Grupo Comercial Chedraui SAB de CV

BMV:CHDRAUIB

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the Chedraui Conference for the results of the fourth quarter of 2020. With us are Mr. Antonio Chedraui Eguía, CEO of Grupo Chedraui; Mr. Carlos Smith Matas, CEO of Bodega Latina; Mr. Humberto Tafolla Núñez, 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.

[Jose Antonio Chedraui Eguia, executive]

Thank you. Good morning, everyone. It is a pleasure to be with you today in this conference call regarding the Grupo Chedraui fourth quarter 2020 results. During this quarter, we continued to face a challenging environment given the persistence of the COVID-19 pandemic. We have maintained our efforts to provide our customers, employees and business partners with the best health and safety conditions in our stores, guaranteeing uninterrupted operation while fulfilling our company's mission to bring the highest quality products at the best possible price. Thanks to the effort of our employees and the trust of our customers, Grupo Chedraui has remained a company at the forefront of the industry, both in terms of our operating model and financial results.

If you'll allow me, we will review the results for the fourth quarter of 2020, starting with the relevant events of the period and then we will review the financial figures.

Consolidated revenue growth of 11.9%. Same-store sales growth of 4.8% in Mexico and 5.3% in the U.S. in dollar terms. 7.2% consolidated EBITDA margin in Q4 '20 and an improvement of 51 basis points year-on-year. Consolidated net income growth of 115%. Net debt-to-EBITDA ratio 0.36x at the end of 2020, generating MXN 5,615 million in cash flow in 2020. Positive net cash in Mexico of MXN 769 million. CapEx invested in 2020, MXN 2,527 million.

Now I'll continue with the financial results, starting with the top line. Our consolidated revenues amounted MXN 38,963 million, 11.9% growth year-on-year. In Retail Mexico, we achieved 4.8% same-store sales growth to MXN 23,221 million. Our growth was solid in all regions, especially the north and the northwest of the country. And we started seeing a recovery in popular tourist locations in the south. This quarter, we were once again above the 3.3% same-store sales growth reported by ANTAD. The total sales growth in Mexico was 7.1% for the quarter. It is important to highlight the accelerated performance of our e-commerce channel, in which sales have tripled in 2020 compared to the ones we experienced in 2019. Chedraui continues its commitment to innovate its e-commerce and digital media operations to maintain the highest service standards for its customers. During the last 12 months, we have incorporated 15 net new store openings into our operation in Mexico, with a sales floor growth of 1.8%.

In the Real Estate division, we faced a challenging environment in the quarter due to measures implemented across the country to contain the pandemic. This resulted in an 11.5% decrease in our revenues to MXN 235 million. In relation to the leasable area, we added 10,317 square meters during the last 12 months, which represented a growth of 2.8%.

Gross profit. In Mexico, we continued with our commercial strategy, through which we have grown sales as well as sustained cost efficiencies. Thanks to this, we experienced a slight increase in the margin in the quarter compared to the same period of the previous year.

As for the sales mix, it maintained its growth trend in the supermarket and electronics department, while clothing and general merchandise categories have experienced some impacts. With this, at a consolidated level, we achieved a gross profit of MXN 8,441 million with a gross margin of 21.7% of sales and a 17.9% year-on-year increase.

On the expense side, regarding the operating expenses, we continued with a strict control in all business units, thereby mitigating the impact of incremental expenses related to the COVID-19 pandemic. Accordingly, operating expenses in the quarter increased 16.6%, reaching MXN 5,652 million and 14.4% (sic) [ 14.5% ] of sales.

EBITDA. In terms of consolidated EBITDA, we achieved an amount of MXN 2,317 million, with a growth of 20.4% year-over-year and a 7.2% margin. In Mexico, we achieved an EBITDA of MXN 1,692 million and a margin of 7.3%. This result was driven by a onetime benefit of MXN 70 million due to the reclassification from operating expenses to depreciation due to the recognition of assets from stores closed through the year.

In the Real Estate division, the contraction in rental revenue affected generation of EBITDA, which showed 20.8% contraction to reach MXN 126 million, with a margin that, likewise, contracted from 66.8% to 53.7% in this year.

On a consolidated basis, in 2020, Grupo Chedraui's EBITDA grew 18.2% year-on-year, going from MXN 9,127 million to MXN 10,788 million this year, with a 7.2% margin and 32 basis points improvement.

Going over financial expenses. During the fourth quarter of 2020, the financial expenses reached an amount of MXN 781 million, which represents 4.9% decrease year-on-year. This is the result of the extraordinary generation of cash flow during the last 12 months, which reduced outstanding debt.

