Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, and welcome to Organización Soriana Fourth Quarter and Full Year 2018 Earnings Conference Call. With us today is Mr. Ricardo Martin, Chief Executive Officer; and Mr. Rodrigo Benet, Chief Financial Officer, who will be discussing the financial performance of the year 2018 and the last quarter results, along with a summary of the latest news of the company. [Operator Instructions] Now I will pass the call off to Mr. Martin.

[Ricardo Martin Bringas, executive]

Good afternoon, everybody, and thank you for being in this telephone conference. Today, I am with Mr. Rodrigo Benet, Director of Administration and Finance for the company, with whom I will do a summary of the financial results, the actions and strategies for 2018 as well as the plans that we have established for this year, 2019.

If I could define in one word what 2018 meant for the company, was consolidation, a year in which we have done the last stage of integration of the Comercial Mexicana stores to the Soriana platform, finishing, finally, the integration of all systems, distribution centers, processes and human capital. As well, we finished the change in the brand for the format, Mega Soriana, to other Soriana traditional formats, that way, eliminating all those Bodega Comercial Mexicana and Alprecio from our portfolio.

As you know, and like Rodrigo has been commenting with several of you in this -- in several times, the process of stabilization of the new logistic system and provision of the company implemented last year, and that services all of our stores, was the most difficult stage and critical stage of this process because of the high risk of this type of implementations. And even when we work to avoid affecting the operation of the stores, we had some problems that caused some delays in merchandise delivery.

Unfortunately, this migration to the technology platform was longer and had more complications than we expected, causing a loss of market share throughout the year, principally because of the incidence of the stability of our provision and the profitability of products as well as the speed of our systems to do adjustments day-to-day and falls in the operation systems for the stores.

Today, I can share, that has all been stabilized completely. So at short-term, next to -- or with the investments that we are doing in systems and the commercial efforts and operational efforts that we have implemented to recover the traffic, we can start to see a better and gradual increase in sales to stores as well as indicated by the working capital, inventories and loss.

As like -- as what I said before and about the investment that we are going to do in technology, I can tell you that we are -- have programmed a very ambitious plan at the short and medium term, which will concentrate in 2 lines of action: first, to reinforce and strengthen the technological tools that we have currently; and to update all those tools that were implemented as part of our transformation project that we initiated 7 years ago, with the latest versions available for our SAP platform.

Additionally, we will continue with the development of proprietary systems that will allow us to improve the operations in our stores and in logistics as well as the revision in processes that will capture all the improvements that we've done as the practices as well all those work is in response of the need that these guarantee and support the operation, current and future operation of the organization. We will continue to work in the development and implementation of new initiatives that will support the transformation of Soriana to work an intelligence business that is responsive to the trends that we are seeing and the demand -- and demanded by the retail industry.

As well as, as part of our strategy of recuperation of flow of traffic, we wish to invest in our competitive and to get better synergies this year as which a standardization of our levels of loss as well as reductions on the central expenses for the company, specifically in our strategic expenses, what we have -- what we believe will allow us to recover the traffic of customers that we lost in 2018 once we are standardized and we have a stable level of gross margin.

About the business established through Falabella, we are very satisfied with the achievements. And about the financial business, we already have 130 modules for attention and sales in 7 states of the country.

During last year, we originated more than 126,000 new accounts that have a portfolio, a total of 115,000 clients per day, with more than MXN 2.8 billion. And for this year, the focus will be in strengthening the digital platforms and then complement offering of additional services, with insurance and health as well as expanding into more Soriana and Sodimac for attention to the client.

So about then the Sodimac Homecenter, we are very enthusiastic opening 3 new stores, 2 of them in Valle Mexico, which can be -- which are next to a Soriana store, making it a commercial focus, and one in the city in Cuernavaca, Morelos. These stores, since opening, have been very well-accepted by the people and services. And even though it is not a very well-known brand known by many, we are very happy that at the medium term, it's going to be expanded. And I can say that, today, we are working in changing 4 Soriana stores that will host these stores also.

Continuing with some projects and actions that we've done during the year, we have major investments in strengthening our strategy of well-thought commerce through soriana.com, and we've had very good results and we've increased double digit in sales. And we will continue working in improving the shopping experience through our web and our physical stores and to have better products or more products and use Soriana's footprint in physical stores to create an operating synergy between the 2 platforms and give better offers to our clients and also taking advantage of technology that will get us to this level of business in the medium term for sales for the company in stores.

