Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2019-Q2

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Head of Investor Relations for Walmex. Thank you for joining us today to review the results for the Second Quarter 2019. On today's call, with me is Olga González, Chief Financial Officer. The date of this call is July 18, 2019. 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. 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 it's my pleasure to introduce our CFO, Olga González.

[Olga González, executive]

Thank you, Pilar, and good afternoon, everybody. Thank you for joining us to review Walmex second quarter 2019 results. We had a great quarter with a strong top and bottom line results. I would begin by discussing our sales performance and then I will cover the financial results for the quarter. Please consider that when I talk about Central America, I'm making reference to figures on a constant currency basis.

During the second quarter, total revenue grew 5.2%, 6.5% in Mexico and 4.9% in Central America. For the first half of the year, Mexico grew total revenue by 6.1% and Central America by 3.5%, which resulted in 4.9% consolidated revenue growth. Consistent same-store sales performance in Mexico continues to be our main growth driver. We saw traffic growth of more than 2% in our stores as well as higher average baskets, which together contributed to the strong same-store sales performance. During the quarter, same-store sales in Mexico grew 5.4% and 1.7% in Central America. The 2-year stack for same-store sales growth in the first half of the year was 13.3% in Mexico and 4% in Central America.

All regions posted strong results. The south and the north regions had the highest same-store sales growth followed by the center and metro regions, which also delivered solid growth considering the competitive environment in those areas. Our operations team is doing a great job. They're focused on providing a seamless shopping experience while managing expenses and inventory in a disciplined way. It is very exciting to see how our customers are responding to the improvements we're making at our stores.

In Sam's, we had our open house event, where we invited customers to shop at the clubs and online without a membership so they can see firsthand the exciting merchandise and the value they can find at Sam's Club.

Walmart delivered strong growth on the back of a great execution of seasonal programs. By offering a compelling shopping experience and great prices at key events such as spring vacations and Mother's and Father's Day, we continue to win our customers' preference. During the quarter, we reopened the Walmart Villa Coapa store in Mexico City. This store had suffered severe damage after the 2017 earthquake, so it was demolished and rebuilt entirely. We reached record high traffic and sales on the week of the opening. It was very exciting to see our customers coming back to our store.

In Bodega, we're focused on providing great value for our customers through lower prices, especially within our private brand offering. During May, we had an event dedicated to private brand, merchandise called Feria de Nuestras Marcas where we achieved over 30% sales growth.

Our Superama customers continue to prefer our selection of fresh items that offered great quality at low prices. Easter vacations and the BBQ Masters campaign are examples of how Superama is differentiating itself from competitors by focusing on Fresh departments and developing new in-store events.

Now looking at the performance by merchandise division. Food and Consumables had the highest growth followed by Apparel, where sales recovered from the external and weather-related headwinds experienced in the first quarter. General merchandise was next as it faced a tough comparison based from the sales related to the workup events last year. Another highlight of the quarter was the second edition of our omnichannel event, Hot Days. By leveraging our strength, we were able to take an online event to the physical world and drive sales across all merchandise divisions. During the event, we introduced Cashi as a commercial activity tool for the first time. The response from our customers was great. They're really appreciating how we're providing them access to promotions, digital payments and services without the need of a bank card.

Remember that Cashi is currently in a minimum buyable product phase, which means we are testing different features and learning from our customers' response. We're in the final negotiations with potential financial services partners, and we expect to reach agreement by the end of this year. This will be an important milestone for Cashi as it would enable features that are key for our customers, such as P2P transfers.

In Central America, we're working to make every day easier for our busy families. Our focus is not just to save our customers' money but to save them time, too. In line with this, we launched the first store pickup pilot in Guatemala, a service that would allow us to serve customers in ways that are most convenient for them. To further improve our price positioning, we're redefining the price gap methodology for the Fresh departments and where we launch our private brands offering. In terms of sales, we drove same-store sales growth in all the countries, and we widened our gap versus the market despite a challenging environment.

Honduras delivered the highest growth followed by Nicaragua and El Salvador. Costa Rica and Guatemala were a bit softer as a weak macroeconomic environment in the region keeps pressuring customer budgets and impacting economic conditions in general. I am very excited about how we're leveraging our stores and club to win omnichannel.

Our priority is to win in on-demand, and our infrastructure positions us to lead this business. During the quarter, we reinforced the on-demand assortment to offer more than 7,600 general merchandise items on same-day delivery. Now our customers can buy items such as tablets, mobile phones and TVs and get their orders delivered in a couple of hours. We also launched an ordering service via WhatsApp in Superama through which customers can do their shopping in a seamless and friendly way.

We opened the first omnichannel academy with the purpose of equipping our associates with the improved tools and training so they can do their jobs more effectively and serve our customers better.

During the quarter, e-commerce sales grew 50% and GMV grew 62%. E-commerce represents 1.5% of total Mexico sales and contributed 0.5% of our growth. Last one in commerce, I'm very proud to share with you that we recently opened 2 e-commerce fulfillment centers dedicated to 1P general merchandise. This MXN 370 million investment in our network would allow us to provide 2-day delivery for the extended catalog items in top metro areas and to improve our service significantly in 17 states by reducing the distance to our customers by around 50%.

