated EBITDA growth of 3.8%. We opened 14 stores during the quarter. Net bank debt to EBITDA of 0.59x and CapEx invested in 2017 of MXN 3,178 million.
Going over sales. Regarding Q4 sales in Mexico, same-store sales increased 4%, largely due to an increase in the average ticket, while total sales increased 7% to reach a total of MXN 19,017 million. Q4 sales [ retail state division ] in Mexico totaled MXN 218 million and grew 10.5% compared to last year. This income growth is the result of increased rents for properties whose rents are tied to inflation and in addition of [ 14,885 ] square meters of new leasable area.
Gross profit maintained similar gross margin through effective promotional strategies and continuing aggressive pricing strategy. However, by adding the effect of the accounting reclassification of certain costs out of gross margin to operating expenses, we increased total gross margin by 7% to MXN 5,309 million. The final result represented gross margin of 20.3%.
Operating expenses. By maintaining strict control of operating expenses, both in Mexico and in the U.S., these expenses ended the fourth quarter at the same level before we already mentioned reclassifications. The effect of these reclassifications and an increase in insurance reserves resulted in an 8.5% increase versus prior for a total of MXN 3,712 million.
Depreciation and amortization. The addition of 29 stores in Mexico and 1 in the U.S. for the last 12 months, along with the increased investments in information technology resulted in a 4.3% increase in depreciation and amortization versus prior year.
On the EBITDA side. In terms of EBITDA, our Mexican retail operations grew 7.5% to MXN 1,166 million, while EBITDA as a percent of sales slightly improved. Regarding the real estate segment, EBITDA of MXN 168 million declined by 3% to prior as a result of MXN 37 million in proceeds from a favorable lawsuit during the prior year. Excluding this effect, EBITDA would have grown by [ 22.9% ] on this real estate segment. The real -- the retail business in the U.S. showed a reduction in EBITDA of 6.1%, due to a cumulative adjustment for insurance reserves. Finally, on a consolidated basis, EBITDA grew 3.8% versus prior and totaled MXN 1,597 million.
Financing costs. Debt costs in Mexico were pressured by 33% increase to last year's [ TA ] rate. These increased rates were offset by refinancing expiring facilities with lower market rates, lower average debt and reduced tax expenses for payments tied to inflation. The final result was that the financing cost increased by only 0.4% and totaled MXN 355 million.
Net income, the end result of our quarterly operations, was an increase of 8.3% to net income for a total of MXN 543 million.
Those would be the numbers of our Mexican and consolidated operations. Carlos, would you please comment the U.S. operations?
Certainly. Sales in the fourth quarter in the U.S. was strong, and as we continue the recovery from the slow start that we experienced at the beginning of fiscal year 2017. Same-store sales growth of 3.4% in dollar terms was a result of a healthy mix of a 1.5% increase in customer traffic and a 1.9% increase in the average ticket. Total Q4 sales of MXN 6,878 million were up 3.96% in dollar terms but down 0.5% due to the foreign exchange conversion. The currency exchange was 4.3% lower than the prior comparative quarter. And on a year-to-date basis, comp store sales grew 1.14%, which we are certainly happy about given the poor results we had in Q1 and the beginning of Q2.
EBITDA in the fourth quarter represented MXN 263 million, as Antonio mentioned, 6.1% lower than the prior comparative period. This lower result was primarily driven by cumulative adjustment to insurance reserves and obviously the current -- currency exchange losses. EBITDA represented 3.8% during the quarter. So, overall, I'd say we are encouraged with the momentum we picked up during the last 2 quarters as we head into fiscal year 2018.
Thank you, Antonio.
Thank you, Carlos. Finally, financing and expansion. Final 2017 net bank debt was MXN 3,544 million, which resulted in a net bank debt to EBITDA ratio, as I said, of 0.59x. The CapEx invested during the year increased to MXN 3,178 million. Our main strategy of focusing on proximity formats without sacrificing opportunities for the Chedraui and Super Chedraui stores continues according to schedule.
We opened 14 stores during the quarter under the following format: 3 Tienda Chedraui, 3 Super Chedraui, 2 Super Chain, and 5 Super Che stores. There is 7 of our -- the proximity format and 1 El Super store in the U.S. With these, we ended 2017 with 262 stores in Mexico and 59 in the U.S.
