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 standing by. Welcome to the Chedraui Fourth Quarter 2018 Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded.
Now it's my pleasure to turn the call to Mr. Diego Montes, [ Account ] Consumer Analyst from Crédit Suisse. Please go ahead.
Good morning, and welcome to Chedraui Fourth 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 assumption of Chedraui's management and the information currently available to the company. They involve risk, uncertainties and assumptions because they relate to upcoming events, and therefore, depend on circumstances that may or not may occur. Investors should understand the general economic conditions, industry conditions and other operating factors could also affect the upcoming 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. Antonio, you may begin your conference call.
Thank you, Diego. Good morning, everyone. It is a pleasure to be here with you today in this conference regarding Chedraui's results in the fourth quarter of 2018.
During the fourth quarter, we had excellent results from our retail operations in Mexico, as we achieved same-store sales growth of 5%, which is higher than the 3.7% same-store sales reported by [ Antad ]. In the U.S., we had same-store sales growth of 1.8% in dollar terms at El Super, while Fiesta sales showed important advances in customer accounts and units sold volumes.
I will go through the relevant figures. We had consolidated sales growth of 32.3%, same-store sales growth in Mexico of [indiscernible] [ 5% ], and in U.S. same-store sales growth of 1.8% in dollar terms. Invested CapEx in 2018, MXN 4,501 million and we opened 17 stores in Mexico and 1 in the U.S. during the quarter. Sales floor growth of 19.1% in the last 12 months.
I will proceed with a review of the financial results, starting with sales. Consolidated income increased, as I said, 32.3% to MXN 34,534 million. As I mentioned, in retail Mexico, we achieved the growth in same-store sales of 5%. While in total, sales growth was 8.9%.
This is the second quarter in a row that we have surpassed growth reported by [ Antad ]. In Mexico, we finished the year growing at an accelerated rate. During the last 12 months, we incorporated 35 net store openings that reflect a 6.1% growth in total sales floors.
Our real estate division continues to obtain good results. Revenue grew 6.6% in the quarter, reaching MXN 233 million. This growth is the result of higher revenues from lease agreements tied to inflation and the addition of 13,464 square meters of leasable area in the last 12 months. This new leasable area represented a growth of [ 3.9% ].
Gross profit. Due to the very competitive environment in Mexico, we maintained our aggressive pricing strategy. In Mexico, the gross margin was perfectly the same than last year. However, this strategy allowed us to obtain, in our opinion, great result in sales.
During the fourth quarter, we achieved consolidated gross profit of MXN 6,953 million. We achieved 31% higher than in previous years, and represent gross margin of 20.1%. Operating expenses, while we continue with a strict control on all our segments, we experienced accelerated store openings during the fourth quarter, the higher participation of the business in the U.S., which operates with higher expense structure than Mexico, and higher insurance provisions [indiscernible] in our U.S. operations combined to increase operating expenses by 40.8%, reaching an amount of MXN 5,239 million.
Total operating expenses, as a percent of consolidated sales, was 15.1%. Depreciation and amortization. The incorporation of 35 net stores in Mexico, with 5 in the U.S. and 61 Fiesta stores during the last 12 months as well as higher investments in technology and maintenance grew in this sector 52.4% versus prior. EBITDA in retail Mexico grew 8.9% versus prior MXN 1,270 million. EBITDA, as a percent of sales, was the same as last year.
The real estate division obtained an EBITDA of MXN 287 million, which is 71% higher versus last year. This result is due to the fact that during the fourth quarter we experienced evaluation of the investment propositions [ and we outperformed ] in this quarter. The effect of this evaluation was net increase of MXN 110 million. If you take out that evaluation, we would have experienced growth a little higher [indiscernible] compared to last year.
Regarding retail in the U.S., we obtained an EBITDA was MXN [ 157 ] million, which represents a reduction of 36.4% versus last year. EBITDA as a percent of sales was [ 1.4% ]. EBITDA amount and composition will be explained in the result of the segment.
Finally, consolidated level, we achieved an EBITDA growth of 8% to MXN 1,734 million. EBITDA as a percent of sales was 5%.
