Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Walmart de México y Centroamérica's Second 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 second quarter 2018. On today's call, with me is Olga González, Chief Financial Officer. The date of this call is July 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 could 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 CFO, Olga González.

[Olga González, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us to review Walmex's second quarter 2018 results and to get an update on how things are progressing relative to our strategy.

This time, Gui won't be able to join us, so I would cover both sales performance and financial results of the quarter.

We're halfway through the year, and we continue to be pleased with the momentum we are seeing in most parts of the business. We're encouraged by our top line growth, particularly traffic, as consumers and members are responding positively to our investments in key areas of the business. We will continue making such investments in prices, associate wages, new stores, logistics, e-commerce and digital, with the goal of balancing the short and the long term to position our company for continued success.

Now let me start with the total sales performance. Please consider that when I talk about Central America, I'm referring to figures on a constant-currency basis. Despite an incremental headwind due to Easter calendar shift from April to March, we delivered strong total sales growth in both regions. During the second quarter, total revenues grew 8% in Mexico and 4.7% in Central America. Consolidated total revenue growth was 8.1%. For the first half of the year, total revenues grew 8.7% on a consolidated basis. Mexico grew 9.7% and Central America, 7.9%.

In Mexico, growth has been driven by a consistent and solid same-store sales performance. Even though inflation is lower than last year, we have managed to increase the basket size by offering great merchandise at unbeatable prices and to drive traffic to our stores. In the first half of the year, traffic increased 2.2%.

During the second quarter, same-store sales increased 6.5%, and the 2-year stack was 13.7%. For the first half of the year, the 2-year stack for the same-store sales in Mexico was 13.9%, which clearly demonstrates the progress we have made on our strategy.

In Central America, we faced a very challenging quarter. Growth was slower than expected as same-store sales increased only by 0.6%. We're experiencing headwinds in some of the countries. However, we continue to gain share in a market that is decelerating. I will get into the details shortly.

Growth was broad-based in Mexico. All regions had a positive performance. The center delivered the highest growth, followed by the north, south and metro regions. Our customers are appreciating the regionalization efforts that we performed as part of the Center of Excellence to improve their shopping experience. As I mentioned before, same-store sales growth in Central America was 0.6%. El Salvador was the country with the highest growth, followed by Honduras.

Growth was slower in Costa Rica, which represents about 40% of our sales. Consumption is decelerating in the country as macroeconomic conditions become less favorable. High inflation and interest rates are pressuring consumers' budgets.

Sales declined in Nicaragua. As you might know, due to political conflicts in the country, there have been protests that have affected economic conditions in general. Preventive measures were undertaken to safeguard our associates and customers at all times. This included the temporary closure of the stores. As of now, all stores are operating regularly, and we're working to normalize the supply chain in the country, but the situation is volatile.

Even though overall growth in the region is decelerating, we have managed to grow ahead of the self-service market and to gain market share, but we're not satisfied. For the back half of the year, we're implementing specific commercial strategies to boost growth in the region.

One of our key bets is taking Bodega Aurrera's emblematic Morralla program, which is the largest campaign in Mexico, to the bodega and descuento formats across the Central American countries. We're increasing our focus on price leadership, and we're positioning our private brands offering to drive more sales. As we shared with you during our analyst meeting this year, we're testing the Center of Excellence program in Central America. So far, 4 stores have been converted, and we're fine-tuning the pilot to expand it to more stores in the coming months.

Markets have up and down, but we believe Central America's trajectory is still positive. We know we will face challenging conditions from time to time, but we're committed to expanding our low-price value proposition to Central American families to help them save money and live better.

And now with what I just mentioned, we recently announced that we have reached an agreement with Grupo Empresarial de Supermercados to acquire 52 stores located in Costa Rica. The stores have great locations, and they complement our existing geographical footprint.

By adding 39,000 square meters of sales floor, we will strengthen our leadership position in the country. We're very excited about this investment. The number of stores we're acquiring is almost as big as the number of new stores we opened last year in all the Central American regions. All stores will be remodeled, with the purpose of operating them under our standards and brands within the supermarket, bodega and discount store formats. The transaction is subject to the approval of regulatory authorities and to other customary conditions.

