Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, and welcome to Organización Soriana First Quarter 2019 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia Gonzalez, Head of Investor Relations, who'll be discussing the financial performance of the quarter, along with the summary of the latest news of the company.

At the end of the presentation, there will be a Q&A session in order to answer any questions you might have. [Operator Instructions]

Now I would like to pass the call to Mr. Benet. Sir, please begin.

[Rodrigo Córdova, executive]

Thank you very much. Good afternoon to all and thank you for joining us in this conference call.

Here with me is Ms. Claudia Gonzalez, Deputy Director of Finance, and today we'll review the company's quarterly results published some minutes ago as well as other news.

And I will try to be very brief in order to go to the question-and-answer session to be open to solve any doubt that you may have.

The results of the first quarter of the year continued showing a trend that is very similar to the results obtained in previous periods, where the top line of our financial statements continue under pressure and in a stabilization period after the drawbacks of the previous quarter in logistics and procurement systems of the company.

Which take us to talk about on the recovery according to what we have commented before.

Getting into the detail of the performance at a format level. We have perceived some points of clear improvement trend like the one in our super format, which have been recovering significantly up to 8 percent points above the consolidated growth, remembering that this format is one of the format that have the less effects of the migration of the systems we'll achieve.

Also, in our high performance, we have seen different growth of up to double digit above the average of the format in at least -- [ fifth ] of the stores which seems -- they have already had a longer stabilization period, have already [ rewarded ] in their performance, confirming once again, that with the pass of the time, we are recovering the clients and recovering the sales.

On the other hand, City Club format continues to have a positive trend as it has not -- have any impact in the seasons of the supply chain, operating in a complete and definite way. And each time, we are there understanding our focus on the target customer, covering and exceeding the customer expectations. Thus, the top line indicator close with a decrease of 0.7%. This negative valuation of total sales is also influenced by the closing of 16 units in the last 12 months.

In addition to the expectation of our current number level is due to the lack of the holy week for the month of April. During this quarter, 3 units were indefinitely closed and 2 were temporarily closed due to a major remodeling.

Closing with a total of 810 operating units. These are part of the operating efficiency program that we have been sharing in order to consolidate micro market and increase higher sales per square meter as well as improving the profitability of the sales flow of the Nissan operating expenses.

Also, we have already tested with this variable results, so we will continue making progress in this operational strategy in order to use the broad business platform we have in a more efficient way.

In regards to the gross margin, it show an expansion of 60 basis points in the quarter compared to the first quarter of the previous year, reaching a profit of MXN 8.1 million, which represents 23.2% as percentage of sales, and up 2% increase compared to the same period of the previous year.

This is basically due to the successful consolidation of our commercial synergies and the first effect of improvement in the management of our shrinkage, that as we have said, were increased in the last 12 months due to changes in logistics systems, which continues in the stabilization period.

For the operating expenses, this line show a 1.7% decrease in the quarter compared to the same period of the previous year, as well as a contraction of 10 basis points as percentage of sales amounting to MXN 5.4 billion, equivalent to 15.6% over revenues.

The decrease of the operating expenses is due in part to the reclassification of the leasing expenses that is under the IFRS 16 standard adopted in 2019, which represented MXN 333 million in the quarter and are eliminating this -- and if we eliminate this effect, the nominal increase would have been 3.2%, which normally there is an increase, is one that is very well controlled, despite the fact that the energy cost remain under pressure and labor cost with an increase higher than inflation.

Managing the contract of this asset with the strategies of optimization of resources at all the levels of the organization. Consequently, with the variation previously mentioned, there was a result at EBITDA level of MXN 2.7 million equivalent to a margin of 7.9%. We had an expansion of 80 basis points and an increase of 10.6% compared to the same period of previous year.

In regard to the net financial cost, there was a 54.2% increase. This incremental effect is mainly due to the adoption of, again, of the IFRS 16 standard, in which there is an impact in the operating expenses for leases of MXN 277 million that if we now consider this adoption, the nominal increase will have represented 10.4% against the previous year.

Lastly, regarding the financial statement, the quarterly cash net profit was MXN 1.5 billion, which represents a 4.2% of our sales.

Referring to the progress of business with our partner Falabella, we are glad that the 3 Sodimac stores have opened, have an excellent acceptance from our customers due to the value proposition that they offer, once that we see this tremendous success, we will consolidate in this strategy along this year with the first cap with the opening of 5 more units.

Additionally, and it was communicated a few days ago, we have signed a collaboration contract for a period of 4 years with PAYBACK Mexico. In order to add the benefits of what -- that program to last one, achieving a very interesting and beneficial alliance for our clients.