We have a new prototype of the hipermercado prototype when we remodeled and changed and retrofitted the sales floors for 9,000 square feet -- square meters to a store of 5,000 square feet -- square meters. We are doing a plan to take those stores that are candidates to do this consolidation and in which we're going to do in the period of 4 years, and that will allow us to increase productivity and profit for a per square meter of the stores and it is used by our real estate business.

And going to the commercial area. I can tell you that we have a business with El Corte Inglés to offer in our stores, exclusively, 120 products under that prestigious brand and the same that you can see in the exhibition of more than 150 stores in the country, and that will allow us to offer our clients a better variety of products in a very good quality and reasonable cost as well as we've worked with the development of products of a proprietary brand, and we are looking at a differentiator for our client and I believe this will help us in repositioning the image of Soriana, not only as a chain of a low-price chain, but also as a competitive player at medium and high socioeconomic levels. We're offering products of high quality at good prices.

About investments for the year, and these came up to MXN 2.565 billion, which were done in 48% in remodeling and retrofitting, and 12% of 2 opening new units, which were Soriana Hiper in Carlos, Baja, California and Soriana in Santa Fe in the city of Mexico -- in Mexico City. And the rest of the 40% of the investment was to systems, electronic systems, logistical and other corporate things.

For 2019, we have an investment of MXN 2.2 billion projected and in which 32% of that investment will be remodeling and retrofitting of stores, followed by an investment in systems and technology.

I'm taking this occasion to tell you that we are -- where we are today about the uninvestment of the 12 Comercial Mexicana stores, but that were involved in COFECE. And as you see, it's a process that has been going on for 3 years, but we continue to work on that. And at this point, we have gotten to the close of sales of one unit in San Luis Potosí.

And in parallel, we continue evaluating different alternatives and talking to the interested parties to doing notifications of sales for the rest of the stores.

In the use of energy, renewable energy. At close of 2018, we have 46% of our requirements in electrical for a clean energy chain. With the construction and the inflation of the new Vicente Guerrero Park, for this, in March, we will increase our clean energy supply up to 65% to get to 650 business units.

This park will be the biggest of the parks that give energy to Soriana, and they will have an installed capacity of 1.1 -- 117.5 megawatts. This advance in electrical energy is only one step in our policy to take care of the environment long-term, and well, you see that it allows us to mitigate and control the cost in this, as you can see.

About our foundation. During the year, we had more -- we benefited more than 481,000 people and we supported 479 institutions [by] under an initial investment, a social investment of MXN 113 million.

[Technical Difficulty]

[Rodrigo Córdova, executive]

Sorry, we had some technical problems, and we will continue with my presentation.

Mentioning that we had a difficult -- we have macroeconomic variables that continue to give us a vision of a -- the future that is a little bit more unstable, a reduction on unemployment in the year, we've seen a level that has been quite healthy and the ascent of money back to the country, which has not gotten to historic levels.

Knowing about the -- what Ricardo said at the end of the close of units that we have throughout the year that we did in 2018, we had an effect of -- in our income. We got a sales at MXN 153 trillion, which had an effect of sales per stores of 0.1% same-store sales.

And throughout the year, we had a differentiated format in City Club. City Club, when it was a completely different technological platform for the rest of Soriana, we had no [affectations]. We closed with -- at a high single digit in the sales of our same stores. We believe that this format, the formats in Soriana, that started the year on the low end and negative, which were the ones who migrated, ended up in low single digit in consolidation, and Mega, which was the most affected and the last one to join the platform, it had, throughout the year, a same-store performance of minus 5%.

About gross margin. We can see without changes, without [disclaimer], at 22.4. This at a gross was a consequence for the reduction in the supply, and it was contained in a way in the achievement of commercial synergies and a better management of our promotional strategy.

About the GAAP cost. This increased for the year and as a percentage [over] sales to 15.4% versus 14.6% of the -- for the prior year. This increase is principally attributed to the increase in energy cost, as he mentioned, and which is the operational cost, the biggest one for the company, and a cost of personnel associated with integration for Comercial Mexicana. All of this are at the top of the lowering of sales. This added to the lowering of sales. That is why, as a result of the variations, the EBITDA for the exercises, the 7%, is a reduction against the year before of 10.3%, getting to MXN 10 billion -- MXN 10.736 billion.

About the reduction of debt for the year, it was reduced by MXN 278 million against the close of the year before. So we have a net debt EBITDA of 1.9x.