Finally, net income. Consolidated net income for the quarter grew 115.8% compared to that achieved in the same period of 2019, reaching an amount of MXN 812 million, with a margin of sales of 2.1%. This growth benefited from provisions in the CARES Act legislation that was implemented in the U.S. The effect of this legislation was a reduction in the tax rate to 20% for the quarter and 29% for the year. We expect that the tax rate return -- will return to its historical levels for the following year.

For the full 2020, income increased 74% year-on-year, reaching MXN 2,674 million and 1.8% of sales.

Now Carlos will talk about the operations in the U.S. So Carlos, if you please?

[Carlos Matas, executive]

Yes. Thank you, Antonio. Good morning, everyone. Sales continued to show strength in both banners in the U.S. with same-store sales growth of 20.4% during the quarter. This growth has 3 important components to discuss: same-store sales growth of 5.3% in dollar terms, with El Super at 7% and Fiesta at 2.9%; an additional week of sales in the fourth quarter of fiscal year 2020, which contained 53 weeks total for the year instead of a more typical 52-week fiscal year, which is due to a periodic calendar adjustment; as well as a favorable foreign exchange rate of 6.2%. Total sales at El Super grew 23.1% in the fourth quarter, while Fiesta grew 16.6%, both converted to Mexican pesos.

For fiscal year 2020, total same-store sales increased 7.7%, with El Super growing 8.7% and Fiesta at 6.4%, these numbers in dollar terms.

Gross profit. In the U.S., we continue to make improvements in purchasing, which allowed us to improve the gross margins of both El Super and Fiesta banners. We continue to see margin improvements at Fiesta, which is consistent with our strategic plan.

EBITDA. The operation in the United States showed an extraordinary result in the EBITDA of both businesses. At El Super, we achieved MXN 675 million, representing 7.3% of sales. This represents a 37.5% increase versus Q4 of 2019. At Fiesta, the EBITDA for the fourth quarter was MXN 296 million, significantly higher than the MXN 165 million obtained in the same period of the previous year. Likewise, EBITDA margin expanded by 140 basis points to 4.7% of sales.

Total EBITDA in the U.S. for the quarter reached MXN 972 million, 45.7% higher than the prior comparative quarter, representing 6.3% of sales. Exchange rate used in Q4 was 6.2% higher than the prior comparative quarter.

That would be all regarding the U.S. operation. Thank you.

[Jose Antonio Chedraui Eguia, executive]

Thank you, Carlos. Finally, financing and CapEx. Regarding financing, at the end of December 2020, net debt-to-EBITDA ratio closed at 0.36x, with a net debt amount of MXN 3,902 million. This is a reduction of MXN 5,615 million compared to the previous year and was achieved due to the outstanding cash flow generation achieved by the company. This increased cash flow allowed the Mexico operation to close the year with a positive net cash balance of MXN 1 billion.

The CapEx invested in the fiscal year amounted MXN 2,527 million, which is 1.6% of consolidated sales.

Well, if you'll allow me, we will go direct to question-and-answer section. Thank you.

[Operator]

[Operator Instructions] The first question is from Mr. Antonio Hernández from Barclays.

[Antonio Hernández Vélez Leija, analyst]

Congrats on the results. Actually, 2 questions. The first one is on U.S. operations, they've been performing quite well. But of course, we're going to face a tough comp base in some of the quarters this year. So could you give more light on how sustainable this strong growth is for 2021? And a follow-up would be on Real Estate revenues. Of course, they were impacted because of rent payments and all of that. But I guess, a similar impact or maybe a larger impact is to be expected in the first quarter in the year?

[Jose Antonio Chedraui Eguia, executive]

Thank you, Antonio, for your question. Well, we are seeing that with the consistent commercial strategy that we have in place and with the numbers we're seeing in the first quarter already, we believe that these numbers that we showed last year would be sustainable with some extra efficiencies that we expect where we think we will be able to gain EBITDA margin in Mexico. So yes, we are seeing a good first quarter with sustainable results, if not better.

[Antonio Hernández Vélez Leija, analyst]

Perfect. And in terms of the U.S. operations and Real Estate, any -- I mean with social distancing measures and so on, any more light that you can provide?

[Jose Antonio Chedraui Eguia, executive]

Carlos, maybe you can talk about U.S. operation and then I'll go over the Real Estate. Real Estate, we are still seeing some difficulties, but starting to open. We believe it's going to continue until we have a complete recovery or back to normality. At this moment, we still see an effect in our Real Estate operation.

Fortunately, on the other side, it has not affected the consolidated results because of the good results we are seeing on the supermarket side, Mexico and U.S. So Carlos, can you talk about U.S., please? Thank you.