We truly believe that winners in retail will be those who can bring together the best of the off-line and online world to serve customers in a seamless way, and we have a unique competitive advantages in this race.

Now looking at our performance versus the market.

On the second quarter of 2019, we outpaced the self-service and club segment measured by ANTAD by 110 basis points. With these results, we have led the market growth for 18 consecutive quarters. It is really exciting to see the momentum in the business as we execute our strategic plan.

Moving to the new store growth. During the quarter, we opened 32 new stores with 24 in Mexico and 8 in Central America. This compares to 30 stores opened at -- during the second quarter 2018. New stores contributed 1.8% of total growth, which is within the guidance we shared for the year. We have also made important progress in environmental, social and corporate governance-related matters. We received for the 19th consecutive year the Socially Responsible Company distinction for our contribution to the country's sustainable growth.

As signatures of the global declaration on plastics promoted by the Ellen MacArthur Foundation, we committed ourselves to reduce the use of plastics in our operations and private brand products by 2025. We will also seek to sensitize our customers to use less plastics bags while for promoting the use of reusable bags.

For the third consecutive year, associates and their families joined the LGBT pride parade in main cities across Mexico and Central America. In Walmart, we value and encourage diversity. We believe that unique styles, experiences, identities and ideas among our associates enrich our culture.

Now let's review the financial results of the quarter. In order to provide the investment community a better view of the underlying performance of our business, we're including a retroactive estimation of the effect of the adoption of the IFRS 16 would have had on the 2018 financial results. These pro forma 2018 figures are not audited but are based on the 2018 audited reported results and adjusted with our best estimates to show the effects related to the adoption of the IFRS 16. Please note that all the references that I would do to the last year's results are based on the 2018 pro forma figures.

In Mexico, we had a great quarter with a strong top and bottom line results. Total revenue grew 6.5%. Gross profit increased 6.2%, and we maintained a 22.4% margin. Gross profit increased 6.2%, and we maintained a 22.4% margin.

SG&A grew 4.5%, and we achieved 30 basis points of leverage. By focusing on productivity and Every Day Low Cost, we were able to grow expenses at a slower pace than revenues. Operating income and EBITDA grew 11%. And EBITDA margin expanded by 40 basis points to 10.7%. In Central America, total revenue grew 4.9% on a constant currency basis. Gross profit margin contracted 20 basis points to 23.8% of sales as a result of deeper price investments in fresh categories.

General expenses increased 2.4% driven by a greater focus on productivity. Operating income and EBITDA grew 8.5% and 9.1%, respectively. Second quarter 2019 consolidated results were positive. Total revenue grew 5.2%. Gross profit increased 4.8% to achieve a 22.6% margin. Expenses grew 2.9%, 230 basis points below total revenues growth. EBITDA increased 9.7% and EBITDA margin increased 40 basis points to 10.5%. Net income grew 13.2%.

Now let's review the results for the first half of the year. In the first semester, revenues increased 6.1% in Mexico. Gross profit grew 5.4% and gross profit margin contracted 20 basis points to 22.4% primarily driven by the issues we experienced in the apparel and shoes imports in the first quarter of 2019.

Our teams remain focused on reducing expenses, and I am very pleased with our performance in terms of SG&A. We achieved 20 basis points of expense leverage as SG&A grew 4.1%, 200 basis points before total revenue growth. Operating income increased 8% and EBITDA 8.6%. EBITDA margin expanded 30 basis points to 10.9%. In terms of SG&A in Mexico, in the first half of the year, we were able to leverage expenses and reinvest in the business. We reduced regular operating expenses by 39 basis points through productivity initiatives and good sales performance. Operating expenses related to the remodeling and maintenance of stores decreased 3 basis points, and we invested 15 basis points in new stores and e-commerce. Central America continues to deliver strong results amid a very challenging environment.

Total revenues growth was 3.5%. Gross profit margin reduced by 10 basis points as we are doing additional investments to improve our pricing position. Expenses grew 2.9%, operating income grew 4.7% and EBITDA 6.1%.

In summary, we had a solid first half of the year and we're improving our competitive position. Consolidated revenues grew 4.9%, gross profit increased 4.2% and gross profit margin contracted by 10 basis points to 22.7%. Expenses grew 3% below total revenue growth. Operating income increased 6.9% and EBITDA 7.5% to achieve a 10.7% EBITDA margin. Net income posted a double-digit growth of 10.7%.

Now moving to the balance sheet. Our cash position decreased by 12.1% to MXN 26.6 billion. We continue to distribute to shareholders the cash that we're not using to fund strategic projects. Inventories increased 4.8% below the 5.2% total revenue increase. Operating cash flow increased 5.8% versus last year, reaching MXN 62.1 billion. After investing MXN 20.1 billion in high-return projects, we returned MXN 32.7 billion to our shareholders in the form of dividend.

In closing, I would like to thank our associates for the job they're doing. We're working together as a team and our results are largely driven by the efforts we're doing around our 5 strategic priorities, which are to maintain a market-leading growth; to continue to build and implement a winning omnichannel strategy; to drive a strong EDLC mentality, focusing on productivity to reinvest in our business; to evolve our way of working, innovating faster and with data analytic capabilities; and to inspire and satisfy our associates, developing an enterprise agile culture.

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