Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, and welcome to Organizacion Soriana Third Quarter 2018 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia Gonzalez, who will be discussing the financial performance of the quarter, along with a summary of the latest news of the company. [Operator Instructions]

Now I will pass the call to Mr. Benet. Go ahead, Mr. Benet.

[Rodrigo Córdova, executive]

Thank you very much. Good afternoon, everybody, and thank you for joining us in this conference call. As you already heard, here with me is Ms. Claudia Gonzales, the new Finance Director of the company, who will be in charge of our Investor Relations area. And I'm pretty sure that she will be really glad to serve you and to discuss with you going on the results of the company and all events that you can have.

As you may observe it, the third quarter results continue showing a trend very similar to the one that we obtained in the previous periods where the income line of our income statement continue to be under pressure due to the impact of sales derived from the operational breakdown caused by the stabilization of the new companies, new procurement and logistic system.

As we have already commented in previous phone calls, we are aware that the recovery in [indiscernible] will not be immediately, given the efforts we must take in order to recover the lost customer traffic that we have lost in the last 6, 8 months. However, we are expecting that the results of these efforts will be evident by early 2019, and in a more significant way, by the second quarter of the next year.

That is how basically our same-store sales indicator for the third quarter will close practically unchanged in a flat number. Also as you could appreciate in our report, in the July-September period, we proceeded with the closure of 8 units have loss carryout. This is part of our efficiency program that we are performing to consolidate micro markets and power up a higher retail sales per square meter, together with a reduction of our operational expenses, in addition to making a better use of our business platform for the diversification of our format.

Also, although temporary, in the month of August, our unit was closed for remodeling, and we are expecting to reopen by the end of November. Thus, in the last 12 months, 11 stores have been permanently closed. One of them due to the -- this investment that we are doing caused the COFECE command. And another one we'll be awarding this entity to a Sodimac store in the state of Morelos. Situation has also contributed to a decrease in the income line. Particularly and regarding the last month of this third quarter, September, the September month -- the September performance, I want to point out that this indicator has shown a slightly recovery with respect to the first 2 months of the quarter, promoted by a positive calendar FX and a better performance in Soriana traditional format, which has turned out comparing with the results showing by commercial Mexican stores, together with a very positive high single-digit result in our price club, City Club. Referring to the gross margin, this presented an improvement of 10 basis points in the quarter, 21.8%. This increase at gross profit level was mainly influenced by the consolidation of synergies and better commercial strategy, which as I have been commenting, have managed to compensate around 50 basis points that have been temporarily affected by shrinkage in our gross margin.

As to the operational expenses, this item showed this quarter an increase of 9%, as percent of sales is totaling 15.7%, an increase of 130 basis points, caused mainly by an increase in the energy cost as well as a nonrecurring negative effect on total personnel costs. As a result of performance variations and as you have already seen, our line of generation and operating flow already [indiscernible]. This was affected by an increase of 17.4%, to be in a margin of 6.1%, which represent a contraction of 130 basis points.

Basically going down into the P&L and with respect to our debt payment commitments, we continue with our financial efforts in some of our most important long-terms credit, and thanks to our new interest rate coverage strategy, we have reduced our interest rate 30 basis points. Thanks to this debt restructure and optimization that we have achieved, we have been able to mitigate the negative effects of the increase in the reference rate.

Also to comment a little about our progress in our businesses with our partner, Falabella, I would like to share with you that in the month of August, we successfully opened our first Sodimac store in the country, located in the municipality of Cuautitlán Izcalli, next to our Mega Soriana Izcalli store. After 2 months of operation, we want to share with you that it has shown a very good performance and a high acceptance among our customers. Before the end of this year, we have the expectation to open up at least 1 store more, or probably 2 stores more.

Also, and talking about the openings for Soriana stores, we expect that by the month of November, we should have opened all the stores that we are scheduled for this year. One of them in Los Cabos, and the other one that will be our first store in Cuajimalpa in Mexico City, with a renewed premium concept for our Soriana super format.

