Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Walmart de México y Centroamérica First Quarter 2018 Earnings Conference Call.

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Investor Relations Senior Director for Walmex. Thank you for joining us today to review the results for the first quarter 2018.

On today's call with me are Guilherme Loureiro, President and Chief Executive Officer for Walmart de México y Centroamérica; and Olga González, Chief Financial Officer. The date of this call is April 25, 2018. Today's call is being recorded and will remain available at www.walmex.mx.

Before we start, let me remind you that the content of this call is property of Wal-Mart de México S.A.B. de C.V. and is intended for the use of the company's shareholders and the investment community. It should not be reproduced in any way.

This call may contain certain references concerning Wal-Mart de México S.A.B. de C.V.'s future performance that should be considered as good-faith estimates made by the company. These references only reflect management's expectations and are based upon currently available data. Actual results are always subject to future events, risks and uncertainties, which could materially impact the company's actual performance.

Now I would like to turn it over to our CEO, Guilherme Loureiro.

[Guilherme Loureiro, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us to review Walmex first quarter 2018 results.

Before discussing our quarterly performance, I would like to thank all of you who attended our analyst meeting last month. As we shared with you, the retail market is evolving, and we are innovating and moving fast to continue to win our customers' loyalty. A good example of how we are leading the retail evolution is the new Walmart store that we visited during the meeting. It is the first store developed for our omnichannel customer. It combines elements such as self scan, extended catalog screens, in-store Wi-Fi and dry fruit pickup with a strong focus on traffic-driving departments, such as fresh and health and beauty, to enable a seamless shopping experience. Both [ two ] and digital transformation are key to this new store concept. Transformation SG&A is allowing us to invest in development of digital tools for our associates that encourage a more agile way of working and help us to run better stores and improve our customers' experience.

Now I'd like to begin by discussing sales performance, and then Olga will cover the financial results for the quarter.

In the first quarter, we delivered strong total revenues growth of 11.4% in both Mexico and Central America. Please consider that when I talk about Central America, I'm referring to figures on a constant currency base. On a consolidated level, total revenues growth was 9.4%, and 11.4% at a constant currency basis. It is important to mention that during the quarter, sales were positively impacted by the Easter week shift from April to March. And that in the first quarter 2017, sales and in-stock levels were lower, because we were forced to close some stores at the beginning of last year. However, our performance is backed by our relentless focus on price leadership and efficient execution of added stores as we are capitalizing on the rollout of Centers of Excellence.

Growth continues to be driven primarily by same-store sales, which, during the quarter, grew 10% in Mexico and 7.1% in Central America. Our performance has been consistent. The 2-year stack for same-store sales in the first quarter was 14.1% in Mexico and 9.2% in Central America.

I would like to note that sales have been driven by robust traffic. This quarter, we hit an 8-year traffic growth record of 3.5% in Mexico. Growth has been broad-based across all the countries and regions in which we operate. In Central America, Nicaragua was the country with the highest sales growth followed by Honduras and El Salvador, which also posted strong growth. Costa Rica and Guatemala had a lower but yet positive performance. In Mexico, we also drove a house growth across all regions, stands out the strong performance in the center of the country.

Now viewing the performance by format. Walmart Supercenter delivered a strong double-digit same-store sales growth. We successfully implemented seasonal events such as Valentine's Day and Easter that drove traffic to the stores. The opening of the new omnichannel store, that I mentioned at the beginning of the call, was a big milestone in the omnichannel journey of the format. Sam's Club has been able to keep the growth momentum. In effort to further integrate the digital and physical business, we launched the first online grocer event for business members with a great results. We also implemented the social first event, where all members could find differentiated merchandise at unbeatable prices. In Bodega Aurrera, we further expanded our price leadership and it translated into strong traffic and sales growth in the 3, 4 months.

During the quarter, we opened 10 stores to reach 1,830 units in total. A great start to the 60th anniversary of Bodega celebrations. Superama also posted solid growth, especially considering that unlike the rest of the all formats, supermarkets are negatively impacted by the Easter week shift. We are making progress in strategic departments, such as fresh and pharmacy to further improve the performance of the format.

In terms of divisions, apparel and our core division, food and staples, achieved double-digit same-store sales growth. Promotional campaigns, such as [indiscernible] at Superama, [ West des Bajada ] at Walmart and Morralla at Bodega were well received by our customers and boosted the division's growth.

In first quarter, I mentioned that the pharmacy department was underperforming compared to the rest of the business. And now I'd like to share with you that the department's performance is improving. There is still work to do, but we are starting to see results of the actions we have implemented to resume the growth of the department.

Now looking at our performance versus the market. In quarter 1 2018, we grew 520 basis points ahead of the self-service same levels market, measured by ANTAD, which represents the largest gaps since 2009. Each one of our formats and divisions individually surpassed ANTAD. Price leadership has been key to our performance. We firmly believe in Every Day Low Price, because it builds customers' trust in us and it's a clear competitive advantage. We have now outperformed the market for 13 consecutive quarters, demonstrating the quality and consistency of our results. By innovating and serving our customers in a seamless way, we have consistently earned their loyalty.

Now moving to new store growth. During the quarter, we opened 22 new stores, 13 in Mexico and 9 in Central America. This compares to 13 new stores opened during the first quarter 2017. New stores contribution accelerated from 1.9% in the first quarter 2017 to 2.3% in the first quarter 2018. We are growing in a profitable and sustainable way beauty stores with much better capital efficiency to maintain a healthy store portfolio.