Going on to the financing cost. During the fourth quarter, financing costs reached an amount of MXN 530 million, which represents a growth of MXN [ 49.4 ] million. This amount includes not only debt for [indiscernible] Fiesta, but also increased significantly the expenses associated with the exchange rate [indiscernible] and updated taxes. This, for instance, represented an expense of MXN 70 million. Without them, the financing cost during the Fiesta transaction would have grown below the [ increase ] of sales. We would have grown -- would have experienced an increase of 29.2%.
Going over to net profit. Due to significantly lower performance than last year in the U.S. operations, we had a consolidated net income of MXN 401 million, which represents 1.2% of sales.
Carlos, maybe you can go and explain our U.S. operation, please.
Sure, good morning. To keep the figures clear, we will refer to the purchase of Fiesta and El Super separately. And together, we'll call it retail U.S.
Sales at El Super increased 10% during the quarter to MXN 7,567 million. This growth was driven by same-store sales growth of 1.8%, as Antonio mentioned, and the incorporation of 5 stores in the last 12 months, also the 5 El Super stores.
Fiesta sales for the quarter reached an amount of MXN 6 million -- MXN 6,030 million. And on the EBITDA side, fourth quarter EBITDA at El Super was MXN [ 260 ] million, representing 3% of sales. As I explained in the operating expense -- as Antonio explained in the operating expense section, increased insurance provisions cost our EBITDA to contract by 12.3% versus the prior period. That's built on the general liabilities side and the workers comp side.
EBITDA at Fiesta reached, we had a loss of MXN 63 million. This loss was primarily due to the implementation of a more aggressive pricing strategy that we believe firmly will get our customer count improvements as well as unit volumes to increase.
Total EBITDA for U.S. retail was MXN 167 million, with a margin representing 1.2% of sales. In the fourth quarter, the exchange rate for the conversion financial statements was 4.3% higher than last year's. Thank you, Antonio.
Thank you, Carlos.
Finally, going over financing and expansion. By the end of December 2018, the ratio of our net bank debt to EBITDA ended at 1.36x, with also net debt of MXN 8,875 million. Invested CapEx during this quarter increased to MXN 4,501 million with our expansion plan for the year ending as expected.
Now if you allow me, we can go to questions and answers, please.
[Operator Instructions] And our first question comes from Robert Ford from Bank of America.
It's Bob Ford from Merrill Lynch. I had a question with respect to Fiesta, if that's okay, Carlos. And there's been a lot of operating improvements made at Fiesta in terms of driving floor traffic and pricing in Fresh. Can you talk about what you've done? And then, may be, some of the operating trends in early 2019, right? It seems as if maybe it's on a discounting transitioned to something else in January and early February?
Certainly, Rob. Yes, well, as you know we've had -- we've attacked this in very -- many different angles. One of the largest -- one of the big concerns we had was looking at deterioration of customer count when we took over, but fortunately, since we've physically taken over the traffic has improved 330 basis points and unit volume has improved 700 bps since we took over. So that -- our big focus has been on making sure our itemization is correct, our ad comp positon is correct. But most importantly, we had to figure out where we were from a pricing standpoint versus all of our competitors. And it was evidenced that Fiesta was not well priced. So the first thing we did was get ourselves well-priced and see where that takes us and begin to make all of the adjustments, first, at the operating level and with our vendor community to make sure that we've got the right cost on the right item. So that's been our initiative. We certainly think the shift is pointed in the right direction. We all want some more speed, and we've made several management changes. We've brought on board [indiscernible] but we've transferred over to that division several experienced El Super executives, which we believe are going to be critical and -- in getting some additional speed and maximizing the end operations with the El Super side. You can imagine, it's very difficult to have 2 divisions discussing different promotions with the same vendor, so that's been kind of taken off the table, and we're operating as one unit with vendor community. So that's been positive. And so far, I will tell you, in January and February, we've had the best sales results yet, we're still a bit negative, and customer count also a bit negative. But once again, another 150 basis point improvement from where we ended up the year, so very positive there. And for the first time, we are showing positive 2% growth in total unit volume. So good indicators to start the year. Certainly on the El Super side as well, comp store sales through the first few months are positive 2.4%. So we're seeing things move in the right direction.