Finally, as I had already anticipated, last August, we successfully completed sale of our COFECE store unit located in San Luis Potosí. This store was sold to HEB. And also, and as you could have read in the media last week, the antitrust commission rejected an offer for one of the stores made by a real estate developer interested in one of our locations. Basically, because of these rejections, we will continue looking for interested parties and other options that meet the provision of the antitrust commission to complete this resolution.

Basically, with this, I conclude my participation, and we can pass for the question-and-answer session. Thank you very much.

[Operator]

[Operator Instructions] We'll take our first question from Antonio Gonzalez from Crédit Suisse.

[Antonio Gonzalez, analyst]

I just have 2 quick ones. The first one, you mentioned in your prepared remarks that you've closed 11 stores in the last 12 months. If I'm not mistaken, the vast majority of them were in the last quarter, 8 of them, I think, you mentioned in the press release. So I just wanted to see if we can get a little bit more color from you as you try to consolidate the micro regions in which you participate. Do you expect this process to accelerate? Or with this 8 stores that you closed in the last quarter, finalize the process? And any color you can give us on whether there's any specific city or region where you're seeing the largest opportunity for this consolidation. And then, I have a second follow-up question, but I can pause here.

[Rodrigo Córdova, executive]

Sure, Antonio. Well, basically, with this, we end 70% of the stores, of the total number of stores that we are planning to close. Basically, the major part of these stores were listed stores. Some of them, the ones that we acquired several years ago from Gigante, or third parties from the Gigante operation. Right now, have an overlap with some of our stores that belongs to Soriana. It doesn't make any more sense to continue operating both and paying rent in one of them. We tried that -- with this efficiency program, we can upgrade the sales per square meter of the proprietary stores. So basically, that is the reason #1 of this efficiency program. And the second one is related in some of the cases, our stores that were damaged by the earthquake that we suffered last year and that again have a Soriana store in the same influence area. So we are taking advantage to shut down the store, or in some cases, change it to a real estate development and at the same time, try to increase the sales per square meter of the proprietary store. Going into the future, for the next 12 months, you have to expect the shutdown of 6 stores more -- around 6 stores more. Some of the major part will be listed stores, a couple of them will be converted into Sodimac, I mean our proprietary stores that will be converted into Sodimac. Probably some of them will be converted into real estate development.

[Antonio Gonzalez, analyst]

Okay. Very clear. And if I may just -- I also wanted to ask about the logistics issues that were impacting your sales and inventory in the last couple of quarters as it relates to the integration with Comercial Mexicana. Can you just update us on where you are at the moment? Are you seeing any material improvement as of the most recent months or weeks? And any sort of examples that you can share with us of what was still not working that has been recently fixed.

[Rodrigo Córdova, executive]

Sure. Well, basically, I mean, the positive part that we are seeing right now is that we already start to see a very different trend in the performance of our different formats according to the level of integration or the stage of integration, in which they are. Let me be a little more clear with this, we have like an example, a City Club, that is the only format that were not accepted by the integration basically because runs in another platform, this membership club. And City Club, that doesn't have any single expectation of the systems, basically the whole year have a high single-digit number and we expect that for the whole year report around 8% to 9% of same-store sales. And probably, double-digit in the EBITDA growth. Then we have the Soriana traditional format that the Soriana store only migrate the central systems to the new platform, basically the logistic and the assortment platform, that we're the first one to migrate, that already have completed total migration and, right now, start to see the first benefit and it starts to turn around the results. So basically, the Soriana stores already are reporting a low single-digit positive same-store sales. And finally, we have Comercial Mexicana. There are the stores that are more affected because have to change basically all the systems. And here is very important to understand and to remember something. Probably in the last couple of quarters, I have been very specifically talking about the logistic and distribution systems, but you have to remember that by contract, all the systems of Comercial Mexicana, not only logistic and assortment, basically all the systems of the company, have to be shut down by the end of December because we doesn't have more time to use that life or lesson. So basically, the Comercial Mexicana stores have a bigger and a deeper impact in this regard. The migration of all the systems will be ended basically in the last week of November, third week of December. So these stores are the ones that is affecting more with a mid-single-digit negative in the same-store sales. And basically, the mix of all of this is the one that given the result that you see in the report. Again, the positive part is that we see the strategy and the commercial effort and all the synergies are there, like an example, in City Club that doesn't have this kind of effect, we are having great results gaining market share. Soriana is already going into the recovery, and Comercial Mexicana, it will take more time. But at least right now, we are seeing this different across the different formats. So we believe that we are in the right track. Unfortunately, these things take time, and as I mentioned in my first intervention, obviously, recovery of the traffic will take time. It will not be just an immediate step just after we solve the systems problem. It's not that next day, the people is already in store. So we will have to invest. We will have to be more aggressive in promotional campaigns next year in order to gain a new opportunity from our clients. So basically, that's what we expect, Antonio.