Also, a very important notice is that we would like to share with you is that we also have signed a contract with [indiscernible], the global leader company in the big data analysis of loyalty program in the retail industry. With the aim of improving the performance of the company by using information from our customers and their consumption patterns to make better business decisions, as well as offer a personalized shopping experience in our shops.

We are confident that this action will significantly strengthen performance of the organization and in the near future, its effects will be reflected in our P&L. Also, regarding the e-commerce business, I share with you that in this first quarter the business continued with a constant growth. Our product offer continues to increase and our catalog grew [ 186% ] in terms of growth with respect to [ 1,008 ].

In addition, our soriana.com site growth in visits and users in [ 115% ] and 125% respectively.

With this growth in traffic, we have been able to increase the number of orders by [ 96% ] so far in 2019. The investments and products planned for 2019 for this year follow the implementation process, will allow us to increase sales equivalent to our plans to continue providing to our customers and omnichannel experience adapting more and more to their needs.

Basically, with this I end my presentation and we'll -- and right now, we can go to the Q&A session in order to clarify any questions that you may have. Thank you very much.

[Operator]

[Operator Instructions] And our first question comes from Antonio Gonzalez with Crédit Suisse.

[Antonio Gonzalez, analyst]

I just have 2 quick ones if I may. The first one, apologies if I missed this, but can you give us the numbers for same-store sales and perhaps the breakdown between the format and brands, I believe I might have missed that in the press release. And secondly, you mentioned the 60 bps improvement in gross margin, right? And I was just wondering if you can give us an indication, perhaps a range of where was the shrink at the worst point during the logistics migration. And where is the shrink now, and where do you think it can be over the next few quarters, just to, I guess, get an order of magnitude of how these are improving?.

[Rodrigo Córdova, executive]

Sure. Well, I will start with the last part. And in the worst part of the integration of the systems of Comercial Mexicana, the shrink in some months, even touched levels close to 2.5%. Completely out of the range that in the last 20 years, they cover more the company's CapEx. Right now, we are still not under the goal. The goal is below 0.8%. Right now, it's a little higher than 1%, the consolidated. We continue working on that. We are seeing a very, very clear trend of decreasing there in the shrink. Obviously, we have more than 6 months. And we would take very fast action in order to decrease it back to the controlled least point. That -- this allow us 2 important things. First of all, give us a space in the gross margin to be more aggressive in order to help to recover the traffic that we have lost in the last 12 months and also help us to recover the profitability. And as you see in the P&L, with this also, we are achieving and increasing the gross margin as percentage of the sales. So we can say that we are in the right track but probably, we are in the half of the way end of it. You still see at least another 60 basis points of opportunity to decrease the shrink or increase the gross margin as you can -- as you want to see it, if we end this process to recover it to the normal shrink levels of the company. And regarding the first questions about the same-store sales, basically, for this first quarter was practically flatter, I mean, very -- is slightly negative, 0.8% negative in the first -- no, sorry, 0.5% negative in the first quarter. And again, the important thing that probably is important to highlight is that when we make the breakdown on that, we still see very important difference in the stores that have a longer period operating under the new systems than the ones that are operating or have less months operating under the new system. If you ask me which will be -- the expectations that we have in terms of recovery of the traffic and the same-store sales, I think that we will need -- no matter that the system, it's already -- we already end with migration, and it's already starting to size. We -- it's very clear that we will need a very strong promotion in order to recovering the traffic that -- to buy an opportunity from the clients to go again to Soriana, and see that we already have the right capital growth and the right assortment, and I think that the best shot that we will have to do that is the next Julio Regalado campaign. So I expect to have the better performance, one that we enter to Julio Regalado in the following months.

[Operator]

Our next question comes from Robert Ford with Bank of America.

[Robert Ford, analyst]

Rodrigo, can you talk a little bit about where you are right now in terms of stabilizing the systems, I just want to get a better sense. I mean, I understand the issue with the shrink, but in terms of POS visibility and maybe inventory because the inventory looks a little bit above plan as well, right? Can you talk a little about maybe markdown risk or maybe it's an inventory build-up in anticipation of a much more aggressive folio, but that was something that caught our attention.

[Rodrigo Córdova, executive]

Sure. Probably, I will revise it in 2 different ways.