And to end, and so as not to repeat what we have already said in the report that we presented this morning, I will tell you our guidance, financial guidance, for this year. It will be, as the main points, one, an increase for same stores between 4% and 5%, an increase between 50 and 70 basis points at the EBITDA margin, a CapEx of more or less MXN 2.2 billion, with remodeling of stores and system investments, opening of 3 stores -- 3 new Soriana stores and reopening for remodeling of one unit in the city of -- in Mexico City and our stores in Falabella, we want 4 Sodimac stores now and a plan for a reduction of debt for[ MXN 5.1 billion ].

Without anything else, we have -- this is our presentation. Thank you for your participation, and we are opening the session for questions-and-answers. [Operator Instructions]

[Operator]

[Operator Instructions] And your first question is from the line of Antonio Gonzalez from Crédit Suisse.

[Antonio Gonzalez, analyst]

I wanted to ask you specifically about the operational flow for the year, Rodrigo. I imagine that through the problems that you had in 2018, logistical problems, I think there is a reduction in investment and the rest of the capital accounts, working capital accounts, which resulted in a cost of operations to -- went from 8 to -- from MXN 4 billion to MXN 8 billion. Can you tell us a little bit more, in detail, not only the portion of the logistics, but in working capital, what do you think that this is going to be standardized or normalized and what is the progression in the next 12 or 24 months?

[Rodrigo Córdova, executive]

Look, the comment is for, Antonio, we see the company generated about MXN 6.4 billion in cash, that was our available cash, and from there, we had to do a capital investment of -- a working capital of MXN 4 billion, which would left us MXN 2.5 billion, which is CapEx, and the MXN 276 million that we -- that I mentioned, was to pay down the debt. The MXN 1.4 billion, the difference is what you're going to see as a reduction in cash flow. And evidently, this is related to all of the problems that we had in the management, inventory management, which was a process, as Ricardo said, which was harder than we planned and that has the characteristic that we create excess, of course, because of those faults in systems, and we can see that in the balance sheet. At the end of the day, we see inventory grow at a higher rate than what we have for our providers. So basically, this is a temporary situation that we are seeing, the reduction that we are doing gradually in each one of the formats, and more importantly, we want to differentiate the management of inventory of the stores, at the level of the stores, that have 3 or 4 months in migration compared to those who have 6, 7, 8 months. And so what it says is that the system is working correctly and that once that we finish the implementation, the formula per store is healthier for inventory. It is a topic that is going to take time, not because we get the solution, do we fix the inventory the next day per store, but I think that throughout 2019, since we started seeing it from the year before, during these stores that have more time, we're going to stabilize the inventory, and this is going to have 2 positive effects. On one side, we're going to reduce that investment in working capital, and on the other side, it's going to help us to reduce losses. And we are going to, getting to 80 or 100 basis points above the mean for the company for the next 10 years. So there are very good opportunities that we see there, as Ricardo mentioned already in his initial comments, will be part of the synergies that are going to give us additional resources to invest in productivity.

[Antonio Gonzalez, analyst]

And tell me a little bit about what Rodrigo said, the difference between last year and 2 years ago, that are included in this work.

[Ricardo Martin Bringas, executive]

I wish -- I thought that this year would be that we would have an expectation of -- in a better way because we have better technologies now that is working to get to this point. And also, that we have inventory, this investment in working capital. We have very good investments, very healthy investments and the inventory. We don't have worrying inventory, that we have very good efficiencies in control because of the trajectory. Today, we are working in inventories, it is either a healthy set of inventories, and we are supported by very basic products, that I see all that, after going through this season that we're coming out of during the first quarter. Beginning from there, we have a better management, a better handle of the workflow, with a healthier inventory, where the location of inventory is better than we've seen by the end of 2018. And the most important part is that we also have a -- the vision, if you want, as a little bit of protection just at the end of the year. Because of the problems that we had in the management in -- for -- in the management, we saw ourselves in need not to run any risks and so as not to have more effect. I'm going to say we have healthy inventories, and at short term, we're doing well.

[Antonio Gonzalez, analyst]

Can ask you again, I don't know, if in 12 or 24 months, you are -- are you going to have negative capital? Work capital is going to be a small investment, but you're going to have -- but are you going to have to invest in working capital once this situation gets normalized or standardized?

