Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, and welcome to the Organización Soriana Second Quarter 2021 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia Gonzalez, Head of Investor Relations, who will be discussing the financial performance of this quarter, along with a summary of the latest news of the company. At the end of the presentation, there will be a question-and-answer session in order to answer any questions that you may have.

[Operator Instructions] Now I will pass the call to Mr. Benet. Go ahead, Mr. Benet.

[Ricardo Martin Bringas, executive]

Thank you very much. Good morning, everybody. Thank you for joining us in this conference call regarding the second quarter 2021 results. Today with me is Claudia Gonzalez, Head of Financial Planning Department and Investor Relations, and together, we'll be going through some important information of what has happened during this period as well as the progress in the objectives that we have set for this year. Even though the pandemic of COVID-19 started 16 months ago, in Organización Soriana, we continue responsibly working in order to benefit our clients and collaborators to consolidate as a strong team that face challenges and opportunities.

Thus, this year, our most important commercial campaign, Julio Regalado, which has started on June, showed great results of double digits compared to the same period of last year. This increase was deep in non-grocery, general American bag and clothing category with important improvements compared to last year's performance. In the same way, there was an increase in profitability in almost 1 percentage points during the month of June by operating the promotions launched in Julio Regalado with the stores inventory value of minus 6% compared with the level of inventory of last year.

Also, achieving a reduction in product shortage and focusing in always maintaining the products at the reach of our clients, while the promotions are selective. This year, commercial line for Julio Regalado was 2 periods in Julio Regalado [ Manda ] where all of our shopping channels were enforced in order to reach more people through social media, which have been positive for our omni-channel strategy, and very important channel to new generation of clients. Likewise, regarding payment methods available in the stores, we are pleased to inform that based on the current trend, we are also adding the acceptance of [indiscernible], the Mexico initiative that facilitate the payment transaction through electronic transfers. This another commercial and operative strategy enabled us to grow our capital of services available to our clients and strengthens day by day in benefit of them and the company.

Going through the second quarter results, we have that the company closed with a decrease in total revenues of 1.3%, reaching MXN 39.1 billion, where the main expectations were: First of all, the comparative versus second quarter 2020, especially the high sales in April of 2020 with a negative impact in the percentage of sales of 180 basis points; second, the permanent close of 10 stores in the last 12 months, affecting 70 basis points the growth in the total income; in third place and on the positive side, the real estate revenues had an increase of 50 basis points, basically improving the occupancy and the profitably levels of this business unit; and finally, an increase of 60 basis points due to continued growth in our e-commerce business that every day is more relevant in the portfolio of businesses in Soriana.

Regarding pro forma performance, it's important to highlight that City Club, our membership club, continue reporting a double-digit increase in sales, which has allowed us to increment market share for second consecutive year. This store format is focused in attending business in the sectors of hospitality, restaurants and coffee shops, achieving a 45% increase in this specific sector, whilst last year were deeply affected by the mobility restrictions.

Also, the specific business clients that we attained in diverse programs with City Club is going back again to track their businesses, and we are maintaining an adequate level of wholesales with a sales increase of 8.7% in this specific business line. And finally, in the individual membership clients, who are the ones that position membership club in the market and helps trigger traffic into the clubs, in the first semester of the year, had an increase of 6.7%.

Regarding our self-service store format, the same-store sales performance in this quarter remains in negative low single digits, but showing a better performance than last quarter results and particularly in the month of June in which Julio Regalado campaign already started. This positive recovery trend motivate us to continue on the path that we have set and working hard in a specific strategy focused on improving competitiveness, reduce the level of shortages and reduce the level of inventory. In this last matter, we have been very constant, and as a consequence of their -- as a consequence, we obtained a reduction in the level of inventories of 7.3% versus last year. Also at a division level, the closing department showed an unusual better performance than the rest of the divisions since it was totally affected by the limitations set by the federal government last year. This easy base of comparison allowed the clothing department to grow in double digit in this quarter.

Slide 1, general merchandise also have a same-store sales of mid-single digit increase during the quarter. Referring to our e-commerce business unit, we continue consolidating our digital business, which has a solid triple-digit increase in the first half of the year. Also, we have made some investments in order to improve our technology and customer service platforms, Additionally, at this day, we have implemented a new assortment system for the purchase orders to smartphones in 100% of our stores, helping us to improve delivery times as well as customer service. In our home delivery service called Super en tu Casa, we have implemented different ways to order, and not only through the website but also in a new app and also in a telephone number that helped us to achieve a 79% increase in the sales versus last year as well as an increase in the number of orders of 115%.

