Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2020-Q2

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Head of Strategy and Investor Relations for Walmex. Thank you for joining us today to review the results for the second quarter 2020. Today with me is Guilherme Loureiro, President and Chief Executive Officer of Walmart de México Central America; Milton Brandt, Interim Chief Financial Officer; and Ignacio Caride, E-Commerce Senior Vice President. The date of this webcast is July 23, 2020. Today's webcast is being recorded and will be available at www.walmex.mx.

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

This webcast may contain certain references concerning Walmart de México, S.A.B. de C.V.'s future performance that should be considered as good state 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 CEO, Gui Loureiro.

[Guilherme Loureiro, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us in today's webcast.

Before I discuss our second quarter results, I would like to give you an update on our response to the pandemic caused by COVID-19 in Mexico and Central America.

I will begin with our associates. Words can't express how proud I am of each one of them. They are taking care of customers and members while providing a vital service to communities during these unprecedented times, and their hard work and dedication is truly helping people live better. Our associates overall well-being remains a priority. They look after our customers every day, and we are committed to giving them and their families the support they need. So we constantly look at additional ways to keep them safe and healthy during this time. Since March, we granted a special bonus for associates in stores, clubs and distribution centers to show our appreciation. We changed the salary payment frequency from biweekly (sic) (bi-monthly) to weekly so that associates can have quicker access to their earning. We provide transportation allowance to locations with difficult access, and we extended a discount for our associates to buy everyday needs at our stores. In addition to these financial and operational efforts, we have implemented a number of measures to support associates health and well-being. An epidemiology expert is giving us advice and helping us guide our decisions, and will enable our medical lines so that associates and their families can receive medical assistance and emotional health support 24/7. Our more than 21,000 associates in vulnerable conditions continue to be absent with pay. This includes pregnant women, adults over 60 years of age and other groups of people defined by the authorities.

As a company committed to helping people save money and live better, we are working to respond to the many ways our communities need us. From an operational standpoint, we continue to reinforce cleaning and sanitizing, especially in high-traffic areas. We provide face coverings for all associates. We implemented protocols for temperature checks and sanitizing solution distribution at the store entrance. And we limited the number of customers in the stores and clubs to comply with capacity guidelines.

In April, we launched Los Esenciales program in Mexico City. And the metro area to ensure we provide the lowest price on 125 base free items for a minimum of 60 days. With the purpose of supporting our most price sensitive customers, we increased the number of items to nearly 300, we expanded campaign to all of our self-service formats across the country. We are also helping those who needed the most through the Walmart Foundation. On our previous webcast, we shared with you that we donated 250 tons of food to nearly 23,000 seniors that back goods voluntary in our stores. And we donated MXN 100 million to finance the construction of a temporary COVID-19 units, enabled with more than 850 beds to provide medical service for the healthcare system patients in Mexico City.

In addition to these efforts, during second quarter 2020, we donated ventilators for the Mexican Red Cross ambulance. We donated and distributed more than 15 tons of food to over 1 million beneficiaries from food banks and community business. And we donated 21.5 tons of food to people who were affected by the earthquake and hurricane that impacted Gua Jaca.

We recognize the importance of frontline workers during these times. And in effort to support them, we decide to receive frontline workers, among them, doctors, nurses, paramedics, police officers and firefighters, in our 163 science labs without a membership. We know that current conditions are affecting many of our suppliers. So in addition to the reduction of payment terms for micro and small suppliers, we extended our factoring program to all of our suppliers. We also decided to waive rent for our macro and small tenants in Mexico for the months of April and May.

The pandemic also allowed us to explore new ways of work. We decided that from now on, all our call center operators will be people with disabilities who will be able to work with us from their homes, regardless of where they are located. We are doing everything we can to help strengthen our community of families, friends and associates. Together, we will get through this.

Now let's talk about the financial results for the second quarter 2020. Please consider that when I talk about Central America, I'm making reference to figures on a constant currency basis.