[Unknown Executive]

Our objective is to go back to the time in which we financed 13% above the inventory. So we have providers for inventory of 1.3. I don't know if I explained this correctly, of talking about merchandise for sale, not talking about for equipment or accounts payable to providers for equipment or all of those stuff. The answer is yes. In short term, and I would answer that this year, by the end of this year, we are going to -- at the end of the year, of December of 2019, we wish to have that relationship, that positive relationship of working capital.

[Operator]

The next question is from Rod Cuestas of Goldman Sachs.

[Rodrigo Cuestas Azpuru, analyst]

I wanted to have a little bit on the intermercados format. Is it a format that is still on the pilot stage? Or has it been launched? And has it been -- is it going to be expanded at new stores? What are the details on this Hiper...

[Unknown Executive]

It's not a new format. It's a prototype of the same format of the hipermercado, intermercado. It's the market -- we have been doing this for approximately 6 or 7 years, adjusting it so that it will be more productive, much more efficient in its operation from the new trends for consumer habit. As you know, small stores are having an impact in the market. We are very -- working very hard in the intermercado format. And from approximately 3 years ago, we started to study that prototype of less than 5,000 square meters. We started with 6,000 and now we're going to 4,500. And we believe that, that store in Chihuahua, that we opened as a pilot store, this is the ideal size where we have an inventory, a catalog, a portfolio of intermercado, is 4,000 or 5,000 square meters, and it is a comfortable store. And specifically, that pilot program that we did with the sales -- the sales grew almost twice what it was and with 4,000 less square meters. So we are still adjusting, but we're thinking that, that is the prototype. That is -- the intermercado is the same format as hipermercado, all under the same roof, in the same categories, with a smaller catalog, and the store is comfortable. Even if we narrow the aisles, the store is comfortable.

[Rodrigo Cuestas Azpuru, analyst]

And the idea is more who is your customer there, the same client? Or is it going to compete more with Abarrotes? How are you thinking about this?

[Unknown Executive]

It is the same people as intermercado, and it has a division for food, and general merchandise, that is clothing, and it has this pharmacy, it has everything that intermercado has, but at the same time, it is in a more compact size. How did we do to fit all this in the same stuff? Specifically, in general merchandise and clothing, we reduced the lines of provision. As you know, clothing can do 20% or 30%, depending on the type of consumer. As part of sales, we are doing more or less the same but better location of these categories that are the ones that we have invested the most in this, in clothing. We continue to manage the same clothing areas with reduced inventories and fewer products. And there are products that, at hipermercado, have a variety. I don't know if they have a lot of rotation, but they are part of the concept of having a variety. We reduced those products and now we don't have as much variety. But it is a format where a housewife or a customer can go do their complete shopping. Before 9,000 meters and now we're down to 5,000 meters is perfect.

[Rodrigo Cuestas Azpuru, analyst]

And productivity, do you have some benchmark that you're thinking about for the new prototype as hipermercados and the existing supermarkets at the short term and the long term?

[Unknown Executive]

Yes, there are stores that could sell MXN 4,200 per square foot -- square meter, I'm sorry, on average, but it is much more profitable. It is about half of an hipermercado -- a little bit less than half than the hipermercado.

[Operator]

The next question is from [ Luis Villar ] from GDN.

[Unknown Analyst]

The first question would be I want to have a little bit more understanding of 2019, specifically, what you have for sales, same-store sales. Are you thinking that it is going to be more conservative-focused, taking into account of the problems for the full year? Or is the investment that you are doing in -- that you're thinking in competitive terms of prices or promotions on sales, are you projecting an increase in same-store sales?

[Rodrigo Córdova, executive]

Without a doubt. Generally, we want to be conservative in the guidance. That is our first point. And number two, it is clear that there's an uncertainty, a macroeconomic uncertainty in the country, which doesn't allow us to take that -- to be so adventurous. And as Ricardo said, we are going to be making this investment to recover the traffic that we lost. That is an investment that is going to take time for them to react, to go back to the stores, and it's going to take a little bit of time. Specifically, in the first quarter, I think we are seeing that it is a little bit weak, but we are getting a better reaction for the second quarter and specifically, can have a better Julio Regalado in the technological area because operationally, we are better prepared. But I would say that this is the guidance that we have right now, and that is how we've set up our objectives.

[Ricardo Martin Bringas, executive]

The results from 2018, it goes to what Rodrigo has just said, it is conservative, it is very achievable, but we do not want to create false expectations.

[Unknown Analyst]

And could I ask another question quickly? In your initial comments, you've talked about that the systems today, they are stabilized completely, they are standardized, that is Soriana stores for the old Soriana stores and for Comercial Mexicana, correct?

