Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. And welcome to Organización Soriana First Quarter 2020 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia González, Head of Investor Relations, who will 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'll pass the call to Mr. Benet. Go ahead, Mr. Benet.

[Rodrigo Córdova, executive]

Thank you very much. Good afternoon, everybody. Thank you for joining us in this conference call. Today with me is Claudia González, the Head of the Financial Planning Department of Soriana. And together, we'll be going through the company's quarterly results that we published a few moments ago.

As you already know, this quarter has been really atypical, mainly because of the sanitary contingency emergency that we are currently facing worldwide originated by the COVID-19 virus that has started to spread out in our country since the past month of March. It is important to point out that since then, we have been seen implementing multiple actions at an operational level in order to protect the security of our clients, collaborators and the supply chain. This action included strong hygiene and sanitization campaigns across all of our stores, distribution centers and corporate offices. Also, temporary measures directed to protect people's health and wellness, which turned out the following actions. First of all, the suspension of all the senior packers in our stores. It is important to point out that we have implemented a special box in the cashier lines in order to collect our entire tip from our customers, and the amount collected by this action is being duplicated by the company and distributed to this vulnerable group. Second, the closure of departments of ready-to-eat and prepared food located inside our stores to prevent people conglomeration and only using the delivery home service.

We also designate a preferring shelf scheduled for senior customers to shop in all our stores. We also are limiting the purchases of certain numbers of products of first necessity in order to balance the family consumption and supply. Recently, we have started to take the temperature of all our clients in the entrance of our stores. Obviously, and since the beginning of the contingency, we are disinfecting all the shopping carts that we use in our operation in a constantly way.

Finally, we maintain a constant communication with authorities in all the states of the country in order to accomplish the security measures established to control the spread of the disease among others. Therefore, in the month of March, we reached an important increase in the same-store sales along to a great performance also in February, closing the first quarter with an increase of 9.9% on a consolidated level.

Regarding the gross margin of the quarter, we reached a 21.9% margin compared to a 23.2% from the same period of last year. This contraction in the quarter margin is produced from a onetime extraordinary benefit applied in 2019. Therefore, this is not an equal comparative, but it still shows an increase of 3.8% against same period of last year. Nevertheless, and due to the effect of the sanitary contingency, the mix of sales in food and nonfood departments have changed in an important matter, affecting the gross margin in a positive way, other division of groceries, fresh products and pharmas, those reaching a double-digit sales increase. And on the other hand, a contraction in clothing, general merchandise and prepared food, which as you know, we have significant margin difference.

Going to the operation expenses line and as we have discussed in previous conversations, at the end of April of 2019, the company has been implementing a strict expense control program, where we have optimized resources, services and storage spaces in order to have an important savings in this line. Those actions allowed us to leverage the deviation that affect the top line in previous quarters as well as to make more productive our operations, even considering the extraordinary expenses aimed to face, prevent and control any contagions from this health emergency situation that we are facing. And also, all the expense and measures to protect our employees in the execution of their responsibilities and attend the community that needs our compromise as a company.

The operating expenses in this quarter reached MXN 5.5 billion, which represent an increase of only 1.3% at the end of last year, figures that is even under the inflation. As a result of the variation formation, in this first quarter of the year, we reached an EBITDA of MXN 3.1 billion, which represent 7.7% of [ our sales ] and an increase of 8.3% against the same period of last year.

Another topic of interest that I would like to share with you is that after the accelerated growth of the home delivery service, Super en tu Casa. In response, we have launched the pick-and-go service in all the stores nationwide as well making alliance with the Uber platform in order to serve a largest number of clients with a customized service that provide those consumption necessities with total safety required in this contingency times. The reaction and answer of our clients has been very positive. And as a result, the sales orders showed an increase of 165% in the month of March and 62% in the whole quarter, which had an impact of 30.5% in the comp quarter service sales and with a trend to reach an increase of 448.6% in the month of April.

Likewise, during the quarter, we continued working on strengthening our customer-centric approach, searching to consolidate this competitive advantage that the transactional information of our loyalty program, Soriana Rewards, give us an offer, a customized shopping experience for our clients. Specifically, under this concept, during the first quarter, we started working with a new collaboration model with some of our leading business partners, where we are developing important synergies by adding the experience they have of the market and their categories, along with the knowledge that Soriana has of the consumer, both using the tools and processes of dunnhumby. Actually, during this quarter, we were able to implement some pilot designs with this model and already obtaining results above the expectation that we initially have set.

