Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2019-Q3

[Operator]

[Operator Instructions] I would now like to turn today's conference over to Rodrigo Benet. Sir, you may begin.

[Rodrigo Córdova, executive]

Thank you. Good afternoon, everyone, and thank you for joining us in this conference call. Claudia Gonzalez is also here with me. And as you know, she is the Head of Financial Planning and Investor Relations Department. And together, we will be looking at the company's quarterly results that we published just a few moments ago, and then we will go to the Q&A session.

As you can see, the top line of our results of operations closed with 2.2% increase in same-store sales. Mainly due to the operational and commercial improvements that we have carried out in the recent quarters by focusing on establishing the logistics and supply operations for all the company format as well as identifying the opportunities we have and started an ongoing improvement process that resulted in showing our customer a new look with the launch of Julio Regalado, which is our most important campaign of the year.

Through 2019, we have taken important steps, such as making improvements to the systems, at the same time movements within our logistic network, making reduction on the sales floor, closing operations due to the overlapping of the stores, customer segmentation and review of catalog basically in our loyalty program and very recently with dunnhumby and these steps help us and lead us to an operational stabilization process, the recovery of the traffic and sustained growth based on the purchasing experience.

The ongoing improvement in strategies have been implemented in all formats. The ongoing improvement studies have been implemented in all formats. However, each of 1 has its own set of complexities and differentiated impact at the top line level. Therefore, specifically speaking of the hypermarket, which accounts for 63% of the total self-service store sales, which was most affected by the 3-plus quarters since it had to absorb 77% of the stores acquired from Comerical. We observed a 1.1% growth, resulting from the combination of a 4.1% growth on the stores of Organización Soriana and a minus 4% of the integrated stores.

Regarding the Super and Express format, which had a growth that surpassed the inflation rate for the year, have provided stability and consistency at the sale service level for our customers helping us to maintain the preferencing and loyalty. In Mercado format, 15% of the stores were integrated after the acquisition from Comerical. And although the first quarter for 2019 was complicated, they recovered quickly, and therefore, have shown a positive growth in the past 2 quarters, which has been above average in comparison with the other sales service program.

Finally, City Club has maintained a constant positive trend with our continuous work in discovering the customer needs and preference, meeting and exceeding the consumer expectation as well as identifying the opportunities for brand differentiation. Therefore an indicator, closed with an increase of 2.1% in stores, influenced by the closing of 7 units during the past 2 months that account for 0.5% of the quarterly sales.

Regarding the gross margin, there was a contraction of 60 basis points in comparison with the prior year, which accounts for minus 0.8%, resulting from the recognition of an extraordinary power item in cost of sales for 2018, basically related with a specific and onetime charges in the third quarter of 2018.

Regarding operating expenses, there was a decrease of 6.6% during the quarter as well as a contraction of 130 basis points as an average on sales, which is MXN 5.6 billion, equal to 14.4% income. This decrease is due to the reclassification of lease expenses, subject to IFRS 16 that was adopted in 2019 are represented -- and represented MXN 352 million.

Apart from the accounting method mentioned above, the nominal decrease in this line would have been of 1.7%, much lower than the inflation rate as a result of our expensive control plan implemented in the beginning of the year.

As a result of the variations, aforementioned, there was an EBITDA of MXN 2.7 billion, equal to 6.9% on sales, with an expansion of 80 basis points and a 14.7% increase in comparison with the last year.

Regarding the net financial cost, there was a 66.8% increase, primarily due to the adoption of IFRS 16, which is data reclassification of lease operating expenses that we already mentioned.

Finally, regarding the result of operations, net income cash equals to MXN 1.4 billion, which represents 3.6% of overall sales and an expansion of 10 basis points in comparison with prior year and a growth of 5.2%.

During the third quarter, 2 units were opened and 3 were not operating, closed. Also regarding a strategic initiative, very important -- or one of the most important, the dunnhumby JV gives us a lot of pleasure to announce that the 3 bases on which we started this project have moved it forward steadily following the planned training program, of which we have covered 70% during the first phase as well as implementation of action in the sales floor basis on roles and behavior of most relevant categories for every format.

This is the beginning of a highly relevant project for which -- is for great importance to understand and fulfill the customer needs that are different and at every sales point on national level and we're committed to improve the purchasing experience on a daily basis.