[Operator]

We'll take our next question from Robert Ford with Bank of America.

[Robert Ford, analyst]

Rodrigo, there was quite a bit of expense pressure relative to sales, and some of it seems like it was nonrecurring, right? You mentioned store closures and personnel reduction and the energy prices. Can you talk us through what's recurring and what's not recurring in the period, please?

[Rodrigo Córdova, executive]

Sure. Let me start. Very good question because we will have some of these things in the fourth quarter. First, our nonrecurring is some specific effect that we have in cost of personnel as part of the process of integration and efficiency of the company. We have to absorb the -- I don't know how to say it in English, the one-time cost to fire people.

[Robert Ford, analyst]

[Foreign Language]

[Rodrigo Córdova, executive]

Basically [Foreign Language] in Spanish.

[Robert Ford, analyst]

Severance in English, I think, is better.

[Rodrigo Córdova, executive]

Thank you. That is one-time. We are expecting that probably in December, we will have another impact in less, not so big the impact, but we will have also efficiency in terms of cost of personnel thing in December. That's going into the Q2 will be very productive, both in the -- just for one time, we have this extra expense. The second important item is energy that, unfortunately, we are expecting that the increases of the cost of energy will continue in the fourth quarter. So at least, the fourth quarter, we will have an important -- or we will continue with this impact in our P&L. Here, the positive thing is that we are expecting that in the first quarter of 2019, we will be open another -- an additional [ olic ] park that basically will give us energy for an important amount of stores with the one that we are planning that probably around 70% of our energy will be supplied by energy or sustainable energy at a better price than [ Fefe ]. So in the medium term, this will be very positive, but at least for the fourth quarter, we are expecting a negative impact. And finally, and going into the future, we have to remember that in the fourth quarter of last year, we have a one-time nonrecurring incomes basically due to the negotiation, the close of the negotiation with Comercial Mexicana, some indemnities, and also the sale of SORIBAN, that will create a very difficult comparative base this fourth quarter. So that is basically why we expect that also the fourth quarter will be a complicated one.

[Robert Ford, analyst]

Rodrigo, could you just help us understand like how big the one-time severance cost was in the quarter? And then, when it comes to the energy prices, there are 2. If you could give a sense what percentage of SG&A comps, I mean, I know this was a summer and it's probably the single biggest impact, right, because of the greater need for air conditioning during the summer months, but if you could give us a sense of the magnitude of the impact.

[Rodrigo Córdova, executive]

Yes. Particularly, energy, both in the third quarter have a -- I mean, already including the benefit that we have in the -- due to our [ olic ] park, no matter that, we have a total increase of double-digit in the energy. Just to give you a sense of the impact of this, the energy is a little more than 2% our sales. So it's a very important amount of money.

[Robert Ford, analyst]

Great. And then, with the severance expense, how big was that in the quarter?

[Rodrigo Córdova, executive]

Take this.

[Robert Ford, analyst]

The [Foreign Language].

[Rodrigo Córdova, executive]

You mean -- yes. Okay. It's -- well, the cost of personnel is the most important cost that we have. It's around 9% of the sale that each quarter represent the total cost of personnel. And also, we'll have a double-digit increase in this line.

[Operator]

[Operator Instructions] We'll take our next question from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

So once you've resolved the integration issues, I was wondering if you can share with us about the commercial initiative that you would implement in order to regain the lost traffic. What would be, in your view, the implied impacts on margins?