Also, we start launching segmented promotions to our clients from the PAYBACK platform, which are already designed to capitalize the opportunities and promote a bigger purchase among these clients while the activity contributed to improve their shopping experience. For the next weeks, the contribution that Soriana makes to the communities where we are present will be very important, and our loyalty program platform will play an important role in order to implement in a quicker and an efficient way the support needed in those sectors of the population that require an additional inputs. The special support for the health sector that was announced this week is to offer an additional discount of 10% to the current offers and prices in the stores and a discount of 15% in the prior prices, in pharmacy and prepared foods.

Finally, and regarding the number of stores in operation, in the month of January, we opened 2 stores, a Soriana Super in the state of Baja California Sur and a Soriana Express in the state of Yucatan. On the other hand, we closed 5 units, few of which in a temporary basis because it will go into a remodeling process, 1 City Club that will be converted into a Sodimac store and 2 -- and the remaining 2 stores have permanent closure as part of our efficiency program. A total of 807 units in operation the one that we have at the close of March.

Finally, and to keep -- keeping you informed about the divestment process that we need to carry out with the competitive stores, we have made a significant progress with 5 stores out of 5 units remaining, which later on we, we will share with you in more details as soon as we close the deal and receive authorization from the regulators authorities.

Without furthermore, we can move on to the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Antonio Hernández from Barclays.

[Antonio Hernández Vélez Leija, analyst]

First of all, congrats on the results. Just a couple of questions. Can you bring more light on your performance, especially these last few weeks and that might be expected throughout April? And the social distancing measures, a breakdown through geographies and performance as well.

[Rodrigo Córdova, executive]

Sure. I hear you a little -- with a little of noise, but if I understand well, you are asking about a little more of details in the same-store sales and the performance in the margins, is that right?

[Antonio Hernández Vélez Leija, analyst]

Yes. I mean basically, the difference across sales performance as well the different formats like City Club and Soriana and so on, and where exactly the different geographies where the other...

[Rodrigo Córdova, executive]

Sure. Well, first of all, I want to make -- I mean probably the main important difference is if we make a distinction between Soriana stores, Soriana all stores and Comercial Mexicana stores. As you know, and we have talked about this in the last quarter, the last one, the Comercial Mexicana stores have underperformed against the Soriana stores. Since September of last year, basically, we shut down all the headquarters of Comercial Mexicana in Mexico City, and we passed all the commercial strategy to Monterrey, together with the Soriana headquarters. Since then, we have seen an important improve. Actually, we can say that if in the third quarter of 2019, the Comercial Mexicana stores used to have a mid-single digit negative in same-store sales to the fourth quarter, but to a low single digit, practically flat, but low single digit. So the increase just to change the commercial strategy from Mexico City and join us together with the one in Monterrey and share the same strategy, promote an important change.

Then we continue to see that this positive trend continued in January, particularly also in February that we were close to 7% in same-store sales. And then in March, particularly from the second half of March, we start to see huge increases in all the formats, Soriana stores and Comercial Mexicana stores. Actually something that is really positive is that if we see already April, the Comercial Mexicana stores, particularly the 1 in Mexico City, is having a better performance than the Soriana stores. So we can say that, first of all, that difference that we used to have between Soriana and Comercial Mexicana is practically closed.

If we talk about format, not by chain, particularly, we see a huge performance in Soriana Super, the supermarket that we have. No matter have a -- it becomes -- the origin is Soriana or Comercial Mexicana, Soriana Supermarket is having the best performance. Like an example, particularly in the month of March, around 30%. And also City Club, the membership club that we have, it has been incredible, the number of new memberships that we have co-locate in the last 4 weeks, also showing a huge increase in same-store sales in March. If we talk in a geographically way, all the countries having good results, but if we have to rank it, the first one it will be Mexico central part, Mexico, particularly in Mexico City; then the north part of Mexico and south part of Mexico, it will be the last one, but it's still positive. Also positive.

I don't know if with that, I respond to your question, Antonio.

[Operator]

Our next question comes from the line of Valentín Mendoza from Banorte.

[Valentín III Mendoza Balderas, analyst]

Congratulations on the results. I have a few, if I may. The first one has to do with the erosion you reported on your gross margin. You mentioned on the press release that it had to do with an extraordinary gain the last year. And however, I went to the transcript of last year, and I couldn't find any color on that. I don't know if you can give us some color and then I have some...