Also, the e-commerce business has had an ongoing triple-digit growth. Our product offering continues to grow, and our catalog of products increased by the triple in comparison with 2018. Visits and user of the website have increased by 117% and 125%, respectively. This traffic growth has resulted an increase in orders of 96% in 2019. And we continue to work in development projects that will allow us to offer our customers a truly omnichannel experience.

Basically, with this, we close our introduction and we can move forward to the Q&A session.

[Operator]

[Operator Instructions] Our first question will come from Luis Willard with GBM.

[Luis Willard Alonso, analyst]

Just a quick one about your -- if you can talk about the outflow that you saw on the supplier side and of your working capital. Looking at the past 3 years, like the largest for a long -- for the last few months. So my question is, this strategy to incentivize suppliers to participate more risking the Julio Regalado campaign. And if so, why we expect the fourth quarter to reverse the majority of this quarter's outlook? That will be my first question.

[Rodrigo Córdova, executive]

Sorry, Luis. Just to clarify your question. You're talking about, if we have more participation of the suppliers in Julio Regalado or -- sorry, I don't understand your question.

[Luis Willard Alonso, analyst]

I'm sorry. I'll try to make it clear. If you look at your working capital there like MXN 11 billion outflow from suppliers. So looking at the last 3 years like the largest outflow from working capital since you have acquired the Comercial. My question is, did you use short-term in terms of payment with suppliers to incentivize their participation in Julio Regalado. That's the question.

[Rodrigo Córdova, executive]

Well, basically, you had the right comment. Basically, if you see our working capital, they are mainly negative effect that we have in the working capital, is coming from increasing the suppliers' account. And yes, this is related with Julio Regalado. Basically, what happened is that we are -- in difference with the last year in which we had lack of products and that affected Julio Regalado. This time, we were much more cautious about the -- to have the right levels of inventory, probably we have to say that we're going out from Julio Regalado over on the inventory, but we have the right agreements with the suppliers in order to reduce very quickly that levels of inventory, there are things in which right now we are working on. So basically, what we believe is that probably by the end of the year, you will see an important decrease in that level of inventory and obviously have a positive impact in the working capital. I don't know if I answered your question with this, Luis.

[Luis Willard Alonso, analyst]

Yes. I think the large outflow is the MXN 11 billion on the supplier side. So I'm getting that part of the negotiation was to reduce or to improve payment terms with those suppliers on which we are paying, right?

[Rodrigo Córdova, executive]

No. For a lot of the suppliers more than increased the rate of payments, Luis. What we have is something that we'll call a compensation in the working capital. There are specific negotiations, supplier by supplier, in which depending the promotion and depending the suppliers, they help us with an impact in the working capital. But that is something that is one-on-one with each of the suppliers.

[Operator]

Our next question will come from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

Just a follow-up on the working capital, just to confirm on the payables account. We are not -- well, you're not doing any kind of reverse factoring or pursuit similar to these right? And do you think that by the end of this year you could improve the inventories and payables ratio back to 1 by year-end? That would be my first question.

[Rodrigo Córdova, executive]

Okay. Well, we have a program with Cadenas Productivas and also with [ 2 banks ] in which the suppliers can discount their accounts receivable with those. It is an important program, close to MXN 5 billion, and that is what we already have with the suppliers. And in the other part of your question, yes, we expect to have a positive trend in the inventory levels for the close of the year. Actually, right now, in October, we already have some advance on that.

[Rodrigo Alcantara, analyst]

Okay. And my second question would be, so we have seen an impact related to the changes of social programs, particularly with the vouchers [ in Cuautitlán Izcalli and Estalzo ]. So I was wondering has there any impact related to these? And if you can perhaps give a feel of how much of your sales just too depend on these or any color on it would be helpful.

[Rodrigo Córdova, executive]

Yes. Basically, we have an impact because right now the people can use it in another kind of establishment. So we'll lose part of the market share on that. It's is not so important for us, particularly. It doesn't have a huge participation in our sales, particularly in the central part of Mexico. But obviously, something that has some impact. But actually Mexico City and north parts of Mexico is one of the venues in which we have the highest recovery. Probably the south part of Mexico in which we are obtaining the weaker results. So to be honest, I mean, we have to assess that it is not a favorable program for us, but this is not creating a huge impact.

[Operator]

Our next question will come from Martha Shelton with Santander.