So please, if you allow me, we'll go to Q&A.
[Operator Instructions] Our first question comes from Sergio Matsumoto with Citigroup.
I have 2 questions. One is on the CapEx budget, the CapEx guidance that you released earlier in the year. Of the 70% CapEx that you would allocate to the smaller format, can you give us the breakdown what would be between Super Chedraui, Super Chain, Super Che store. That's the first question.
On the first question, it's 70% on the number of stores, but not in square meters and not on the CapEx amount. In -- that means that for next year, we plan to open 44 stores, where 13 are going to be of the big format, Tienda Chedraui, 5 Super Chedraui stores, and then 24 on the proximity format, but that is in number of stores. In square meters, it comes to a different number; and as a percentage of total CapEx, it's a different number as well. Most of the growth will still be in square meters on the bigger format, Tienda Chedraui and Super Chain -- and Super Chedraui. Out of the 44 stores, 18 will come on these new format. And the total CapEx will be MXN 3,950 million, which is approximately 3.8% of our sales.
Okay, great. That's very helpful. And my second question is also on the guidance, but this -- my question is in the U.S. I was wondering if -- with the faster same-store sales growth that you would expect this year, why this year you wouldn't have an EBITDA margin expansion in the U.S.?
Carlos, can you help us with that question?
Yes. Well, certainly, one of the problems that we've had in the U.S. that's eating up a little bit of the EBITDA margin, as you -- as I've discussed in the past, we are on a path to a $15 minimum wage in California, as well as in the state of Arizona. So both the state as well as the city of Los Angeles increases minimum wage every January and every July and that forces some compression on our wage scales that has even up a little bit of the productivity gains at the top line.
Next question comes from Benjamin Theurer with Barclays.
I wanted to quickly elaborate a little bit on the same-store sales performance in the 2 regions. So, I mean, clearly, I mean you ended up with roughly 4.5% for the year, which is more or less what you're guiding for in Mexico as well into 2018. In U.S., we have a little bit of an acceleration. Could you actually elaborate on a composition point of view how did traffic behave throughout the fourth quarter, what are the ticket dynamics you're seeing and that also very important on the U.S.? If you could share a little bit the composition on ticket traffic, what you're seeing in terms of the same-store sales performance in the U.S., that would be much appreciated. And then, I might as well have a follow-up.
Thank you, Benjamin, for your question. On the same-store sales in Mexico, basically, all the growth was by ticket increase. We did not increase traffic in our stores. And this result is still affected by the Southeast region, where growth has a different dynamic than the rest of the country. We calculate our sales -- we had, for essence, a pretty much -- distributed pretty much like as ANTAD. And we would have been growing even stronger than ANTAD and very close to Walmex result. But because of our sales distribution at the moment, we are being affected and that's why we were able to reach only 4.6% growth throughout the year and 4% in the very last quarter. And most of it -- not most of it, all of it came from ticket increase, but not by traffic.
Okay. And in the U.S.?
Carlos, can you help us with U.S.?
Absolutely, absolutely. As I mentioned earlier, so in the quarter, we had 3.4% positive comps and traffic represented an -- saw an increase of 1.5% and average ticket 1.9%. So it's not exactly 50/50, but very, very -- but close. And those are the trends that we're continuing to see.
Okay, perfect. Now, the follow-up I had and it's back to Mexico and it was actually what I was expecting. So with that relatively aggressive growth plan you've laid out about a month ago, targeting clearly 40-plus stores opening -- to be opened in 2018. Could you give us a little bit of a regional direction where you're aiming to put most of the efforts into -- in Mexico? I mean, I guess it's a lot in trying to further dilute the strong southeast exposure you're still having. So -- but just to confirm the regional exposure of the CapEx spend in Mexico for openings in 2018, if you have a little bit of detail here, that would be much appreciated.
Yes. Thank you for your question, again, Benjamin. Most of the growth will be in the metropolitan area of Mexico City and the central Mexico. We are avoiding, as much as possible, the weaker region in sales expansion at this time. So we're concentrating in these 2 areas basically.
Our next question comes from Luis Willard with GBM.