First, I will -- technically speaking, by the end of 2018, I mean, in the last week of December, we already shut down all the systems of Comercial Mexicana. Actually, we have a -- we used to have an obligation to the -- to return all the systems to the former owners of Comercial Mexicana. So basically everything is shut down. All the migration of systems is already done. Once that is already is done. And I mean, in sale assistance store by store, there is a period of stabilization. So normally that the migration as a whole is already done. The maturity or the stabilization period of the stores have different levels of maturity depending the store and depending the region and depending even the format. Like I mentioned in this -- in my presentation at another conference call like an example, City Club, never have any effect because operating in all platform, so we have a very important success in the last 36 months in City Club. Saying that, it's very clear that we still have opportunities in some of our stores in an important part, particularly in the stores that we call integrated stores that are the ones that we inherited from Comercial Mexicana, are the ones that have the less -- yes, there's the less progress in terms of the stabilization period and still have a important difference against the other formats of the company. Going into the second part of your question, like an example in the inventory level, it's important to understand that no matter that the system is already migrated, that doesn't mean that the problem is solved. First of all because probably I already have the right assortment in the store but in the last 6 months, I lose my client because they go to the store and doesn't find the right product or always find it's stock out. So normally that the problem is solved in order to see it in a positive way in the P&L, it will take time, and it will take investment, and it will take promotions in order to convince our clients to give us a new chance and come again to the stores. And something very similar happened in terms of the inventory. No matter that right now we feel much more controlled with our formulas and all the assortment and the logistics and all the procurements, the system is working much better than last year.

We had a problem of around MXN 1.5 billion worth of inventory of a slow movement that we inherited from the problem that we have last year, that we have to solve. So when you see the inventories, right now, in this first quarter, you are seeing inventories that are growing because 2 reasons. First of all, because we are already receiving because of Comercial strategy, it brought to Julio Regalado. We already start to receive a part of the product and secondly, because we have around MXN 1.5 billion of inventory. It's a mistake that we inherited from the migration of the last 16 months that we have to solve and that, obviously, we'll need an aggressive commercial strategy and map it in order to sell it more.

[Robert Ford, analyst]

Okay, understood. And then have you reserved maybe for the clean up of that, Rodrigo, or is that something we should be -- should anticipate...

[Rodrigo Córdova, executive]

Yes, well remember that basically all important programs that basically we can say 2 important things. When seeing Julio Regalado and the clothes department sales or [indiscernible] is a tradition that we make with first in the [ P&L ] and that also is happening with this problem that I'm talking about, the MXN 1.5 billion. So we are not seeing that we will show a negative effect in the gross margin. Actually, the expectation both because of adoption of the [indiscernible] and the new commercial agreement is that we can maintain even an expansion of our gross margin level. That doesn't mean that we will not use part of that money to dispose.

[Robert Ford, analyst]

Understood. So the gross margin improvements that you're posting are despite the reserves that you're taking for maybe this unproductive inventory that you have right now, right? So it's pretty clear.

[Rodrigo Córdova, executive]

Yes, and not only for that. It's already with Julio Regalado, though, I think.

[Robert Ford, analyst]

Understood. And with respect to your value propositions, how do you feel where you are right now in terms of relative competitiveness?

[Rodrigo Córdova, executive]

Sorry, I don't understand you. With my daily progress?

[Robert Ford, analyst]

No, how do you feel about your price points relative to your major competitors right now?

[Rodrigo Córdova, executive]

In general, Rob, we are trying to be much more precise in our price strategy in the -- I can tell you that probably 3 years ago, we use to see a lot of [haberdashery] in terms of competitiveness. In format by format, even store by store both also considering the whole basket or baskets of products right now, we are going deeply and actually is part of why we, at the end of the day, we are making this agreement with [indiscernible] is because in the last year in particular, we work very, very hard to start to be very precise in which articles we have to decrease the price of the products. So right now, I can tell you that is not the objective of the company to be cheaper in everything against all the competitors in all of the stores. We want to work on that and to be cheaper in what really matters to our client and really create a perception of price to our customers. And actually we worked so hard on that in the last 12 months that part of the conclusion that we achieve is that we will need help. And in order to be more efficient on that is why we sign, at the end of the day, this agreement with [indiscernible] that means is probably due I'm pretty sure that and all of the participants [indiscernible] probably the more rewarded companies and in loyalty programs is the analytics behind Fresko, behind [ Clover ] we and we can already pay the companies of retaining the growth with great success and we see that this new strategies like payback that give us access and communication to MXN 8 million of clients of the payback that right now we have a direct way to contact joined with our MXN 8 million of client that we have in our loyalty program, join it with a client that we are achieving from the growth [ cap ] of Falabella, join it with this initiative that by the end of the day, we have Internet for free for our clients in all the stores. Join it with the data analytical capabilities of [indiscernible]. We think that we create that important differentiation against our main competitors.

[Operator]

Our next question comes from Ulises Argote with JPMorgan.