[Unknown Executive]

Yes, we have integrated, which caused a lot of problems, a lot of money and a lot of effort, but we are ready. So we are ready now for -- and this consolidation is done.

[Operator]

Ulises Argote from JPMorgan has the next question.

[Ulises Argote Bolio, analyst]

Can you give us a closing, a store closing? Last time, it was 70% at the closing, the plan of closing, and to clear up this guidance that you gave us, the 3 open -- new openings or to remodel the stores.

[Unknown Executive]

It's 7 new stores. It's a City Club. It's a Hiper and Super. It's 4 stores and 4 Sodimac stores. About the store closings, we are -- in their majority, we are closing them [intermediately] because now with the consolidation, we -- the stores that we changed to Soriana, some are too close to others. And with a very clear analysis, we are looking for the sales to stay within the store that is closest, and so we are doing those closings. So I believe that to answer your question, I believe that we have this year and next year to finish the timing in which stores we're going to close, especially stores that are very productive. We think about it twice before closing them because the risk of losing the customers exists, but with our loyalty program, we have a little bit better contact with our client so we can steer them to the sister store. So what we make -- we want to make sure that the closing does not impact the results for the company. We can close the store and we stop doing sales at that store, but we have another store that picks up. So this year, next year, as I said, we are going to have these decisions and executed and -- make these decisions and then execute it. We started 3 years ago, as you know, for some stores. Some of them already changed format. Some of them are waiting for the precise moment to open, like the case in Victoria that we closed one across from a Soriana. And so possibly, next year, after the fourth year, we'll open it as a City Club, which is a new format. So this year and the next year, I believe, that 95% of the stores that we are considering closing and reopening because we will then close that, will happen.

[Operator]

The next question is from Ravi from HSBC.

[Ravi Jain, analyst]

Can you remind us what is the percentage of 2018 stores that belong to electronic commerce and which are the initiative, main initiatives that you are going to have this year for electronic commerce, for e-commerce?

[Unknown Executive]

Unfortunately, our division -- our e-commerce division, since we launched it through the new page of soriana.com, every year has had an increased growth and some months, even triple-digit growth. This is a new initiative. We haven't gotten to 1% of sales as we wanted, which is our initial objective. When we achieve that, we will let you know. And the initiatives that we're working on, I'm saying, we have evolved to have a better, more potent commercial offering. What we're talking about the e-commerce having a catalog is -- having a very good catalog is important, and it's a differentiator. 2 years ago, in the same sense, we started with just direct purchase to provide -- from providers, which gave us a better catalog. But it was a higher investment and a higher risk in working capital, and that's why we have the second initiative, which is ours, which we increase our -- the availability of our catalog without having to have inventory, a strategy that has given us the catalog for all the providers in the web page. And when they do the purchase, I buy it from the provider and I do the fulfillment for the product. So this year, as the last stage of this initiative, we are starting to work in the marketplace and we are taking the best practices from our partners and other players in the industry and starting to develop the first pilot programs to increase our physical store sales with sales online. We have a couple of stores in which we have digital kiosks to complement the inventory of the store. If you can't find a product, you can order directly from the store online. And we have some pilots so the client can do click-and-collect, which you know. You purchase and then you get it at the store with a savings in the freight cost. These are the strategies that we have and on the other side, a commercial differentiation. We all know that in e-commerce, at the beginning, 80% of e-commerce, it was buying tickets, and then we started doing retail with the electronic categories and we have started to diversify with categories that have good margins and that create a differentiation. And we are strengthening our topics for babies and pets, which are giving us a good difference and which make us different in the commercial space and the e-commerce space.

[Ravi Jain, analyst]

And maybe if you'll allow me to -- I don't know if you've talked about, well, how much of the CapEx is destined to e-commerce.

[Unknown Executive]

The CapEx, we didn't comment, but I'm going to say that, basically, it is strongly leaning toward remodeling, and the second CapEx is for systems. In systems, most of it is going to be under digital business, and we were talking about MXN 6 billion. That is the box that we are investing the most into as an area for, perhaps, remodeling and investment in stores and systems. It is the strongest part, especially the digital area.

[Operator]

At this time, there are no other questions. So the panelists are going to make the final comments.

[Unknown Executive]

Thank you very much, everybody. I hope having clearly stated all our positions and given very good answers to your questions. Thank you very much.

[Operator]

This is the end of today's phone call. Thank you for your participation. You can hang up now. Thank you.