[Carlos Matas, executive]

Yes. Similar to Mexico, we feel bullish about 2021. We are off to a really good start here in the first couple of months of the quarter. We still believe we have some tailwinds that are going to be favorable for our industry. Obviously, we're getting into the teeth of the key pandemic weeks that we experienced in 2020. But certainly, some of the departments that were significantly impacted due to the pandemic will recover. They've been recovering. And I think that will offset some of the declines in some of the center store categories that saw significant increases. But like I said, we feel pretty bullish about 2021.

[Operator]

Our next question is from Mr. Miguel Ulloa from BBVA.

[Miguel Ulloa Suárez, analyst]

If I could, 2 of them. The first one would be regarding the profitability in the U.S. With this development, what kind of margin would you be targeting for the medium term? Do you think it's something that will be [ special ] in Fiesta and also El Super? And what actions can you do -- can you need in order to work to those margins?

And the second one, this is regarding the penetration of the e-commerce. How big is it and how are you doing in Mexico and the U.S.? And what is [indiscernible] third party, if you've got some kind of pickers and the last delivery infrastructure on the business?

[Jose Antonio Chedraui Eguia, executive]

Miguel, I'll talk about the e-commerce and then I'll let Carlos talk about the profitability in the U.S. that you're asking. E-commerce, we ended up with 3.6% of all sales in Mexico. We expect to grow still a little longer at 5%, that keeps growing this year. We are very happy with our strategy, where we have an omnichannel platform, where we have our own platform as well as third-party operators that add value to the customers. We keep those doors open to the customers and they decide which door they want to go through to come and buy in our stores. We are guaranteeing the customers that it doesn't matter which door they go through, they can still buy at the same Chedraui price. And we're very happy with what we're doing. We keep growing very, very strong. We are the first supermarket alternative for our third-party operators partners. So we think we're going to continue with the strategy.

Carlos, maybe you can talk about the U.S. profitability? Thank you.

[Carlos Matas, executive]

Yes. Antonio, I apologize. And Miguel, I know the question was related to the profitability in the U.S., but Miguel, you were breaking up throughout the question. Could you -- would you mind repeating it, and a little louder, if you would?

[Miguel Ulloa Suárez, analyst]

Sure. The question would be regarding EBITDA margins in the medium term for both banners and what actions you think that you will be taking in order to achieve those margins in the medium term?

[Carlos Matas, executive]

All right. Well, you were breaking up again, but I think you're asking about the EBITDA margins at both banners, correct?

[Miguel Ulloa Suárez, analyst]

Correct.

[Carlos Matas, executive]

Okay. All right. So we're expecting similar EBITDA margins at El Super in 2021, which were quite strong. And as we've said before, we're continuing to close the gap between the EBITDA margins at the Fiesta banner and the El Super banner. Our goal, as we've expressed throughout, is that by 2023, we should be in the 4.5% EBITDA margin rate on a U.S. GAAP basis, which is where we were initially. So we're on plan. The way we're going to get there is through our gross margin expansion, the improvements in sales mix of our perishable departments and a lift in top line. So we're on track. We're comfortable that we're taking the proper actions to get there. And once again, we feel bullish about the short term as well as the medium term and long term for both banners.

[Operator]

[Operator Instructions] Our next question is from Rafael Romero from GBM.

[Rafael Romero, analyst]

Congratulations on the results. I just wanted to ask about CapEx. What should we expect for this year? And what are the projects on your pipeline?

[Jose Antonio Chedraui Eguia, executive]

Thank you, Rafael. Well, we expect CapEx to be 1.9% of our sales this year in 2021. Should be between MXN 2.7 billion and MXN 2.8 billion. So that would be the CapEx. We're growing with around 8 stores in Mexico. So that will be our CapEx and our growth -- organic growth and that's it.

[Rafael Romero, analyst]

Perfect. Very well. And for 2021, in Mexico, what are your drivers behind top line? Will same-store sales be as good results for this year? Or what should we expect during the competitive environment, particularly starting this year?

[Jose Antonio Chedraui Eguia, executive]

Well, we projected same-store sales growth in Mexico of 3.3% for 2021, but honestly, started a lot better than what we expected in January. We're seeing the same trend in February. So we will probably be over that projection same-store sales in Mexico. We are growing strong in our physical stores as well as in our omnichannel platform. So we'll probably be able to grow stronger than what we expected.

On the other hand, we are seeing an increase in EBITDA margin in Mexico. We projected 15 basis points. We think it would probably be higher than that. We are seeing good numbers for this year, again, in our supermarket operation in Mexico.

