Grupo Comercial Chedraui SAB de CV

BMV:CHDRAUIB

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Chedraui Fourth Quarter 2019 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to your speaker today, Andrés Ortiz, consumer analyst from Crédit Suisse. Please go ahead, sir.

[Andrés Ortiz, analyst]

Thank you very much. Good morning, and thank you for joining. Welcome to Chedraui's Fourth Quarter 2019 Results Conference Call. Today with us, we have Mr. Antonio Chedraui, CEO for 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 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 operational 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'll turn the conference over to Mr. Antonio Chedraui, CEO of the company. Antonio, you may begin your conference call.

[Jose Antonio Chedraui Eguia, executive]

Thank you, Andrés. Well, good morning, everyone. It is a pleasure to be with you today for the 2019 Grupo Chedraui fourth quarter conference of results. 2019 has been a year of challenges for Chedraui. On one hand, in Mexico, we experienced a deceleration in consumer spending in the second half of the year, and we migrated our ERP system to the S/4 HANA version of SAP. Similarly, in the U.S., we implemented systems and processes at Fiesta that are already [ set up ] at El Super. These to changes our systems in both countries will allow Grupo Chedraui to continue to improve our processes and keeping the preference of our customers.

Now I will go through the results related to the fourth quarter of 2019, starting with our relevant facts. Consolidated sales growth of 0.9%, same-store sales growth in Mexico of 2.1%, consolidated net income growth of 95.4%, invested CapEx in 2019 of MXN 4,092 million, 5 store openings in Mexico during the quarter and sales floor growth of 2.2% in the last 12 months in Mexico.

We will proceed with the financial results of the quarter, starting with sales. Consolidated income grew 0.9% to MXN 34,831 million. As I first indicated, in Retail Mexico, we experienced an important consumption deceleration, which has especially concentrated in the central areas of the country, particularly in the metropolitan area of Mexico City. However, good results in the Southeastern portion of the country, where we have a strong presence, allowed us to achieve the same-store sales growth of 2.1%, with total Mexico sales growing 4.7%.

In Mexico, during the last 12 months, we have incorporated 9 store openings, which resulted in a 2.2% of sales floor growth. Our Real Estate division continues to show good results during the fourth quarter of 2019. Its total income was MXN 266 million, which represents growth of 14.1% in relation to previous year. This growth is the result of higher revenues from lease agreements with rents tied to inflation and the addition of 18,216 square meters of leasable area in the last 12 months. Total leasable area grew 5.1%.

Gross profit. In Mexico, we were able to keep our price aggressiveness and at the same time, we maintained the same gross margin as last year. In the U.S., we managed to increase the gross margin at both El Super and Fiesta during the fourth quarter. Consolidated gross profit grew 2.3% to MXN 7,162 million, and gross profit was 20.6%, which is 29 basis points higher compared to the same quarter in 2018.

On the expense side. At a consolidated level, operating expenses get the same relation to sales as a slight increase in Mexico was offset by an important reduction in the United States. Total operating expense grew 0.9% to MXN 4,845 million, and this represented 13.9% of consolidated sales.

Depreciation and amortization. Due to the implementation of IFRS 16 during the fourth quarter 2018, depreciation adjustments were made with the changes concentrated in the United States. Because of these changes, depreciation expense has been normalized and the net result has reduced depreciation expense of 18.3% versus prior year.

EBITDA. Consolidated EBITDA increased more than the rate of sales, reaching an amount of MXN 2,317 million. EBITDA grew 5.4% and 29 basis points over last year and represented 6.7% of sales. The EBITDA amount and its growth will be explained in the results of the segment -- of each segment.

Financing costs. During the fourth quarter, the financing costs decreased 8.7% and reached an amount of MXN 829 million. This reduction is mainly due to a lower interest rate in short-term cuts this year as well as the exchange rate fluctuation and updated tax rates. The reduction from the change in exchange rates and taxes represented an amount of MXN 70 million in 2018. And without them, financing costs will have decreased 1%.