The next slide shows the performance by format in Mexico. Sam's continues to deliver the highest sales growth. We're stepping up our efforts to further integrate the physical and digital world by adapting the club layout to reflect the changes in our members' shopping behavior. We are migrating merchandise to the e-commerce operations while repurposing the sales floor to expand traffic-driving categories. So far, we have made these changes in about 30% of the clubs, with great results.

Superama also posted strong growth. The changes we made to our perishables and pharmacy strategies are starting to show results. Traffic and sales trends are healthier than last year. To celebrate our 60th anniversary in bodega, we launched the 60 Years Growing Together campaign, where we offer our customers exclusive promotions and great prices across the store.

In Walmart, seasonal events such as Children's Day, Mother's Day and Father's Day drove sales. During the quarter, we also had a Great Value event that helped us to boost private brand sales. Our brands are a great differentiator and help us to build customer loyalty. We believe there is plenty of opportunity to grow private brands sales, and we will continue to develop our business relationship with suppliers to reinforce our offering.

Now let's see the performance by merchandise division. We show a strong growth in general merchandise sales, partially driven by the World Cup promotional initiatives. We're also encouraged by the sales performance of our core division, foods and consumables, which has been consistently our main growth driver. Apparel posted a lower growth largely because of the Eastern timing shift. For the back half of the year, we will manage this department closely to resume growth.

I am pleased to share with you that during the quarter, we launched our first omni-channel event, Hot Days, with amazing results. By leveraging our strengths, we were able to take an online event to the brick-and-mortar world and drive sales across all merchandise divisions. Electronic, beverage, appliances and apparel delivered the highest growth. We served more than 57 million customers and members in our stores, clubs and websites. Our online grew more than 100%, and overall growth was double digit. We firmly believe the winners in retail will be those who can bring together the best of off-line and online worlds to serve customers in a seamless way, and we have unique competitive advantages in this race.

Continuing with omni-channel, things are moving fast, and we're very excited about how the business is evolving. In June, we launched our new Walmart Online Grocery platform. This platform provides a better and more friendly customer experience, drives repeat customer engagement with enhanced product availability updates and give higher visibility of online discounts when we lean into our price investments.

We're working very hard to continue to lead on online grocery business. During the quarter, we introduced online grocery operations in several stores, and now we're offering the service in 40% of our Walmart stores. It's gratifying to see how much this service is helping our customers save time.

We're also growing our marketplace offering at a fast pace. Year-to-date, we have added more than 300 sellers, and as of today, we have 540 active sellers on our walmart.com.mx site.

We're in the process of updating our Walmart General Merchandise platform. The new platform will allow us to accelerate the number of sellers in the marketplace in order to expand our reach to new customers through an extended catalog. We expect the new platform to be ready by the end of this year.

The omni-channel business in bodega is also growing at a strong pace. For the Hot Days event, we almost doubled the number of kiosks, and now we offer an extended assortment in 185 bodegas.

As a result of all of these efforts and a successful Hot Days event, GMV growth accelerated to 58%, the strongest growth over the last 6 quarters. E-commerce sales represented 1.4% of total Mexico sales, and the contribution from e-commerce to total growth reached 0.5%.

Now moving to new stores. During the quarter, we opened 30 new stores: 27 in Mexico and 3 in Central America. This compares to 21 stores opened in second quarter 2017. We're quite pleased with the new stores' performance. During the quarter, new stores contributed 2.2% of growth, in line with the guidance we gave for this year.

Looking at the performance versus the formal market represented by ANTAD members. Each one of our formats and divisions individually grew ahead of the self-service and clubs market measured by ANTAD. In fact, during the quarter, we were able to surpass each of the ANTAD divisions. We surpassed ANTAD's total by 250 basis points, the self-service division by 430 basis points, the specialized business division by 240 basis points and the department store division by 30 basis points.

By focusing on price leadership and operating with discipline, our customer and member satisfaction scores are improving and our customers are rewarding us with their loyalty. We have outpaced the competition for 14 consecutive quarters. During the first half of this year, we grew 460 basis points ahead of ANTAD, the largest gap since 2009.

Our customer-centric strategy and a clear value proposition by format have allowed us to outpace the competition in every region of the country.