We continue to move forward in our digital transformation and in the omnichannel business. This quarter, we opened the first pickup location at Mi Bodega format. As you may know, this format has a real footprint and the remitted general merchandise assortment. So the kiosk and pickup services are powerful tools to expand our reach to new customers. They look for value and price through an extended catalog.

I'm also pleased to share with you that we are gradually rolling out the Walmart jobs app that we developed for the store managers in our digital labs. The app provides a more efficient way to analyze and take decisions based on KPIs and the notifications system. It's an example of how for Walmex the digital transformation goes beyond technology. It is a mindset and a way of work.

Finally, I'd like to give you an update on our marketplace. We have now more than 400 active sellers on our walmart.com.mx site. During the quarter, omnichannel sales grew 28%. They represented 1% of sales and contributed 0.3% to our growth. This quarter, sales growth was lower given that, as I mentioned earlier, Superama's performance was negatively impacted by the Easter holiday. And Superama grocery home shopping has a hell of weight on our omnichannel business. When we see opportunities for further improvement in omnichannel, but we are convinced that we are making investments at the right pace, and we'll continue working to drive sales by serving our customers in a seamless way and leveraging our assets.

In summary, we started the year on the right foot. Our associates are working very hard to better serve our customers, and they're really appreciated therefore. The second quarter would be more challenging as we face a negative calendar effect from the Easter week shift, and our competitors' promotional activity is intensifying.

We will continue to focus on 3 priorities to deliver for our customers and shareholders. Deliver a seamless shopping experience, drive traffic to our stores, changing how we work to be more digitally enabled.

Now I'll turn it over to Olga, who will cover the financial results for the quarter.

[Olga González, executive]

Thank you, and good afternoon to all of you. Before starting, let me remind you of the financial framework that we presented last month at our analyst meeting. This framework will guide the way we manage our business going forward. We're focused on delivering quality growth across all countries, regions, formats and categories in which we operate, driving transformational SG&A to reinvest in the business and refining our capital allocation and working capital management to deliver shareholder value.

Now I will cover the financial result. I would start by mentioning that we have made certain accounting reclassifications that impact gross profit and SG&A in Mexico and in Central America. These reclassifications have no effect on EBITDA or EPS, and are related to vendor allowances that were previously recorded reducing SG&A, and are now presented in the cost of sales line.

In this presentation and in the rest of the quarterly documents, 2017 income statement was adjusted to show these reclassifications and give uniformity and comparability to our information.

Now moving to results in Mexico. I am very pleased with the strong performance. We delivered 11.4% total revenues growth. We're growing throughout the business in a healthy and sustainable way. Gross profit increased by 11.4%, in line with revenue's growth, and gross profit margin remained at 22.7%. SG&A grew 8.6%, significantly below total revenue growth.

Given the above-mentioned results, EBITDA margin increased 20 basis points to 10.2%, and operating income grew 15.5%.

Regarding SG&A, productivity and discipline allow us to achieve 280 basis points of leverage. We were able to reduce our operating expenses base by 41 basis point through our transformational SG&A and a strong sales performance. The expenditures related to store remodeling and maintenance decreased by 1 basis point, and we invested 18 basis point in new stores and eCommerce.

Onetime FX related to a store fire and diluting of some stores that occurred last year had a positive impact on expenses of 13 basis point.

Now shifting to Central America. We start summarizing the results for the first quarter. Total revenue grew 11.4% on a constant currency basis. Gross profit increased 11.7% and remained at 23.9% of sales. SG&A, as a percentage of sales, leveraged by 230 basis point as a result of driving a low-cost operation by increasing productivity at the stores. Operating income and EBITDA grew above total revenues growth, 20.3% and 18.4%, respectively.

I would like to highlight housing for America has reached a best-in-class EBITDA margin of 8.8%. Overall, consolidated results were solid. Total revenues grew 9.4%. Gross profit margin had no variation versus last year, and expenses grew 6.4%. So we also achieved expense leverage at the consolidated level.

EBITDA increased 12.5% above revenues growth, which allow us to expand the margin 30 basis points to 9.9%. Finally, net income grew 17.1%, almost twice as fast as total revenue.

Now moving to the balance sheet. As we grow and we invest in the business, our financial strength further improves. During the quarter, cash position increased by 90.9% to MXN 33.9 billion, MXN 16.2 billion more than last year. I am very pleased with the significant progress we have made in terms of working capital. Inventories increased only 1.6% versus 11.4% increase in total revenues. And payables increased 23.5%.

As I mentioned earlier, working capital management is a key element of our financial strategy, and we will continue focusing on both inventories and payables going forward. We're balancing the long and short term by investing in key areas of our business while generating returns for our shareholders. Over the last 12 months, cash generation increased by 10.9% reaching MXN 56.2 billion. After investing MXN 16.9 billion in the business over the last 12 months, we returned MXN 43.1 billion in the form of dividends to our shareholders.

In closing, I would like to summarize the key highlights of the quarter. We delivered strong results across the business, and our performance is backed by superior execution. Walmex operational excellence efforts and clear value proposition have translated into traffic growth and important share gains. We were able to drive operational leverage while investing in our business for the future. As Gui mentioned, the second quarter will be more challenging given the negative calendar effect and the intensifying promotional activity. But we are confident that our strategy is clear. We have the right talent, and we will continue working to keep our strong performance.

Thank you very much. And as always, we will make ourselves available to receive your calls to answer any questions you might have.

[Operator]

With this, we conclude Walmart de México y Centroamérica's First Quarter 2018 Earnings Conference Call. You may now disconnect.