[Martha Shelton, analyst]

Just very quickly. Could you give an update on some of the -- what kind of same-store sales you're saying thus far in October? And then also if you could comment on e-commerce. How are you all doing with e-commerce? What percentage of sales does it account for in your -- of your top line?

[Rodrigo Córdova, executive]

Sure. Basically, regarding the first question, we're seeing that this will be a little higher than this third quarter. Probably we can start to talk about levels of something between 3% to 4%. And regarding the second question about e-commerce, we are really happy with the result that we are seeing right now. And also it's important to mention that it is important results considering that we cannot right now invest a lot of money or at least the same amount of money that some of our competitors invest in e-commerce. In other kind of this conference I already commented that our investment in the last 4 years is around MXN 500 million to MXN 600 million that obviously is an important amount of money, but it is very, very low, if you compare with the investment that other players are making in e-commerce. No wonder that e-commerce is growing in triple digits. I will say 117% in terms of visits and 125% in terms of users. The sales staff also growing in triple digits but the business is still very, very small compared to the total sales of the company. Still we are below the 1% of participation over the sales.

[Operator]

Our next question will come from Benjamin Theurer with Barclays.

[Benjamin Theurer, analyst]

I wanted to follow up on one of the topics we have been talking about in the past. That's about the integration of the systems between what used to be Soriana and then got integrated the former Comerical Mexicana assets. So clearly, I mean we're now seeing a little bit of a relief in results in terms of profitability. Can you try to quantify how much of an impact you're seeing because of that? How things have been moving. I mean clearly there was a good margin expansion here at least on the operating income side, but still gross income somewhat challenged. So just to understand how much is related to the system changes and some of the fill rates that were just not as good in the past, if I remember right when we discussed about it, so a quick update on that and then I have a follow-up.

[Rodrigo Córdova, executive]

Sure. Well, basically, the impact that we have in -- if you remember, and I think that this makes very clear the so big impact that created the integration of the 2 platforms is that if you remember, in 2016, in the first year in which we operate Comercial Mexicana as part of the strategy were maintained completely separately both companies, Comerical Mexicana and Soriana. And in 2016, we have basically huge results in everything, expansion in gross margin, expansion in EBITDA margin, expansion obviously in sales. Actually, we have higher sales than all our competitors in Mexico. And the problems started in 2017 in which we started to mix the systems and to shut down some systems of Comerical Mexicana and integrate to the new platform of Soriana. So we can say that -- and probably 90% of the loss of market share in 2017, 2018 is related with the problems generated by the integration of Comerical Mexicana. Also remember that in the first day of 2019, we started the company as 1 company with only 1 system. And from the first day of this year to today, we have seen a positive trend, in which every day we are recovering traffic, we are recovering the assortment, we are recovering the inventory levels. So we can say that we are in a positive trend. It's just that it's taking longer than what we want. And if you want to measure the impact, probably we lost in the last 2 years like 1% of participation in the market share. That is a lot.

[Benjamin Theurer, analyst]

Yes. That's decent. Now -- and that actually goes into my follow-up question. So you've reported a little over 2% same-store sales growth, you just said 3% to 4%. Can you give a breakdown ticket versus traffic? Was traffic flat, slightly positive, and ticket was fairly low? What's been driving the 2.2%, and how do you think about the composition into 4Q?

[Rodrigo Córdova, executive]

Sure. Well, depending on the format, formats like City Club and like Mercado, of a particular express have positive both traffic and ticket. If you -- if we take the number for the whole company, basically, traffic is practically flat, a very small growth, and the 90% of the growth in the same-store sale is coming from the ticket.

[Benjamin Theurer, analyst]

Okay. And going forward you expect us to be the same or you expect a little bit of a traffic recovery and hence the outlook for the 3% to 4% or is it because you're less on a promotional period of time and getting ticket closer to what, call it, headline inflation is running around something like 3-point-something percent?

[Rodrigo Córdova, executive]

No. We believe that we have opportunity to grow both. Probably the only thing that can change this is that if Mexico continuing at a deceleration trend. What we have seen in other views in which we have our economical crisis in the country is that it happened -- start to happen the opposite. Increase the ticket and -- decrease the ticket and increase the traffic because the people are starting to lose jobs and live day by day. That fortunately is something that right now we are not seeing. And we hope to doesn't see that in the country. But I mean, if everything continues just as today, we want to have a growth combined by the 2 concepts, traffic and ticket, with higher percentage coming from ticket than traffic.