[Rodrigo Córdova, executive]

Well, basically, we are -- once that we, as you've mentioned, solve the problems of the logistic and the assortment that basically amended the integration that basically are occurring in December of this year, we are planning to launch very aggressive campaigns in terms of commercial strategy. Obviously, make a more powerful Julio Regalado. You know in the last 2 years, where the focus of the attack of our competition, mainly because the importance of Julio Regalado in the summer season. Also, we are working very hard in terms to be more strategic in our price and in our commercial strategy, basically making stronger our loyalty program, not only in the promotion that we use our loyalty program but also investment in the knowledge of the client. So in the following months, you will see Soriana investing really hard on that. We are in maybe advanced talks with [ Don Holmby ] in order to use these guys that, as probably you know, are the best one in the world in the use of loyalty programs that we will leave that. For sure, it will be a very important competitive advantage going into the future. However, the knowledge of our clients have been more precise in the promotion that they want to receive. Also, we are planning very interesting things with the financial services that we have in the JV with Falabella that we have seen in the last 8 months that in the stores in which we are offering the great cuts and specific promotions, we have a very important role in the high items category of the store. And we believe that particularly, it will be a very important competitive advantage and differentiator in the food retail mainly because not only -- there is no other food retailer have a very strong proposal or financial tools. And obviously, advertising maintain the competitiveness in general. So basically, right now, we feel comfortable that this is -- we are pretty sure that this is a temporary negative effect, due to the integration. But we feel comfortable with the strategy and the commercial efforts that we will give result. And part of the reason why we feel comfortable with this is because we have 2 very clear examples of business units in Soriana, and one of them is City Club and the other one is Sodimac that -- no matter, is pretty new, in which both of them that doesn't have any relation with the problems of logistics and assortment of the company, are gaining market share against very hard competitors. I mean, City Club competes with Costco and compete with Sam's Club, and no matter, that is growing at a high single-digit, and in some months, have a double-digit in same-store sales. So we trust that we have the right strategy. It's just that, right now, we are suffering in some of the key issues of our business, that is logistics and its assortment. And we are softening that impact, but again, we are seeing other format that are having very good results and we trust on that. Obviously, right now, I cannot say nothing but these intentions and we will have to wait to see the progress. But at least right now, we are seeing a Soriana with important differentiation against the performance of Comercial Mexicana. That makes sense because Soriana is in a more advanced stage of integration than Comercial Mexicana. So everything seems and give some sign that we are in the right way.

[Operator]

We'll take our next question from Valentín Mendoza with Banorte.

[Valentín III Mendoza Balderas, analyst]

Rodrigo, my questions have just been answered.

[Operator]

[Operator Instructions] We'll take our next question from Thor Solanes with HSBC.

[Thor Solanes, analyst]

I want to ask if the news on IKEA entering into Mexico in the next year, do you have plans to accelerate the openings of Sodimac stores? And if so, how many do you plan to open next year?

[Rodrigo Córdova, executive]

No. Right now, we continue with the same plan. As I mentioned, the idea is to open 3 stores in this year. We are opening 1, and we are pretty sure that probably in November, we open the second one. And the medium, long-term plan is exactly the same, is open 20 stores in 5 years. Obviously, we are really aware about these plans of IKEA to enter in Guadalajara, but I mean, we are just aware and if we have a change in the plan, together, Falabella and Soriana, we will make a release. But right now is we maintain just the plan of 20 stores, at least 20 stores in 5 years.

[Thor Solanes, analyst]

And I have a follow-up. If you can give us some color of how is the Sodimac store in the state of Mexico performing in the last month?

[Rodrigo Córdova, executive]

Yes, sure. We are really happy basically because, obviously, the store is just the first store in Mexico. Obviously, the brand is not -- basically doesn't have a name in Mexico and the community. This is something completely new for them. But no matter, that is giving very important results is in the first month, accomplish the budget. It's selling a little more than the average sales of the home improvement stores in Mexico. So I mean, so far, we saw very good comment from the client. We will lead that the value proposition is very well-differentiated against the other competitors. I mean, to be the first store and no one know the brand, I think that the result is great. I mean, just 1 month, first store and have higher sales than the average of the market is positive.