Next, let's look at the financial results of the quarter. Before we start, I would like to remind you the financial framework that guides the way we manage our business. We're focused on delivering quality growth across all countries, regions, formats and categories in which we operate, on evolving our way of working to drive productivity and reinvest in the business and on refining our capital allocation and working capital management to deliver shareholder value.

In Mexico, top line growth was strong. Total revenues grew 8%. Gross profit margin expanded by 10 basis points to 22.6% as a result of strategic price investment and effective negotiations with suppliers. Expense growth slightly outpaced total revenue growth given the acceleration of store openings and investment in key areas of our business such as the new online grocery platform. EBITDA margin increased 10 basis points to 9.4% versus 9.3% last year.

In Central America, revenues grew 4.7% on a constant-currency basis. The combination of a onetime effect that negatively impacted gross margin and expense deleverage resulted in an EBITDA margin contraction of 30 basis points.

On a consolidated level, total revenues grew 8.1%. Gross profit increased 8.3%, and SG&A as a percentage of total revenues increased 10 basis points to 15.7%. As a result, we maintained a 9.2% consolidated EBITDA margin in second quarter 2018. Net income reduced by 40.9%. As on second quarter 2017, we recorded the sale of Suburbia and continuing operations margin increased 40 basis points to 5.4% of total revenue.

Now let's look at the results for the first half of the year. Mexico delivered solid results. Total revenues increased 9.7%. Gross profit margin remained at 22.6%, and we achieved 20 basis points of expense leverage as a result of strong sales performance and very disciplined expense management, driven by productivity initiatives that we're implementing at the stores and home office. Operating income and EBITDA grew double digit, and we reached a 9.8% EBITDA margin.

As I just mentioned, during the first half, we achieved 20 basis points of expense leverage in Mexico. Together with a strong focus in expense control, we are becoming more productive in our remodels and store investments. Regular operating expenses reduced by 21 basis points, and expenses related to store remodeling and maintenance reduced by 7 basis points. We invested 23 basis points in new stores. E-commerce and digital and onetime effects related primarily to a store fire that took place last year represented 13 basis points. We managed to leverage our base expenses and to preserve the long-term health of our business.

First half results were also positive in Central America. Total revenues increased 7.9%. We're pleased that for the first 6 months, SG&A growth was below total revenue growth, even though that was not the case in the second quarter.

Profitability continues to improve. EBITDA margin expanded by 10 basis points to 8.5%. Our teams across the region will remain focused on driving sales and managing expenses for the back half of the year in order to keep up the good results.

Putting all this together, on a consolidated level, top line growth was strong. Total revenues increased 8.7%. Gross profit increased 8.8%, and gross margin remained at a healthy 22.9% of sales. We achieved 20 basis points of expense leverage after reinvesting in key strategic priorities, and as a result, EBITDA margin expanded 20 basis points to 9.6%.

Now let's move to the balance sheet. As we grow and reinvest in the business, our financial strength increases. Our cash position increased by 89.4% to MXN 30.3 billion, MXN 14.3 billion above last year level. Inventories growth outpaced total revenue growth due to the purchases for the World Cup commercial activities, the advance purchases for the summer season and the accelerated pace of store openings. As in second quarter 2018, we opened 9 stores more than last year in the same period. Accounts payable grew 29.9%, which led to significant working capital improvements. We will continue to focus on working capital management going forward as it is a key element of our financial strategy.

Over the last 12 months, cash generation increased 13.2%, significantly outpacing total revenue growth to reach MXN 58.7 billion. After investing MXN 16.7 billion in strategic and high-return projects, over the last 12 months, we distributed MXN 21.4 billion in dividends to our shareholders.

In summary, I'm encouraged by our position of strength as we enter the second half of the year, particularly with the steps we are taking to improve performance in Central America and to continue to grow in the region. We expect competition to intensify, especially during the summer, when industry promotional activity increases significantly. I am confident in our associates' ability to deliver for our customers with Every Day Low Prices and in our strategy to position our company for continued success.

We will continue to focus on 3 priorities: deliver a seamless shopping experience, drive traffic to our stores, change how we work to be more digitally enabled.

Thank you very much for your interest in our company. As always, we will make ourselves available to receive your calls and to answer any questions you might have.

[Operator]

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