[Rodrigo Córdova, executive]

Sure. Well, basically, if you see -- and just give me a second just to tell you exactly the numbers. If you analyzed the whole year of 2019 and previous years, you will see that the normalized gross margin is around 22%, 21.5%, 22% something. Only in the fourth quarter because the Christmas season is the one that we have higher margins. So if you see -- and just give me a couple of second or minutes, but if you see the first quarter of last year, it was 23.2%, atypically high. But then you go to the second quarter, on 21.8%; third quarter, 21.2%; and come back again to the fourth quarter of 23%. But if you analyze, the first quarter was even higher than the fourth quarter. That is something that is really, really atypical. Also, if you go to the 2018 year, you will be exactly the same.

So basically, what happened in the first quarter of last year is that we have a onetime nonrecurrent income that basically is because some agreements with the suppliers in which we have an income recognizing some historical gains from 3 years that increased the gross margin. That is what makes the difference. But in general, if you see the gross margin in this year, it's healthy, it's 21.9%. That is really similar to the gross margin that we regularly obtain in first, second and third quarters in previous years. That we -- probably the only thing that we have to recognize is that, obviously, the mix of sales have a little impact, mainly because we are losing sales in clothes department, in clothing and prepared food. As you know, have very, very high margins, other categories with the highest margin. And that has a little impact, but no more than 15 basis points.

So basically, the margin, we see, really strong, healthy. We are not seeing any pressure going further. Actually, probably, we see that in the following quarters, we'll be in 22% something, and in the fourth quarter again, 23%. So basically, just the base of the comparison, base the one that makes the difference. Also, we have recovering the shrink. So I'm really positive about that.

[Valentín III Mendoza Balderas, analyst]

Okay. Just one follow-up question. I was wondering if you could give us a sense on how are sales -- same quarter performing during these 2 first weeks of April.

[Rodrigo Córdova, executive]

Yes. Sure. Actually, we are also happy about that. I mean we are in April -- today is April 24. Right now, the expectation is to close in high single digits. So we are seeing -- we can say that in the first 4 months of the year, we are obtaining an important same-store sales.

[Operator]

Our next question comes from the line of Ulises Argote from JPMorgan.

[Ulises Argote Bolio, analyst]

So just one additional question here. Are you limiting the capacity on the stores? I mean you talked about taking the temperature of customers as they walk in and et cetera, but are you implementing any measures to kind of limit the actual number of customers that are in the store at any given time? And can you comment on any kind of additional measures that you're taking? If it's only concentrated in some states, if it's nationwide?

[Rodrigo Córdova, executive]

No, actually something that is a little complicated is that not by state, even by municipality, we have different rules and different measures than the municipality authorities is taking. So in -- we have some rules and some measures that Soriana put in place, that goes to all the country in all the stores, but depending the state and in some cases, the municipality, the rules can change.

By example, in some municipalities, in general, we prefer to close in all the hypermarkets, like an example, we have 2 entrance. Soriana right now prefer to have only 1 in order to control in a more nice way the flow of people and take temperatures and take all the measures. In some municipalities, they force us to open both because they prefer -- they have a different opinion and preferred we make 2 entrances, the people can be better regulated. So -- but in other municipalities, I agree with our measures. So it's difficult. It's changing by state. But in general, we have a lot of measures, like an example, the disinfection of the stores, the nebulization of the stores, the use of alcohol and health, take the temperature to our clients in all the stores, it's a rule of Soriana. It's not a rule of the government. We decide to take the temperature of all the people. Actually, even in our headquarters that are practically empty, if for any reason you decide to enter to the headquarters, you cannot enter if you doesn't pass, first of all, through a check with a doctor. That also includes taking the temperature of your body. We have been really, really careful with this.

[Ulises Argote Bolio, analyst]

Okay. Perfect. And then just a quick follow-up. You said now that in April, you're seeing kind of high single-digit trends there for same-store sales. Any kind of breakdown that you can give us between ticket and traffic, how that's behaving?

[Rodrigo Córdova, executive]

Yes. Well, as you probably imagine, the -- all the category related with the Easter week have been a totally disaster. I mean all things that are related with vacations, we have a very, very bad performance, like an example, in this week, are the ones in which we sell them more times because the people make the check control of their car to go to vacation and all the things that are related with the maintenance of their cars. Our category is really important for this week but obviously, we doesn't have a good performance of that. Obviously, all the clothes related with the summer is something that is going really, really bad.