[Ulises Argote Bolio, analyst]

Two quick questions from my side. The first one, I don't know if you could provide us with some indication of how the ticket and traffic behaved during this quarter.

[Rodrigo Córdova, executive]

So basically, and I think that is probably something that you will see in general in the whole industry, basically have a positive ticket and decreasing traffic.

[Ulises Argote Bolio, analyst]

Okay, perfect. And then the second one on the IFRS 16 issues. You provide some details on the effect on the income statement, and thanks for further disclosure. Just wanted to check with you in terms of the EBITDA margin within IFRS 16 effects. Does it make sense for the EBITDA margin to be contracting inside the year-on-year when we take out the IFRS?

[Rodrigo Córdova, executive]

Yes, sure. Actually -- I mean just to be more precise, this will exclude this effect of the EBITDA -- of the IFRS 16. Basically the EBITDA will be flat, it will be 0.5, the growth.

[Operator]

Our next question comes from Valentin Mendoza with Banorte.

[Valentín III Mendoza Balderas, analyst]

Thank you very much for taking my questions. Actually most of them have already been answered. But probably this would be a good time for asking what would be the company target in terms of additional month of sales for Julio Regalado in this year?

[Rodrigo Córdova, executive]

Well, probably you remember when we buy or we acquired Comercial Mexicana, the idea was to obtain 96% of extra amount in sales as by Julio Regalado. This will be the third time of the -- sorry, the fourth time that we make Julio Regalado and probably if everything goes right, we will be at the half or 50% of that curve.

[Operator]

Our next question will come from Alejandro Fuchs with Itau.

[Alejandro Fuchs, analyst]

Just a very quick one regarding IFRS 16 and then depreciation. I'm seeing that the depreciation is increasing year-over-year around 3% and I was wondering if you could walk us through maybe a little bit on how the depreciation with which IFRS 16 is composed because we are seeing in other companies maybe a bigger increase in depreciation. And I was just wondering if you could give us a little bit more color on the depreciation.

[Rodrigo Córdova, executive]

Sure. Remember that with this new accounting rules, basically when you create an asset and also a liability. The asset is depreciated in direct line. So is very stable and easy to calculate and the debt is the one that -- the interest is the one that is not a direct or linear depreciation. So in order to be more easy, basically that MXN 173.6 million that you are seeing of additional depreciation is basically the same that will see in the following quarters. I mean we are not expecting important [ buyer sense ] on that. So basically that is the effect. The one that have more changes is the one -- the financial expenses because at the beginning of the period, probably the first 12 years. Basically we pay interest and we didn't pay capital. In the last 18 years because neither of us is happy, they will use, we will pay more capital and no interest. So basically your modern purposes, use the depreciation amount that we are given to you as a very precise forecast from what you have to increase the depreciation amount quarter by quarter.

[Alejandro Fuchs, analyst]

Maybe a follow-up really quick, if I may. I understand perfectly that the depreciation should increased MXN 173 million that you have mentioned. However, when I see the P&L, I'm not seeing this MXN 173 million increase in depreciation. I'm just seeing MXN 23 million. So I was wondering why the depreciation on the P&L is not increasing year-over-year by this amount.

[Rodrigo Córdova, executive]

No, also remember that in depreciation and amortization, we have other items that actually some of them are related with the acquisition of Comercial Mexicana. But basically, we already speak to depreciation -- amortization, like an example with systems that I just mentioned, we have to return all the IT platform to the former owners of Comercial Mexicana. So basically we already end the amortization of that platform. The same happened with the brand and I mean right now, there are 2 concepts that I already -- that right now I remember, but we have several other items that already go to the maturity. And basically what you are seeing is the offset and the result of positive and negative variance.

[Operator]

[Operator Instructions] Our next question comes from Antonio Hernandez from Barclays.

[Antonio Hernández Vélez Leija, analyst]

Actually, all my questions have been answered, so thanks.

[Operator]

Our next question will come from Rod Cuestas with Goldman Sachs.

[Rodrigo Cuestas Azpuru, analyst]

So I just -- I have a couple of questions. Quickly, I just wanted to make sure I understood. I know that before we talked about on the point of recovering customers that you guys were going to reinvest gross margin potentially in the price in order to kind of regain that traffic. And so I just want to understand if that you already happen? Like if we saw the gross margin expansion in spite of some price reinvestment or are you guys kind of holding off on reinvesting that maybe until the maturation or the stabilization of the systems as you were talking about?