I'm also very pleased to inform you that in the following months, we will be launching our brand-new digital platform, where the home delivery service, Super en tu Casa, and the e-commerce platform, soriana.com, will be consolidated in only 1 single platform, where our clients will be able to purchase groceries and products from our physical store, but also will include a variety of exclusive online products that we have dedicated in our distribution center for e-commerce and also to the suppliers, distribution centers through the screen of the scheme of dropship banner.

Regarding our loyalty program, Recompensas Soriana, in the second quarter, we continue working to contribute to the results of the company by implementing different initiatives focused on the customers that win levels to implement participation in their basket. The first initiative that I would like to share is a promotion that we call [indiscernible] that was implemented this second quarter and consists in analyzing our clients' previous month expenses and then establish a shopping goal that imply an important increase in their ticket in exchange of payback phones as an incentive for the client. All of this is basically data driven by new algorithm that we have in the new business platform.

Another initiative that we just launched and that we have been improving our promotional schemes in order to bring new clients to our Recompensas program is the one that is helping us to increase the participation of payback and the clients of the Recompensas program during this month of June.

Also and moving forward to the gross profit, this quarter, the company reached MXN 8.3 billion, which represents a decrease of 1% versus last year's figure. Gross margin closed in 21.3%, showing an expansion of 10 basis points as a result of a better management in [ product increase ] and in the commercial administration. Regarding the operating expenses, this quarter, closing to MXN 5.4 billion, which represents 14% as a percentage of sales and a decrease of 1.9% compared with the last year results. This improvement is due to the constant in optimization expenses plan implemented 2 years ago in lines such as product packaging, transportation equipment and energy.

On this last regard, we have been continuing working in replacing the lighting in our stores for LED technology as part of our sustainability commitment in order to reduce energy consumption, achieving in 150 stores an average reduction of 55% in the cost of payment. This project will continue through the year and moving forward until all of our business units operate with low consumption technologies. As a result of all these variations, EBITDA of the second quarter of the year closed at MXN 2.8 billion, which represents a 7.2% margin, an expansion of 10 basis points and an increase of 0.5% in comparison with the last year's same quarter results.

Regarding the financial items, net financial cost closed at MXN 580 million, showing an important decrease of 18% against the same period of last year. This was mainly because the reduction of 31.8% in the debt balance due to refinancing strategies that has allowed us to reach a better debt structure and also better interest rates. As you all know, this hasn't been easy due to the current economic environment, but it had a positive effect in the financial cumulative result of minus 35% versus last year.

On the other hand, quarter net income reached MXN 872 million, which equals to [ 10.2% ] of our net sales. This represents an increase of 5.9% in comparison with the same period of last year results. As of the end of the second quarter, the company had a total debt of MXN 16.6 billion that represents a decrease of 31.8% and a reduction of [ 53.7% ] in the net debt in the last 12 months.

Likewise, CapEx invested during the quarter was MXN 279 million, where 41% was designated to remodeling and operational equipment replacements. In the same line, from the last year, expenses continue to be prioritized to those related to the proper operation of the stores and the distribution centers. The remaining 32% of the CapEx was directed to new stores to be opened in the second half of the year, and 18% in investment projects in partnership with Falabella. And the rest of the CapEx basically was focused in IT and particularly in supply chain.

Finally, let me inform you about the progress within the Falabella JV business, where Sodimac already had 7 units in operation in Mexico with a very positive performance and a great acceptance from the clients. This was reflected in the results of Sodimac that showed an increase of 15.4% in the same-store sales of the quarter. And also, we are celebrating the opening of a new store in [indiscernible].

Finally, the financial business also in the JV with Falabella has already 155 attention and service models in the Soriana stores, serving a little more than 260,000 clients who obtained exclusive promotions and constant month interest-free campaigns, favoring their payments capabilities.

Basically, with this, I end my comments about the second quarter results, and we can go directly to the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Your first question is from Bob Ford of Bank of America.

[Robert Ford, analyst]

Can you discuss your e-commerce business recovery there. I was curious what percentage of e-commerce that represents for you now? And how that fits with what you're doing from your own stores and distribution centers?