But in the other way, we have, obviously, in food and groceries, the performance is really, really good. And some other categories that probably is not an obvious but it's having huge performance, like an example, table games. Also, all the -- I don't know if this is right the word, but the [Foreign Language] so inflatable pools is having a huge performance. Probably these 4 weeks are the ones that we sell the most in the story of the company, all related with the exercise department and game and sports. I mean traditionally, Soriana is not a good seller of, well [Foreign Language] sorry, I forget, it was waste. And today, we are selling a lot of that. So I mean it's depending the category. Obviously view, as you know, was something really, really surprising, but in the last 4 weeks, we sell more deals than -- I mean, in quantities that we have never seen.

So it depend on the category, but in general, we can say that clothes and general merchandise is growing well. We have important acceleration, except particular categories and all the groceries and perishable is growing really, really fast.

[Ulises Argote Bolio, analyst]

But they are kind of on the composition of ticket traffic, you would say it's mostly driven then by traffic from the comments that you were saying? No?

[Rodrigo Córdova, executive]

No. Both. Both. Also ticket is going up.

[Operator]

Our next question comes from the line of Rodrigo Alcantara from UBS.

[Rodrigo Alcantara, analyst]

Just two quick ones. The first one related to the guidance you provided last conference call. I mean, it's too early to say something about the full same-store sales guidance that you provided last time. But what can we expect, for example, in terms of CapEx? If I'm not mistaken, you were expecting something about MXN 2 billion for this year? And should we expect something -- should we expect that you're to stay the same? Or can it be revised? That would be my first question.

And the second one would be, if you can please repeat the figures that you provided on the e-commerce front, especially if you can comment on the levels of penetration that you are seeing, how is your own platform performing? You obviously have partnerships with the apps, right? And how is this performing as well?

[Rodrigo Córdova, executive]

Sure. Well, regarding your first question, the official guidance used to be same-store sales between 3% to 4% and a CapEx of 2.4 -- MXN 2.1 billion to MXN 2.4 billion.

Regarding the first one is really difficult. Obviously, in the first 4 months of the year, we already surpassed that goal practically by the double. But to be honest, I mean right now is practically impossible to have a good forecast of what could happen. I mean, I think that probably you will be agreed that this is a situation that we never expect and I think that practically, no one expects. So basically, we are not changing the guidance, not because we are not seeing important changes but because we -- to be completely honest, right now, we also doesn't have all the facts to determine a new guidance. So far the things are going good. But we just prefer to wait to have more certainty and more facts in order to give a new guidance. The positive part of this is that so far, it's going really, really well, the performance.

Talking about the CapEx, and it's a very good question, and thank you for that. On that, we are already determined to make an important change. Basically, we will try to stop all the CapEx of the company and convert it into a reactive CapEx. What does that mean? That obviously, all the things that are related with remodeling, all the things that are related with emergencies or changes that we have to make in the equipment of one store because I don't know if the tortilleria department needs a new machine or something like that. Obviously, we will change it. But in general, we will try to stop all the CapEx and use all the free cash flow of the company to prepay debt. Right now, the priority -- I mean, historically, you know that the priority is to pay off debt, always is something important for Soriana. But in these times of uncertainty and crisis, we prefer to stop everything. I mean even the organic growth plan of our subsidiaries, Sodimac and Falabella, the financial branch of Soriana, it will be completely stopped, and we will use all our free cash flow to prepay debt. That is an important change.

Sorry about your second question, e-commerce. First of all, when I talk about home delivery service, I'm talking about basically food, perishables and groceries. I mean all the things that you need to maintain your health and your body and your weight, but it's not talking about general merchandise and clothes department. Basically, we'd say that, that is e-commerce for Soriana. E-commerce for Soriana, and when I say e-commerce, I'm talking about big-ticket items, mostly general merchandise, electronics and clothes department is growing very well, while this is growing at a rate of 80%, 70%, 90%. We -- the plan for this year is growth of 100%. As a different thing, completely different thing, and I will talk right now about home delivery service, that is sending to your home or to pick up and go in the store, just food, clean items and all the things that you need to survive. On that, we are seeing increases for April of more than 400%.