[Rodrigo Córdova, executive]

We already view I can say part of the investment in order to maintain competitiveness in this first 3 months of the year. But the biggest investment will come basically in the following months, particularly in Julio Regalado. I mean we believe that one of the best shots that we have to recover the client and show them that we have a store that already have a good assortment that already have the right catalog of products, and the mistakes to the implementation on integration of the systems are already sold. It's Julio Regalado not only because the promotion are very, very aggressive or very, very deep also because the publicity and all the marketing around Julio Regalado is very strong and actually particularly in central part of Mexico and the south part of Mexico is a campaign that the community and the client already expect and are waiting for. So we believe that if we have one shot and one opportunity to recover client and show them that the store is already in good condition is that promotion. So right now, we have not invested all the money on the provision that we have. But I think competitiveness is something that we [indiscernible], is really, really important so we will never put in risk that -- but what we are doing right now is to do it in a very more intelligent way. And in order to do it in a more intelligent way and not decrease hundreds of products but decrease a specific products in the right -- and in the right level of discount. We are using information and we are using the data and the new capability that Soriana has acquired.

[Rodrigo Cuestas Azpuru, analyst]

Got it. Great. And so I imagine that's part of why the [indiscernible] coming on board. And so I guess are you guys able to quantify maybe the level of margin that you are going to have to reinvest given that maybe you're able to target it better as much you said with the data with [indiscernible] coming on board? Was that kind of the idea in order to have to recover traffic, take less of a hit to the margin?

[Rodrigo Córdova, executive]

Yes, we are on the process of -- to the final of that particular with [indiscernible] for Julio Regalado is already defined it. But to give the specific numbers of how much of our margin and money we will invest is something that we doesn't release.

[Rodrigo Cuestas Azpuru, analyst]

Okay, yes. No problem. And then my quick follow-up on SG&A. So if I look at the pro forma for excluding IFRS 16, actually seeing some pressure on SG&A ratio of about 80 bps year-over-year. And so I just kind of want to understand what's driving that. Did you guys see some cost pressures? You mentioned wages and electricity or were there maybe some expenses? Are there some write-offs in there related to the store closures or is it just deleverage -- just operating deleverage from the slowdown in sales?

[Rodrigo Córdova, executive]

Exactly. Because it's important and I think that is important that you have mentioned. In particular in this case, I think that is more important to see the basis points as percentage of the sale, but more important to me to see the pesos. And if you see the expenses, excluding IFRS, is growing only 3.1% below inflation. So below inflation considering that the 2 important -- more important expense of the company that is labor and energy that basically is like 85% of expenses of the company is going much more higher than inflation. Particularly in energy, you see double digit. So basically the company has been really, really, really efficient to manage the expenses, actually we in our austerity program in order to add that to the conditions that right now we have in the [space]. So that increase in basis points that you mentioned is basically for the leverage of the OpEx in the levers because the lack of space. But we feel -- I mean obviously, as any company, I cannot say that we have more opportunities but in general, I think that we are doing a really good job in terms of expenses by square meter. And again, it's growing just 2.1% below inflation and very far away from the increasing labor and energy costs.

[Operator]

Our next question comes from Rodrigo Alcantara.

[Rodrigo Alcantara, analyst]

Apologies if you have already answered this question but -- so I was wondering so in January, we saw this reduction of value-added and income taxes in about 40 municipalities in the U.S. So my question here is if you have seen some positive incremental consumption here in this areas and how many stores are exposed or do you have in this areas? That would be my questions.

[Rodrigo Córdova, executive]

True. Actually, it's a good one and the answer is yes. We are seeing and I think that is not only because, I think as you just mentioned, the reduction of the BAT also because the increase of the minimal wage in this -- [ different rank ]. So basically we take the -- if we make assume to the behavior of our stores in the particular, in the north frontier of the country basically the same-store sales in that region in the quarter will be close to 5%.

[Rodrigo Alcantara, analyst]

Okay, 5%. And in terms of number of stores located or that could benefit from this, how many stores do you have there?

[Rodrigo Córdova, executive]

I can send it to you by e-mail. Sincerely I don't remember it right now. But I mean it doesn't take us something definitive but if I don't remember wrong, the [indiscernible] like 12%, 13% of the sales of the company. Just let me make -- be sure of that and I can send you the -- by e-mail how much -- which is the participation of these stores in the total income of the company.

[Operator]

And Mr. Benet, there are no further questions in the queue at this time.

[Rodrigo Córdova, executive]

Perfect. Well, thank you to all of you to be with us in this conference call. And obviously if you need some additional information or any other questions, just give me an e-mail to me or to Claudia and we will be really glad to answer you. Have a good weekend. Thank you.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect. Please enjoy the rest of your day.