[Operator]

Our next question will come from Nicole Zaragoza with GBM.

[Nicole Zaragoza, analyst]

My question is regarding gross margin. I was wondering -- well, I understand this has been hampered by price investments. But, if I may, recall your last earnings call, you were expecting a slight growth margin improvement by the end of this year coming from lower shrinkage and better purchasing agreements. So I was wondering when should we start to see improvements coming from this side?

[Rodrigo Córdova, executive]

Yes. Well basically that efficiency is already put in the numbers that we report, particularly if you remember in the first quarter we have a growth of close to 60 basis points, 23.2% to again 22.6%. Then in the second quarter we have a decrease and also here in this third quarter, a decrease of 60 basis points. Particularly second and third quarter is affected by not fair comparison in which, in 2018 we have a specific and onetime income coming from some charges that we made to our suppliers for the nivel de servicio, or service-level agreement, that gave us a very extraordinary increase in income in last year, but for Soriana that is what makes the comparison very difficult. But in general terms the shrink is continuing improving, again, in line with my other comment, is not in the velocity or not with the speed that we want for continuing a positive trend. So we're pretty sure that we can continue showing an increase. Right now if we see that accumulated, we have a decrease of 20 basis points in the gross margin that we expect that probably for the whole year that difference will be 0.

[Operator]

[Operator Instructions] Our next question will come from Victor Cárdenas with Scotiabank.

[Victor Cárdenas, analyst]

I have a 2-part question -- 2 different questions actually. If you could provide us with an update about Falabella, the Falabella expansion plan, along with the credit card penetration? And the second question would be, if you could help us with some guidance for next year as it pertains to comp, same-store sales, margins, openings, if you could provide some color that would be great.

[Rodrigo Córdova, executive]

Sure. Well, the Falabella business is something that is going really, really well. We are really happy particularly with the response of the clients to the Sodimac format. Basically, right now we're operating 3 stores. The 3 of the stores at a store level are making money and really profitable. Also we're having in the guidelines of opening 3 more stores basically in the central part of Mexico. And probably the most important to highlight is the level of sales that these 3 stores have that are practically the same level of stores of the average income that our main competitor has. That is something really important to highlight because basically we have just 1 year -- a couple of years working in Mexico. Sodimac obviously has brands that still doesn't have a penetration in the country or a recognition in the country. And no matter that the 3 stores are having very important level of sales. So we're really enthusiastic about this format and the idea is to accelerate the organic growth in which we will invest, probably we can open between 4 to 5 stores next year.

And regarding the Falabella credit card, it's also growing. In this year, we opened around 80 branches or small branches in the stores of Soriana in which we are promoting the use of the Soriana Falabella credit card. Right now we have around 250,000 clients. Alone this year we have issue around 120,000 new credit cards and we're operating as of today in around 136 stores. So it's also growing. Actually we believe that one pin for Falabella credit card is really, really important because it's the one thing, which we can promote better the use of the credit card. So we believe that this fourth quarter will be also really important to the issue of new credit.

[Victor Cárdenas, analyst]

And Rodrigo, can you comment also on the penetration, the credit card penetration that you've seen in consolidated results? For example, what would be the -- roughly speaking, what would be the total sales compared by the Soriana or Falabella credit card?

[Rodrigo Córdova, executive]

Yes. Well basically, if we take as an example, the last deal that we used to have with Banamex the higher penetration that we achieved on that was like 1.5% of the sales of the stores, in which we have our branch promoting the credit card. Right now in some of the stores in which we have our branch of Falabella, just after 3 to 5 months of operating, we have a penetration of double-digit. So we believe that the response of the client is really, really good.

[Victor Cárdenas, analyst]

Very good. And moving on to the second question as it pertains to the next year guidance, any color as to pertains to margins, to same-store sales, openings, that would be great.

[Rodrigo Córdova, executive]

Not yet. Basically, we will release the guidance in the report of the fourth quarter.

[Operator]

[Operator Instructions] I'm not showing any further questions in the queue at this time.

[Rodrigo Córdova, executive]

Okay. Well thank you to all of you to be with us in this conference call. Please, if you have any other questions, just send us an e-mail and have a good weekend. Bye-bye.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.