Actually, just to give an idea of how this thing is changing so quickly. Four weeks ago, we used only to have 80 stores, 8-0, 80 stores in the company that offer home delivery service. Obviously, that 80 stores cover an important geographical region. So probably cover the regions that serve physically 200, 300 stores. But the demand is so high, that we take the decision to implement last week, the pick-and-go service in the 800 stores. I mean all the stores of the company is implementing the pick-and-go service, even the membership club, even City Club, even

[indiscernible]. All the stores are right now offering the pick-and-go model. And probably in the next 2 weeks, all the stores of the company will be offering delivery service. Everything is changing so far, our call center in the last 4 weeks, practically growth 400%, the number of agents that we need to answer the demand of home delivery service by phone. Our web page is completely -- is working very well, it's working at 100%, also the app. And I mean it's something never seen before but we are seeing. And every week, it continue increasing and increasing the number of calls and the number of orders that we receive in the app, in the web page and in the call center.

Actually, you will see in the following -- probably by the end of the next week, you will see in all the stores of the company, future advertising not only with the call center number, with also with the mobile phone inside the store, the local phone of the store promoting this because, I mean, no matter that we increased 400% the number of agents in the call center is not enough to satisfy the demand that we are having. And also, that is the reason why because we only used to have the home delivery service in 80 stores with our own resources. That is one of the reasons why we are making a lot of agreements and alliance, like an example with Uber, in which right now, Uber is delivering the product of Soriana.

[Rodrigo Alcantara, analyst]

Okay. Great. That's interesting, Rodrigo. Just on the CapEx, was not expecting that. So perhaps we are talking about levels of MXN 1.5 billion, MXN 1.6 billion for this year? Or...

[Rodrigo Córdova, executive]

No. I mean I think that obviously, this depends on -- I mean several things that I -- it's not under the control of the company, I don't know, a bakery machine just [ phase ]. But I think that a more achievable number, it will be something between MXN 700 million to MXN 900 million of CapEx. So basically, we will reduce -- basically, it's a reduction of MXN 1.3 billion in the CapEx. I mean it's cut it to half. A little less than the half.

[Operator]

Our next question comes from the line of Andrés Ortiz from Crédit Suisse.

[Andrés Ortiz, analyst]

I would like to have a little more clear that the numbers that you say of an increasing ticket of 24.5% in March. Could you talk about what was the performance in terms of traffic?

[Rodrigo Córdova, executive]

In terms of traffic, in particularly in March, we have a low single-digit increase, and the ticket is the one that is driving the important increase. It's a couple of formats that, like an example, City Club and supermarkets, the increase in traffic is really high. It's double digit. But in general, as a total company, the increase in traffic is low single digits, and the increase in ticket is the one that is driving the important growth. Again, except City Club and supermarkets, particularly City Club, the increase in traffic because the increase in membership is really, really important.

And basically, what we believe is that the people, because the emergency, start to see City Club as a new channel to satisfy their consumption needs.

[Operator]

Our next question comes from the line of Verónica Uribe from Monex.

[Verónica Uribe Boyzo, analyst]

Could you please give us more color about the provision of MXN 338 million for exchange loss due to the depreciation of the Mexican peso during the quarter? And how it could affect the results in the coming quarters?

[Rodrigo Córdova, executive]

Sure. Well, basically, as you know, Soriana has a very limited purchasing from foreign currency. Basically, it's around 4% of our purchases are made in dollars or in a foreign currency. Typically, the total liability or the total purchases of the company in a year in dollars is around $40 million. So what you are seeing right now in the P&L is a provision because that amount of money represent all the future compromises that the company has for the whole year in dollars. That doesn't mean that I already pay it, but in our accounting policies that are really conservative, what we made is that we pass through result all the liability that we have in dollars. No matter that, that liability or that agreement with the suppliers, it will be paid in August, November or December. Obviously, when we will be in that base, the FX rate will be changed and we will have

[Audio Gap]

on this. And obviously, in the past, we doesn't use to have a 100% [ character ] on this. I mean, we doesn't make forward on all the merchandise that we buy in dollars because the amount, again, is not really high compared with the total purchases of the company. But it's something that we are changing. Also remind all the audience that, in general, we capture an important amount of dollars every month because all our stores into its places. And particularly, I am not talking just about [indiscernible], I'm talking about other cities in which we have the authorization to receive dollars, to capture dollars. So in general, we have a natural coverage on that. But what you are seeing in the P&L, in the

[Audio Gap]

is a provision for all the compromises for the whole year, no matter that are not a cash movement. It's just a provision.

[Operator]

[Operator Instructions] At this time, I'm showing no further questions.

[Rodrigo Córdova, executive]

Okay. Well, thank you very much for joining us in this conference call. I sincerely wish that all of you guys and your families will be safe, keep safe, keep in your homes, and thank you for being with us in this conference call. Have a great weekend. Bye-bye.

[Operator]

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