Net profit. Due to significantly better performance than last year's in Retail in the U.S., we had a consolidated net income of MXN 328 million. Net income grew 95.4% versus the prior comparative period and represented 0.9% of sales.

Now Carlos will talk about the results obtained in the U.S. Please, Carlos?

[Carlos Matas, executive]

Yes. Thank you, Antonio. Good morning, everyone.

Retail in the U.S. Sales at El Super reached an amount of MXN 7,492 million, with same-store sales increasing 1.7% in dollar terms. The growth in pesos was 1% due to the exchange rate effect of the peso against the dollar. Sales at Fiesta reached an amount of MXN 5,389 million, representing a decrease of 3.7% in dollar terms versus the prior year.

On the EBITDA front, this quarter's EBITDA at El Super was MXN 501 million, representing 6.7% of sales. Due in part to nonrecurring insurance provisions that occurred in 2018, EBITDA showed a 22% increase compared to last year. At Fiesta, EBITDA showed an important improvement due to a better combination of gross margin and a reduction in operating expenses. These reasons combined for a 206% growth to MXN 165 million, representing 3.07% of sales. Total EBITDA in the U.S. was MXN 667 million, showing growth of 43% versus the prior comparative quarter, representing 5.2% of sales. During this quarter, the currency exchange rate used for the conversion of the financial statements was 3.9% lower than the one used last year.

Thank you, Antonio.

[Jose Antonio Chedraui Eguia, executive]

Thank you, Carlos. Well, financing and expansion. By the end of December 2019, the ratio of our net bank debt-to-EBITDA was 0.04x, with total debt of MXN 9,517 million. Invested CapEx given this quarter increased to MXN 4,092 million.

Now if you allow me, we will proceed with the question-and-answer session. We are ready.

[Operator]

[Operator Instructions] Our first question comes from Rodrigo Alcantara of UBS.

[Rodrigo Alcantara, analyst]

So my first question is regarding the U.S. operations. Firstly, if you can help us understand the pricing strategy you implemented at Fiesta. Looks like this time, it did support your gross margin, but same-store sales still looks a bit low. Also, on these improvements you mentioned at the OpEx level, can you give us some examples of what you did here? That would be my question for the U.S. section, and then I have a follow-up for Mexico.

[Carlos Matas, executive]

Yes. Good morning, Rodrigo. On the -- the strategy is really, as we've discussed in many conferences during 2018, we've been working on the top line. Now during 2018, it was a foundational year, as you know, where, as Antonio mentioned earlier in the conference, Fiesta was all about putting down the foundational pieces to grow the company. And that includes changing processes, brand new systems. We -- I'm happy to report that now we are on a mirror image of the systems we use at El Super, which now include the ability to manage perpetual inventory. At Fiesta, that's a huge accomplishment because of the high SKU count that we have there compared to El Super. So it was imperative that we get that under control so that we really have a window into what the actual out-of-stock situation can be at any particular time, at any particular store. This is something that Fiesta has never had in its 42-year history, and it's going to be a wonderful tool that we're going to be able to harvest to continue to grow sales.

So, fortunately, we're seeing continued improvement in sales in Q1. Last month, I'm happy to report we're basically -- in February, we're basically flat. Our Dallas stores grew 1.1%, often continues to grow. And one of the 3 districts in Houston showed some growth in February. So some of the things that we're doing are beginning to turn the tide on the top line. The pricing strategy was really very simple, just like what Chedraui does and what El Super does. We're very, very aggressive with price.

We have a series of tools and -- that we use to monitor where we are against the competition. We target different competitors in different categories, in perishables, in nonperishables. And as I've mentioned before, a key indicator of what we're looking at is how our perishable departments are growing quarter-to-quarter. And in Q4, perishables grew 162 basis points. So far in Q1, we've grown another 62 basis points. So when you're getting that type of growth quarter-over-quarter, that shows us that those categories that are important margin builders for us are really beginning to take hold.