[Operator]

Our next question is from Luis Yance from Compass.

[Luis Yance, analyst]

Congratulations on the quarter. Two questions on my side. I mean one is, going back to your CapEx comment, the 1.9% of sales for this year. Yes, it is a bit of an increase versus last year, but it doesn't move the needle that much in terms of sales floor growth, less than 1%, as you said on your guidance. Just wondering what's driving the caution here? Is it mainly related to the weakness in the economy, the political uncertainty, both? How should we think about it beyond 2021? What's kind of your new normalized rate? And when do you start opening in the U.S., what do you need to see? So that will be my first question on CapEx.

And then the second question is more, I guess, philosophical or more related to the stock. I mean you've posted great numbers in the past few quarters and the stock isn't moving that much. So what's your assessment in terms of what are you missing? Maybe you need to be more, I don't know, present with investors in road shows or maybe you need to be more aggressive in terms of distributions, whether it's buybacks. I understand there's an issue with liquidity, but maybe a bigger dividend now that you're pretty much close to 0 in terms of net debt. So your thoughts there would be great to hear.

[Jose Antonio Chedraui Eguia, executive]

Okay. Thank you, Luis. Very good questions, both of them. Well, 2021, we projected CapEx for organic growth. We are open to consolidation opportunities. We think there will be opportunities in both countries, Mexico and the U.S., and we are open for that. On the other hand, why is our stock, with that opportunity that we are seeing compared to our peers? Honestly, I don't know. We think we have posted, as you mentioned, great numbers. Our projections are even better. The multiple, the EBITDA multiples or the PE multiples, seem extremely low for a company that has shown profitability either in the years where the economy has been strong or weak, with any type of competition, being able to beat competition. So I don't know. I don't have an answer for that. We should probably work more in promoting more and better what we are doing because in my opinion, as you said, the numbers are impressive compared to what the industry is showing at the moment. So those would be my comments on the 2 questions you asked. Thank you, Luis.

[Luis Yance, analyst]

Let me do a follow-up, if I may, on that last comment, in terms of the dividend. How about big dividend? I understand buybacks might be not as desirable because you remove liquidity. But I understand you want to be at 0x debt. But to me, 0.2 or 0.3, close enough. Why not a huge dividend to react to that?

[Jose Antonio Chedraui Eguia, executive]

That's a possibility, but we are thinking more of preparing for a consolidation opportunity. We think there will be opportunities and we are getting ready for that. We think that there will be an opportunity to grow through an acquisition and we think we should follow that path. If not, for sure, the next option would be a dividend, if we cannot achieve a consolidation opportunity.

[Luis Yance, analyst]

Great. And then my last question on that, when you mentioned opportunities, what are you kind of seeing in general terms in the market? Is it more kind of a bolt-on, small acquisitions here and there? Or it could be a transformational deal, kind of like what Fiesta was back then?

[Jose Antonio Chedraui Eguia, executive]

Good question, and I don't know if I am -- I honestly cannot answer that question, but we're looking at both. I'm sorry for not being able to answer your question.

[Luis Yance, analyst]

No, no, no worries. I mean thanks a lot for your answers, and congrats again on the great quarter.

[Operator]

Our next question is from Mr. [ Yoshua Pellman ] from BTG Pactual.

[Unknown Analyst]

Congratulations on the results. My question is regarding same-store sales dynamic in the U.S. I know that you posted really good numbers this year. But what should we expect going forward in 2021 and on the long term?

[Jose Antonio Chedraui Eguia, executive]

Carlos, I think that one is yours.

[Carlos Matas, executive]

Yes. Yes. Like I said earlier, we -- well, let me start by -- I think we're going to stick to our guidance for 2021, which is that we expect after a solid pandemic year on both banners, but we expect, on a comparable 52- to 52-week year on the El Super side to be flat in '21 with continued growth in '22. And then on the Fiesta side, we're expecting a slight increase versus previous year based on 52- and 52-week calendar. So that's what we're expecting.

However, on a positive note, like I said earlier, we are off to a really good start here in the first couple of months.

[Operator]

[Operator Instructions] That was the last question. I will now hand over to Mr. Antonio Chedraui Eguía for final comments.

[Jose Antonio Chedraui Eguia, executive]

Thank you. Well, I just want to thank everyone for joining. We are -- we will be very happy to connect with you again after the first quarter results, where we are seeing already fairly optimistic good numbers. So I want to thank you and I'll be talking to you. Please stay safe, you and your families. Thank you very much.

[Operator]

All conference hosts have hung up. This conference is over. Thank you.