[Rodrigo Córdova, executive]

Basically, right now, if we combine soriana.com and Soriana en tu Casa -- I mean the home delivery service and also the e-commerce business, both together represent like 1.6% over the sales of the company.

[Robert Ford, analyst]

And Mercado Libre, how does that fit? And how big is that?

[Rodrigo Córdova, executive]

Mercado Libre is the initiative that have, as you know, just a couple of weeks working with Soriana. We have a specific site of Soriana inside Mercado Libre website. But to be honest, Bob, the participation of the Mercado Libre initiative over the total income of the e-commerce business of Soriana, right now, it's a little less than 8%. So it's still very low.

[Robert Ford, analyst]

Okay. But it's 8% in 2 weeks, right?

[Rodrigo Córdova, executive]

It's a little more than 2 weeks, to be honest, Bob. Because when we make the press release, we already have like 5 weeks working with Mercado Libre. So obviously, we have an important increase. And we are very pleased with the performance that we have seen in the last couple of weeks. But to be honest, this is still very, very low.

[Robert Ford, analyst]

Understood. And how does that fit with what you're doing from the stores and your own distribution centers? I mean, in terms of the assortments, the geographic coverage, the service levels. I was just trying to understand how -- what role that plays?

[Rodrigo Córdova, executive]

Yes. Well, right now, basically, for me, we'll have our distribution strategy for the e-commerce business. Right now, we are following basically the commercial strategy to create an important long sale catalog of products. And as you know, Bob, right now, our system doesn't have the capacity to offer a marketplace. So what we are doing is growing the capacity of our commercial strategy to dropship [ center ]. And basically how it works is that all of these vendors that are set on behalf of the dropship initiative, they are sending the growth to our distribution centers, and from the distribution center, a third-party take it to make the home delivery.

And in some cases, and which is more efficient, the third-party goes directly to the distribution center of the vendor, and from that distribution center, go directly to the final destination or the client home. What we are basically doing, Bob, is that we create an alliance with some software developer, a new business platform that depending on the kind of product that we are talking about, this platform tell us if we have to take it from the store, if we have to take it from the distribution centers of e-commerce, or if we have to take it from the distribution centers of the suppliers. So right now, we have that 3 different models of distribution.

[Robert Ford, analyst]

Okay. That's helpful. And then, Rodrigo, given the strength in Sodimac, how are you thinking about expansion? You mentioned that you're accelerating the store in Leon [indiscernible] but as you think about really scaling this business, are the current results having an influence in terms of pulling things forward a little bit?

[Rodrigo Córdova, executive]

Sorry, I don't hear the last part. Have there an influence in what?

[Robert Ford, analyst]

In just pulling things forward and accelerating the -- maybe the rollout of new stores, right? And I suspect you have a lot of real estate where you can anchor an existing Soriana property. So maybe the -- you can -- the licensing, it wouldn't be a friction on the process? Or the permitting process wouldn't delay you?

[Rodrigo Córdova, executive]

Obviously, Bob, we are trying to accelerate the growth of Sodimac. To be honest, when the pandemic crisis start, we were very upset about to accelerate the growth. To be completely honest, it's [indiscernible] to us, the performance that we are seeing because first of all, something that was really positive for Sodimac is that during the pandemic crisis, the government designed Sodimac as a basic store, and that creates an important difference. That was really positive but was something that we don't expect. So to be completely honest, in the beginning, we, as a strategy, we just accelerated a little bit the growth of Sodimac in order to see what happen in the pandemic. The results have been very, very positive. Again, double digit growth basically all the months. So we are trying to accelerate again the growth of Sodimac.

And actually, probably by the end of the year, we will be opening another 2 stores, particularly here in Monterrey. So the growth of Sodimac continue. We believe that here in Monterrey, it will be a great success. We are pretty sure that here in Monterrey, we can do even better than in Mexico City and Central Mexico. For 2022. Right now, Bob, we already have 4 stores already designed and in the process of construction. I'm pretty sure that we can accelerate even more than that.

[Robert Ford, analyst]

That's great. And then lastly, Rodrigo, there's a big spike in food inflation, right? I'm sure you're well aware. And I was curious how your internal inflation rates are tracking the food components, the CPI. And how are you thinking about passing that through and price elasticity of the consumer right now?