So we are continuing to address item by item, the key items in every single one of the categories. The first thing we do is we get the price right according to where the market is, and we aggressively go after vendor negotiations to get back in line on the margin side. That's what we did. And it showed in Q4 with a slight improvement in sales. I know we're still negative, but we're seeing that trend going in the right direction. We've got some markets already that are positive, and we continue to battle hard on the margin side. So it's what we thought we are going to get into. And fortunately, now the foundational pieces of what we did throughout 2018 are in place. And now it's just about blocking and tackling, lowering prices, increasing margin and attacking expenses.

And on the OpEx, really what we've been focusing on is operational discipline in many fronts. The most important one is on labor productivity. We were -- Fiesta was a company that was really scattered in terms of productivity rates. They've never measured labor on a sales per man hour front. And that operational discipline that you see at Chedraui, that you see at El Super, is taking hold on the Fiesta side. And we still have a long way to go. Our productivity levels aren't where we want them to be, but they are certainly much better than where they were before.

[Rodrigo Alcantara, analyst]

Understood. And just -- okay, for Mexico, just to clarify. So you mentioned that in Southeastern space, your same-store sales for the quarter was above 3%. Is that correct? You can repeat, please, the breakdown or a bit of color on how same-store sales compares in different regions of Mexico?

[Operator]

And our next question comes from Antonio Hernández.

[Antonio Hernández Vélez Leija, analyst]

Can you hear me?

[Jose Antonio Chedraui Eguia, executive]

Yes, I hear you well. I'm sorry, we got disconnected. I don't know what happened. Do you hear me?

[Antonio Hernández Vélez Leija, analyst]

Yes, yes, yes. I can hear you. Now that, I mean, almost 2 months of the year already gone, what are your expectations for Mexico? Would you reiterate the previous guidance that you provided of having same-store sales growth of close to 4% in Mexico? Do you think that's feasible? And also, could you provide more light on what are your expectations reading like, do you expect more of that performance to come through the second half of the year or to be more like stable?

And my second question would be also regarding floor sales growth in Mexico. You also mentioned that you're expecting it to grow approximately 3.4% during this year. Can you give more light on that? Are your expectations the same? And especially now that you're mentioning the different performance in Mexico City and the metropolitan area, are your expectations the same?

[Jose Antonio Chedraui Eguia, executive]

Yes, we expect to meet our target of 4% same-store sales growth. Most -- considering what we have, also [Technical Difficulty] for us has been affected. But we still believe we're going to be able to reach that 4% same-store sales growth. In terms of floor openings for 2019, we believe we're going to be able to grow our sales floor between 2.7% and 3%. We are planning to add 30 new stores. Most of them will be Supercito stores, which is our proximity format. So we believe we are going to accomplish sales growth and square meters growth as planned in the guidance. At the moment, we are suffering a little bit at the beginning of the year because we had a very strong conversion base in the first quarter of the year. But we expect that, in the end, we will meet our projections.

[Operator]

[Operator Instructions] And the next question comes from Nicole Zaragoza of GBM.

[Nicole Zaragoza, analyst]

I was just wondering if you have a free cash flow guidance for 2020. If I look at your guidance and your change in net debt, I am making some calculations, I get free cash flow generation of MXN 2.8 billion. I would like to know if that's correct or if you can give me some color.

[Jose Antonio Chedraui Eguia, executive]

Thank you for your question. If I understand what you're asking me, our projection is to grow sales growth of 2.7%, with minimum 2.8%, is that your question?

[Nicole Zaragoza, analyst]

My question is, if you have some guidance regarding free cash flow generations?

[Jose Antonio Chedraui Eguia, executive]

Free cash flow generation. Okay. Humberto, if you could give any guidance about cash flow generation?

[Humberto Tafolla Núñez, executive]

We will not give a guidance, but we think that next year -- or this year, sorry, we will get around MXN 1.5 billion.