[Operator]

[Operator Instructions] We'll take our next question from Mauricio Santos with GBM.

[Mauricio Santos, analyst]

I was wondering, do you have any -- could you touch on the divestment of the -- I think they were top stores not from competitors, I believe that they recently denied selling those stores. Is that correct?

[Rodrigo Córdova, executive]

Yes. Basically, the antitrust commission denied 4 different proposals, only approved 1. The store to HEB is the only one that approved in San Luis Potosí. Right now, actually, last week -- sorry, beginning of this week, we make the file to the COFECE of a new proposal. We will have to wait for the following week to see which is the answer of the antitrust commission. And we continue looking for new or different buyers. To be completely honest, this is really hard and, in some cases, really frustrating because it's not like there are some other competitors. I mean, we already spoke basically with all the competitors that can operate the stores in the country or even competitors out of the country. And so far, all the proposal are just rejected. So it is difficult and I would like to give you more view about this, but to be honest, even us, we doesn't have a clear view of what could happen because every time that we make a fight, it's just rejected. And in many cases, doesn't make any sense. I mean, I think that for me and for probably a lot of you guys, when we make the sale to the third competitor, I think that everyone will say that, that makes sense, sell it to the third player. But it seems that for the COFECE, that doesn't make sense. So I mean, difficult to say, but I mean, we are working on that and we will continue making our best effort to conclude this process.

[Mauricio Santos, analyst]

Is it possible for you to return those 2 back to commerce if the COFECE doesn't allow you to sell it to anyone?

[Rodrigo Córdova, executive]

Well, actually, we already tried to sell it to La Comer, to the former owners of that store, but La Comer have different plans. And I mean, I cannot just obligate another guy to buy it. But actually, we offer the stores to all the entire associate, so not that we just offer to La Comer or Walmart, et cetera. We have already offered to the more of 100 players in the country.

[Operator]

[Operator Instructions] We'll take our next question from Miguel Ulloa with BBVA.

[Miguel Ulloa Suárez, analyst]

Rodrigo, just a quick one regarding 2019. How should we think about your CapEx for that year?

[Rodrigo Córdova, executive]

You mean for 2019?

[Miguel Ulloa Suárez, analyst]

Right.

[Rodrigo Córdova, executive]

Well, basically, we'll be a little higher than this year, Miguel, but really similar. And we continue with the same priorities about the use of our free cash flow, reduction of debt, remodeling stores and technology and logistics. Basically, that will be the 3 uses of our free cash flow. We will continue with that, just very few opening of stores, mainly the ones that we have the obligation to do it, but we are not expecting to restart organic growth next year.

[Miguel Ulloa Suárez, analyst]

And just a quick follow-up regarding -- do you have a special time frame to revamp your opening plan or...?

[Rodrigo Córdova, executive]

Yes. Basically, with the forecast that we have right now, we believe that probably 2020, we will restart the organic growth in a more aggressive way. But we will start in a slowly way, probably close to 20 stores, and then we will start to accelerate again.

[Operator]

We'll take our next question from Antonio Hernandez from Barclays.

[Antonio Hernández Vélez Leija, analyst]

Regarding the CapEx that you're expecting to use to reduce debt, to remodel stores in '19 and logistics, do you have a breakdown of how much is to all of those items?

[Rodrigo Córdova, executive]

No. Right now, I prefer not to comment a specific breakdown. It's something that we will do in the fourth quarter conference call in which we will announce the goals for the -- and the guidance for next year.

[Operator]

[Operator Instructions] At this time, I'm showing no further questions in the queue. Mr. Benet?

[Rodrigo Córdova, executive]

Well, thank you again to all of you to joining us in this conference call. And please, if you have any other question or something, additional that you want to discuss, just give me an e-mail to me or to Claudia, and we will be really glad to talk again with you. Have a good weekend. Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.