It's great to hear. And Antonio, can you talk a little bit about your outlook for Mexico, in terms of maybe same-store sales margins, base growth and CapEx for the year, please?
Well, thank you, Bob. So we're doing good in Mexico. We have been able to grow more than our competition, and we believe that we can still manage to sustain the sales that we have experienced. So we planned same-store sales for Mexico between 4% and 5% for the year. We have an expansion plan that will allow us to grow close to 3% in square meters in Mexico. And our CapEx for the year will be close to 2.6% to 2.5% of our total income. So we still feel that Mexico will allow us to grow quite strong through the years.
And Antonio, with respect to margins, how should we think about operating leverage? You've been reinvesting quite a bit back into value proposition. You had some expense pressure last year because of energy, if I'm not mistaken, in the second half, right, that you won't [ lap ] until July. Now we've got a little bit of labor pressure. How do you think about operating leverage in the context of a little bit more labor pressure this year, little bit of energy pressure in the first half, and then the competitive scenario?
We don't plan for any margin expansion for this year, even though that our sales growth allow us to have some leverage for some of the expenses because we are seeing a recovery in areas where we had experienced low sales increase in the past. And as you mentioned, we still have an energy cost that the base is not effective until the second part of the year. But on the other hand, our new stores are starting to mature. We opened a lot of stores last year and those stores are beginning to mature a little better. So moving in, even though the [ third night ] the opportunities for margin expansions. We are not suggesting any margin expansion in our guidance for the year. But we believe that we are going to be able to achieve the [ better margin than we had in plan. ]
Okay. [indiscernible]
Just a little expansions compared to the one we obtained in 2017.
Okay. Great. And then one last, if I may, that is the there's been just a little bit of labor activism along the border. There's reports this morning that all Mexican states are seeing a little bit of activism from an organized group that represent about 4% of the employee base. So how do you think about labor and what are you seeing [indiscernible] operations [ usage ]?
Well, we have been very, very, very close to our associates at store level. We have only -- very, I would say, limited -- contact limited to the city of Matamoros for 3 hours in 1 store, but that was diluted and managed very well. We are aware of that situation in Mexico. We're focusing on that. But we feel that the relationship that we have with our associates as well as with the labor union that service our associates at store level, we believe that we should be able to avoid any conflict in the near future.
[Operator Instructions] And our next question is from Luis Willard with GBM.
Actually a follow-up on Bob's question. So Antonio, looking at your guidance -- and thanks for your comments earlier about margin. So is it fair to assume that this [ price ] [indiscernible] that you started the first quarter of last year will continue through most of 2019? And that would be like the main reason behind you not planning for margin expansions in Mexico this year?
Yes, it is correct. We'll continue investing in prices because the pricing strategy is producing [ earning profit ] in -- not only in sales volume but also in customer traffic. But in the end that's, in our opinion, the way that our business should be managed. If there would be opportunities to increase margin without affecting the pricing strategy that would come from sales growth that believes the fixed expenses that would be the only reason that we would be experiencing margin expansions. But we are not projecting this. We are projecting same margin as last year. We achieved a very limited but still higher margin than the ones we experienced in 2017.
Okay. So ask -- if we ask this the other way around, you're only targeting...
Sorry, we were not able to hear you.
We lost you.
We lost Luis. I think we lost Luis.
If you wish, we can continue with the next question.
Yes, please.
And our next question is from Rodrigo Alcantara with UBS.
The first one is, perhaps if you -- your same-store sale performance by region, I mean, at least relatively in Mexico perhaps, also the breakdown by traffic [indiscernible]? And my second question would be about the minimum wage increase in California? And what exposure you have with this? What percentage of your labor would be affected by these increases?
Thank you, Rodrigo, for your question. I will try to answer the first 2 questions. About the region growth, [indiscernible] pretty much in line growth of 5% almost in every region. Still some [indiscernible] in the southeast, even though they are recovering, there's still a different growth compared to the one we experienced in the quarter. And about the traffic, we experienced 1.2% customer count growth same-store sales. And the rest came from traffic that we -- and the rest came from ticket growth. So ticket grew 3.8% and traffic 1.2%. I will allow Carlos answer the question about the wages in the U.S. Thank you for [ your ] question.