[Jose Antonio Chedraui Eguia, executive]

Free cash flow?

[Humberto Tafolla Núñez, executive]

Yes, cash flows.

[Nicole Zaragoza, analyst]

Okay. If I may, I would like to know if you can give us some information or some color regarding your e-commerce business. How is it growing? How is your penetration by today?

[Jose Antonio Chedraui Eguia, executive]

I'm sorry. Can you repeat the question again?

[Nicole Zaragoza, analyst]

Yes. I would like to know if you can give us some color regarding your e-commerce business. How are sales growing? How much...

[Jose Antonio Chedraui Eguia, executive]

Okay. We're doing strong in that segment. We ended up as a percentage of total company sales of 1.25%. We believe we're going to be able to reach close to 2% at the end of the year. And it's growing very, very strong for us. If we include this omnichannel segment, not only the sales we do with our own platform but the third-party platform that sell our products at same prices that we have at the store level, where we have an agreement, such as Cornershop or Rappi, for example. So including those, we will be grossing very close to 2% as a percentage of total company sales. We are going strong, and more focused on the high-end segment in metropolitan areas, particularly Mexico City, for example.

[Operator]

[Operator Instructions] Our next question comes from [ Giovanni Araujo ] of BBVA.

[Unknown Analyst]

I'd like to ask, what is your strategy with regard to your situation in Texas? Is it perhaps negative same-store sales and if possible know what margins do you expect from this operation during the year?

[Jose Antonio Chedraui Eguia, executive]

Carlos will comment for this.

[Carlos Matas, executive]

Yes. So once again, I'll go back to some of the comments I made after the first question. So as I mentioned, the -- our sales continue to improve, although still negative, as you saw in Q4. I'll repeat what I said earlier, that in February, we are basically close to flat, down about 0.6%; Dallas was positive, 1.1%; Austin was positive, I think, just shy of 2%. And 2 out of -- well, excuse me, 1 out of our 3 districts in Houston was positive in the month. So we're seeing very nice improvements at several of our locations. Once again, it's all about our price positioning, and we're making very, very solid strides. Our average retail price continues to go down. It was down 2.2% in Q4. So far in Q1, we're down about 4.5%. But we've been able to do that while continuing to maintain our margins solid. So a combination of making sure our price positioning is right, continuing to battle our out-of-stock situation in an environment where we've got over 40,000 SKUs is critical, making sure our perishable department sales are very, very strong. Those continue to grow. Once again, we grew about 162 basis points in Q4. So far in Q1, about 60-plus basis points. And finally, continuing with our CapEx program of refreshing the stores. As you know, this is a chain that's been without investments, both in systems and in the physical plant, for over -- for many, many years. And we've got a 5-year plan to get that up to speed, and we continue to attack the low-hanging fruit in terms of what stores need it. So we continue to do that. And eventually, 2 of those regions in Houston that we're continuing to see a little bit of hardship on is where, as you recall on previous calls, we had a new competitor open 9 stores that affected some of the stores in those 2 districts. And we're going to cycle through that mid Q3, and that should turn things around in those sections. But it's all about price positioning. It's all about out-of-stock management and continuing to deploy our CapEx plan.

[Unknown Analyst]

Okay. I have another question. This one is about EBITDA margins. I'd like to know, if possible, the EBITDA margins without the effect of IFRS 16 in Mexico, United States and consolidated level, if possible, for the fourth quarter and full year?

[Carlos Matas, executive]

Antonio, I'll let you -- I think that's a Mexico question, right?

[Jose Antonio Chedraui Eguia, executive]

The EBITDA margins without IFRS, that was your question?

[Unknown Analyst]

Yes, without IFRS 16 in Mexico, United States and at consolidated level, please, fourth quarter and full year?

[Jose Antonio Chedraui Eguia, executive]

Arturo, do you have those numbers? I think we just reviewed them.

[Jesús Arturo Velázquez Díaz, executive]

No, I don't give -- we don't give the numbers before. But if you want, I can check it and give them.