[Rodrigo Córdova, executive]

To be honest, Bob, we are seeing an important increase -- correct me if I understand what your question, Bob. Thinking about the inflation that we have in the sale of the stores is happening. It's important. If we analyze the increase in the ticket in the company basically is not coming from more articles. The major part is coming from an increase in the price of [indiscernible]. And to be honest, Bob, we believe that, that will continue for the rest of the year.

[Robert Ford, analyst]

Yes. But you are still seeing neutral to positive volume growth, Rodrigo? Or is the impact on price having a negative impact on volume? Or is it beginning to impact or trigger some down trading among the consumer?

[Foreign Language]

[Rodrigo Córdova, executive]

Both from you say volume versus traffic or volume impact on article?

[Robert Ford, analyst]

[Foreign Language]

[Rodrigo Córdova, executive]

Last year, we see an important increase in private brand that, as you know, have another lower price than the normal regular commercial category. This year, private brands continue growing, but not in the same proportion than last year. So we are seeing a strength in normal size on that sense. In general, we are not seeing a shift in the clients going from high-ticket products or more quality brands to low quality brands. That was something that we see much clear in 2020.

To be honest, we are seeing a trend that is going to normalize that shift in the client preference from price articles to private brands or to more cheap articles. But again, it's one of the categories that is growing the more of the product. And so we believe that, in general, the pocket of our consumer is seeing a recovery. But we also want to say that it's already a trend. And probably the other thing that help me to respond to that, Bob, that we see that the consumers have a little more confidence is also the real estate business because in general, we are starting to see a recovery of all the small team that we have in the company that rent premises to Soriana. And also a recovery on the traffic on that small premises. So in general, we believe that the things are a little better, Bob, than last year.

[Operator]

Your next question is from Luis Willard of GBM.

[Luis Willard Alonso, analyst]

So will you -- can you walk us through your inventory management in the second quarter? And specifically, I would like to understand how should I reconcile this 7% drop in inventories together with sluggish top line growth, same-store sales negative, but also gross margin expansion, all in the kickoff of Julio Regalado. I mean, in the years before the pandemic, inventory was necessarily increasing inventory prior to the campaign. And so it will work out this time. So can you walk us through those changes, please?

[Rodrigo Córdova, executive]

Sure. Actually, regarding the first question, the decrease of 7% in the inventory in the middle of Julio Regalado campaign is basically because the formula and the algorithm of the company makes more efficient the management of the inventories in the company. I mean it's something that, actually, every month [indiscernible] that, that [indiscernible] start to be even more and more efficient. So basically, what happened is that like an example, in particular in June, in the Julio Regalado promotions, we have an increase of double digit with a decrease of 6%, again, particularly in July, of the inventory, the average inventory per stores.

So the return of our investment on the promotion is growing also in double digits. So to be honest, we are really, really glad with the performance of the new management of inventory system that we have because it's allowing us to maintain the sales with much less inventory than last year. And how we reconcile that also with the increasing gross margin, well, we have to be honest and recognize that important growth of the gross margin of this quarter is due to 2 different effects that is not related with the commercial or the normal campaigns of the company. First of all is related with a better management of the shrinkage of the company, which we are robust -- we have an important reduction of the shrinkage of the company.

And secondly is you see we have an important increase in the other income that is basically the real estate business that, as you probably know, have a much more gross margin than the retail business. So the combination of those 2 factors are the ones that is promoting the increase of 10 basis points in the gross margin.

[Operator]

Your next question is from Antonio Hernández of Barclays.

[Antonio Hernández Vélez Leija, analyst]

Well, 2 questions actually. The first one is, you just touched on the point of real estate gradually improving. Could you give us a little bit more color on that, like maybe a quantity or what percentage are you seeing of the recovery versus pre-pandemic numbers? And then I have a follow-up.

[Rodrigo Córdova, executive]

Sure. Well, on that sense, basically, we have 2 important things that have changed. First of all, we are recovering the occupancy in which we see an increase from quarter-to-quarter of almost 2 points of occupancy, and we believe that we can end the year a little higher than 80% of total occupancy of our real estate business. Just to give you a sense, before the pandemic of COVID-19, we used to have an average occupancy of 92%. During the pandemic, in the worst part of the pandemic, we have an occupancy of 75%, 76%. And right now, we are much, much closer to 80%, and we believe that we can end in something below 80% of occupancy.