Thank you. Good morning, Rodrigo. Yes, as you may recall the minimum wage ordinance that took California's minimum wage to $15 started in 2017, and we expect minimum wage to be at $15 by 2022. For us, it affects our store base in California, and it impacts about 35% to 40% of the employees every year. Now -- so we've been living this through -- since 2017. So we've gotten used to it. We know the drill, and fortunately, the trade makes -- the whole market makes adjustments to counter this as best we can.
And our next question is from Miguel Ulloa with BBVA.
It would be 2. The first one would be regarding what kind of margins -- beta margins should we expect in the [indiscernible]? And the second one would be the [indiscernible] color on e-commerce and investment that you are looking for [indiscernible] how much of sales those e-commerce sales represent? There is some developments that you're doing right now.
Miguel, I will -- Carlos, if you please, can you answer the question about the U.S. operation, and then I'll try to answer the e-commerce part.
Yes. Miguel, if you don't mind, I think your question was what kind of margins we're expecting in the U.S.?
Right. For [indiscernible] for [ 2019 ].
Yes. On the EBITDA side, for 2019, our target just on Super side is 4%, and the target margin at the Fiesta side for 2019 is 2.8%.
[Operator Instructions] I'm sorry.
I'm sorry, I was -- let me answer the e-commerce part of the question for [ Miguel ] yet. Miguel, e-commerce represented -- omni-channel represented 0.8% of our sales last year, and we believe that this year it's going to represent 1.3% of our total sales, we're very much in line with our expected growth and it's going quite strong. It's happening more in the metropolitan area of Mexico City and some of the [indiscernible] anticipate.
And our next question is from Pedro [indiscernible] with Bradesco BBI.
I have 2 questions on Mexico actually. One, other than pricing what other kind of in-store initiatives would you highlight as your main focus right now, for example, private label or maybe some kind of [ storage ] forms that you think is worth mentioning? And a second question on Mexico, still making a parallel with how things went here in Brazil. Have you guys generally seen any kind of trend from consumers trading down for more retail type of stores to more -- to larger cash and carry ones? Anything you guys would highlight in this direction? Those are my questions.
Thank you, Pedro. Well, about the first question, we are basically depending of the store format that you talk about. We have first, four different store formats. One, is the big typical box of hyper market, where we focus pretty much on pricing and assortment. And depending on the customer level, we try to produce the ambience and the service at store level depending on the income of the customer. Then we have the Super Chedraui, which is, I would say, a small hyper market concept that focus still on pricing and little less on assortment just to try to service a few super market baskets and an extra SKUs on other categories. Then we would have a super che, which is more of an opportunity store which is around 1,000 square meters, that is concentrated basically in price, very, very limited assortment. And then supercito, which is just price and convenience. Those would be the strategies regarding our performance in Mexico. About the second question, which is a parallel to Brazil, can you repeat it, please, again, because I did not understand it very well.
Sure. Absolutely. In Brazil, we saw, during the crisis especially, consumers trading down from retail formats to cash and carry. I don't know if this is something that you guys are generally seeing in Mexico, this general shift? Or if you have any comments on...
Well, we are experienced by the second part of the year. We have seen that the formats that are more focused on price are experiencing a stronger growth trend than the ones focused in service and assortment. That would be the general [indiscernible] we have seen in the last 6 months. We believe that on the supermarket side, our price has been driving quite strong the customers in many of the formats that we have been talking about. So those are the trends I'm seeing, Pedro. Thank you for questions.
[Operator Instructions] And I'm not showing any further questions in the queue. I would like to turn the call back to management for any final remarks.
Thank you so much. Diego, I don't know, if you would like to do a remark before I do it. Should I just...
No. Go ahead. I'm [indiscernible].
Well, I just want to thank everyone for joining. And I hope to be talking to you after the first quarter results, where we have -- where we think we're going to show you very good numbers, that's what we project in Mexico and the U.S. Thank you so much.
And with that, ladies and gentlemen, we thank you for participating in today's program. This concludes the call -- conference, and you may all disconnect. Have a great day, everyone. Speakers, please stand by.