[Jose Antonio Chedraui Eguia, executive]

Can you send the numbers without IFRS 16?

[Unknown Analyst]

So the numbers are not available?

[Jose Antonio Chedraui Eguia, executive]

Arturo, did you hear? Do you have them? And can you share with them?

[Jesús Arturo Velázquez Díaz, executive]

Yes, I can share them, but it is not in this moment. Please, can you talk to me after the conference call?

[Jose Antonio Chedraui Eguia, executive]

I don't know if you are there, Arturo. I keep asking if you can call them after the conference call so that he can share with you the EBITDA numbers without IFRS 16, please.

[Unknown Analyst]

Okay. I think I understood that. You have no numbers available. So I'm going to my third and last question, please. You reported MXN 291 million from other income. I would like to know, if possible, where did this come from, please?

[Jose Antonio Chedraui Eguia, executive]

Where did the income come from? I'm sorry. Could you please ask the question again?

[Unknown Analyst]

Yes. You reported MXN 291 million from other income. I'd like to know where did this come from.

[Jose Antonio Chedraui Eguia, executive]

Arturo, do you have the income sheets?

[Jesús Arturo Velázquez Díaz, executive]

Yes. Other income is coming from a fee that we have in our stores from warranty extended and some marginal income that we call in Mexico. Service payment, something like that.

[Jose Antonio Chedraui Eguia, executive]

Basically, it's the services that -- where we charge and receive an income, whereas -- when our customers come for stores and paid services, we have an income there, as well as extended warranties, for example, for part of the items that we sell. Anything else Arturo?

[Jesús Arturo Velázquez Díaz, executive]

Yes, that kind of services.

[Operator]

You have a follow-up question from Rodrigo Alcantara of UBS.

[Rodrigo Alcantara, analyst]

Antonio, apologies, got disconnected. So my question was on the same-store sales in Mexico by region. Again, I think you mentioned above 3% in Southeastern space, right? What was the performance in metropolitan region? Is competition to be a problem there? If you can comment on this on same-store sales by region, would be helpful. And also just to confirm, you mentioned a target of 3% for e-commerce as a percentage of sales or was it a different number?

[Jose Antonio Chedraui Eguia, executive]

On e-commerce, our target is close to 2% for this year. We ended up with almost 1.3% in 2019. But that includes sales on our own platform and third-party platforms where we have agreements with those partners. And on the other hand, talking of same-store sales by region, most of our growth comes from the South, basically Southeast, Southwest, and then the third one in importance would be the Northeast region, with the least Offering the most would be the metropolitan area of Mexico City. That's -- that would be our biggest opportunity.

[Operator]

[Operator Instructions] Our next question comes from [ Sandy Ravius ] of Goldman Sachs.

[Unknown Analyst]

Can you give us some color on the macro environment in Mexico and competition in Mexico that you are seeing?

[Jose Antonio Chedraui Eguia, executive]

What we saw in Mexico last year in the last quarter would be a deceleration of sales. We believe it's going to continue, but particularly in certain areas of the country. As I already explained, the metropolitan area of Mexico City is probably the weakest region in Mexico in terms of sales growth. But on the other hand, there are other regions that are growing quite strong. So at the end, we believe that consumption will be getting better. And for us, we would have an easier comparison base in the second half of the year. So we believe that our projections of being able to grow 4% same-store sales in Mexico would be achievable for us.

[Operator]

And I'm showing no further questions at this time. [Operator Instructions] And I'm showing no additional questions.

[Jose Antonio Chedraui Eguia, executive]

Okay. Arturo, would you like me to -- would you close the conference? Should I close it?

[Jesús Arturo Velázquez Díaz, executive]

Sure, Antonio, Please go ahead.

[Jose Antonio Chedraui Eguia, executive]

Well, I just want to thank everyone for joining. I hope to be talking to you at the end of the first quarter. And thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please standby.