Could you provide us an update of the dynamics that you have seen so far in the performance of your proximity formats? How is that business behaving? Are you reaching your initial sales targets, your initial return targets? That will be my first.
Thank you, Willard. Until now, we have 12 stores at a very slow -- very small format and another 12 of the mid-size, those would be 24 with proximity format. And we are reaching our targets in half of them. We believe there are still some adjustments in assortment that we need to do. We need to also adjust our pricing strategy, but we believe we're pretty much in line with what we projected. We're happy to what we have seen at the moment. The assortment adjustment is focused now on smaller presentation of certain items that have not yet been in our stores, but we're happy. We're not losing money on both formats. And even though we're not reaching the return on invested capital we projected, we think that we are pretty much in line with our projections. We are happy with this format and that's what I can comment, Luis.
Antonio, and if I may follow-up, this is a little bit more on the financing side. Can you comment a little bit on the refinance that you've made over the year and what do you expect in terms of savings for interest payments for next year, given the lower rates that you've achieved?
The payments would be reduced basically because of the lower debt that we would have. Actually, the interest rate is higher. At the moment, we have an interest rate close to 7% to 8%, which is higher than what we had last year. But there will be a net debt reduction that is very, very important for us. But in the end, [indiscernible].
Our next question comes from [indiscernible] with HSBC.
My question is regarding the insurance liability expense in the U.S. Is that onetime expense, or we will see this expense affecting margins in 2018?
No, it's a -- what we are in depth doing is, recognizing an IBNR component to our general liability expense associated with the last 5 years of policies. So you will not see that again.
Our next question comes from Miguel Ulloa with BBVA.
Could be regarding the margin expansion [indiscernible] estimated for next year. Could you provide some color on how do you expect by region?
I will talk about Mexico. The expansion comes basically from 2 parts in Mexico, the EBITDA margin expansion. One is the -- basically the reduction of corporate expenses that are not growing in pesos, and that means that there is a reduction in terms of percentage of sales. And the other one comes from a reduction of inventories that is over a certain amount of days that we ended last year by 50% of that inventory that we used to have in the past. So that combination will produce margin expansion in Mexico, and we're seeing it happen already in the first quarter this year. Also, there were one-time effects of last year gross margin that affected, which is the vandalism and the earthquakes that experienced in Mexico. So that combination will produce the margin expansion in Mexico. Can you comment please, Carlos, on the U.S.?
Yes. On the U.S. side, what we're expecting in 2018 is really, as I mentioned earlier, we're experiencing annual labor cost increases due to the [Audio Gap]. However, what we're seeing is, we are gaining productivity on a sales per man hour basis every quarter. So that is where we're going to see some improvement and we're hoping it close down in bottom line.
[Operator Instructions] Our next question comes from Victor Cardenas with Scotiabank.
Just a 2-part question. Number 1, in regards to the -- if you could comment on the effects of U.S. tax reform in the U.S. operations. And the second one is also -- it's unrelated to that, but it's about your omnichannel strategy, if you could comment a little bit about that, including your CapEx, and along with any highlights that the company has envisioning or is envisioning for next year?
Yes. In terms of...
Carlos, maybe you could...
Yes. In terms of U.S. tax reform, I think our all-in rate when it's federal and state together is currently at around -- well, was at around 39%. We are expecting an all-in rate of 25% moving forward.
Yes, Carlos, just a follow-up there. In addition to that, do you expect any significant write-off in regards to deferred tax assets or anything else that we should keep an eye on?
Not at this time.
On the omnichannel business, we ended up last year, Victor, with 0.4% of sales. It's growing quite fast, it's doubling the numbers month-by-month, and we expect to end this year 2018 by 0.85% of total sales. At the moment, in February, we are reaching close to 0.58% of sales, close to 0.6%. And we're very happy with the growth that we're seeing at the moment. We believe it will keep growing, and we think that, in the next coming years, will be closer to 3% to 5%. But this year, we believe, we're going to end with 0.85% of our sales.
And I'm not showing any further questions at this time.
Manuel, would you like to close it or?
Sure, thank you. If there are no any further questions, we can proceed to Antonio for any closing remarks.
I just want to thank everyone for joining and hope to be talking to you soon with the first quarter results of this 2018. Thank you again.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.