And the second reason of the increase that we have in this business is that last year, we had to help our business partners, particularly the [ payment ] that have rented more premises in Soriana with important discounts in the rent. And in some cases, basically, we forget the total rent of -- the payment of the total rent, and that is something that in this year has not been necessary to do. Basically, the combination of that 2 factors are the one that is provoking this increase in the real estate business.

[Antonio Hernández Vélez Leija, analyst]

Perfect. And the follow-up is regarding -- I mean we've seen some pressure on same-store sales overall the last quarters. And considering regarding where are you seeing a more competitive environment, either from a format standpoint or from a geographical standpoint, where are you maybe struggling the most?

[Rodrigo Córdova, executive]

Well, for sure, the competitiveness is an issue that is still in the agenda of Soriana. Obviously, Julio Regalado campaign is something very specific that help us to increase sales, and particularly June and July is going much better than the rest of the June. But still, we are not 100% satisfied about our price strategy. If you remember a couple of months ago, if I don't remember around by the end of May, beginning of June, we have done an important campaign of reduction of around 10,000 SKUs in the company, an important reduction of brands. We have to continue with that strategy in combination with new strategies based in the loyalty program. We are seeing particular pressure in Central Mexico, particularly coming from Bodega [indiscernible].

For the general, we believe that the efficiency of our price strategy is still not in the point that we want in all the regions of the country. So particularly price strategy is something that we have to continue working in all the regions, not only in Mexico City.

[Operator]

[Operator Instructions] Your next question is from Rodrigo Alcantara of UBS.

[Rodrigo Alcantara, analyst]

Just 2 quick ones here, if I may. So talking a bit about e-commerce. You have spoken here about this. But just thinking about shipping from store. And I was wondering if you can give us a sense of how many of your stores are enabled with on-demand? Is it already 100% of the stores or how many stores are already enabled with this on-demand service?

My second question would be about this energy project that you mentioned. I mean it's interesting. I mean, in light of the potential electricity floor in Mexico, just curious about your thoughts about the potential of these projects to mitigate some, I don't know, headwinds in terms of electricity costs. That will be my 2 questions, Rodrigo.

[Rodrigo Córdova, executive]

Well, about your first question. Basically, if we talk about home delivery service, right now, 100% of the stores have the capacity to make home delivery. And with home delivery, I'm talking about basically to deliver a catalog of products that we have in the stores to the surrounding areas. If we talk about the sale of [indiscernible] stores to make the picking of the product and purchases, the e-commerce platform is still a very few of our stocks, like only 10.

What will happen in a couple of months is that we will start to join the e-commerce platform, the 1 that is focusing high ticket items and long-tail strategy with the home delivery platform that actually, right now, there are 2 different websites. Going into the Q2, what we believe is that the trend and something that will be very positive for our clients is to make a union of world price into only one and going into the Q2 in the same bucket or in the same shopping lease, the client will buy probably a furniture and also vegetables. And we will have decided also the distribution network, but is something that is -- it will happen in the following months. But again, just answering your question on home delivery, 100% of the sales of the company [indiscernible] capacity to perform deliveries in their surroundings.

And regarding the second question about the energy strategy and energy initiative. I mean, again, right now, we have [indiscernible] fully converted to very efficient devices or energy strategy, energy lighting, the lighting that we'll use in the stores. Right now, we are in the process as we speak to increase another 200 stores. So by the end of the year, we will be talking about around half of the stores of the company, 350, actually 51% of the company, will be already working with the efficient lighting devices.

And going into the future, we -- the idea is to have 100% of the company only using efficient lighting device. What we expect that, that will save us in terms of kilowatt. Right now, this 151 stores that we already changed are showing a decrease of 55% in the consumption of kilowatts.

[Rodrigo Alcantara, analyst]

Understood. And just a quick one here on the delivery app, you do not charge a delivery fee, right? I mean that's going to stay, right? Or do you charge a delivery fee here?

[Rodrigo Córdova, executive]

No. Yes, we charge a delivery fee, but we have constant promotions that we give it for free for -- if you buy specific products, the supplier paid it, the delivery fee. But we can say that the normal thing is that we charge for the delivery.

[Operator]

[Operator Instructions] We have no other questions in queue. Do you have any closing remarks?

[Rodrigo Córdova, executive]

Well, just I appreciate your time, and thank you very much for joining us in this conference call, and have a good week. Thank you very much.

[Operator]

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