During the second quarter, consolidated total revenues grew 9.5%. In Mexico, total revenues grew 7.7%. And in Central America, we saw a 4.1% decrease. In Mexico, same-store sales continued to be the main growth driver. We saw a 6.3% growth during the quarter. Our regions and formats had a positive performance. The Northern metro regions delivered the highest same-store sales growth, followed by the center and south regions. In the southern region of the country, consumption was affected by the largest decrease in economic activity given the high dependence on the tourism and services sectors. Additionally, sales were impacted by social distancing measures implemented in several states.

Looking at the performance by [indiscernible]. Superama posted the highest same-store sales growth, followed by Walmart and Sans. Bodega sales growth was softer, as our Bodega customer is the most price-sensitive and facing challenging times. We care about their well-being. So in addition to Los Esenciales program that I mentioned earlier, we launched the Bodega Assist campaign, where we are offering unbeatable pricing merchandise across categories to help them save money. Distancing measures are driving higher in-home consumption. And customers' purchase continued to lean towards essential goods.

As a result, food and consumables delivered the highest same-store sales growth. Some general merchandise lines, such as home and computers, posted strong growth. But overall, the general merchandise division is being negatively affected during this emergency period. Demand and purchasing behavior has been volatile. Towards the end of the first quarter, we experienced very high demand in categories like cleaning supplies, consumables and grocery staples. At the time passed by, we saw a home related activity trends start to emerge, and demand for puzzles, board games, as more kitchen ovens and baker and kitchen supplies increased. At the same time, we saw overstocking effect on consumables caterers, and the lower demand for Beauty & Personal Care products.

Now we're entering a phase where we are seeing a higher demand for products like paint. Our supply chain is among the most efficient ones in the country. And the investments we have recently made for the network redesign are paying off. Still, some items like hand sanitizers or cleaning wipes would be difficult to find in some regions. But fortunately, we haven't suffered a major disruption. I really want to thank all of our supply chain associates. They are doing an amazing job to recover our in-stock position. Given the operational restrictions for store selling no essential goods, in this occasion, it is complicated to benchmark our performance versus the market. However, based on entire figures, we're able to grow 30 basis points ahead of the self-service and gloves market. We'll keep listening to our customers and members and executing each format's value proposition to continue to win their loyalty.

In Central America, sales were impacted by strict social distancing measures implemented by the authorities of each county to keep associates and customers safe. Despite the circumstances, we are able to gain market share in the region. Honduras was the most impacted country as authorities guided to opening stores only 3 days per week [indiscernible]. Gradually, customers were allowed to return to their stores, but still in June, operation during weekends was prohibited. El Salvador delivers the highest same-store sales growth, followed by Nicaragua. Sales growth in Guatemala, Costa Rica and Honduras was softer given the operating restrictions and softer economic activity overall. Since March, we started home delivery operations in Central America to help customers stay home and keep their families safe. So far, we have enabled home delivery in all hypermarkets, practically in all supermarkets, and in some Bodegas across the 5 counties. Results and customer response have been positive. The average ticket food we serviced is 3x higher than the store average. And delivery sales represent 2.5% of participating store sales. Despite the circumstance, we continued to invest in the region. During the quarter, we opened 12 new stores, 6 in Mexico and 6 in Central America. During the year, we have opened a total of 21 new stores.

In the situation we are facing, we have not been able to implement our expansion plan at the pace we expected to. Until conditions are suitable for us to continue to construct and remodel stores again with a normal pace, we are shifting CapEx to omnichannel, IT and store automation progress that will help us to be an even more resilient company in the future.

Amid this situation, we continue to innovate and to find ways to serve our customers better. With the goal of creating a digital connection for our customers, we launched Bite, our MVNO that offers mobile phone and Internet access to end users in a prepaid scheme at the lowest price. To launch this service, we entered into a mutual reinforcing partnership with Altan Redes. They provide the telecom infrastructure. So far, the service is available for purchasing 705 stores across 24 states, and we have 110,000 users.

Before moving on to omnichannel, I would like to talk about the implementation of the new labeling rules for consumer products that will take effect on October 1, 2020. In order to meet that date, since last quarter, we have been working for our suppliers to anticipate as much as possible the delivery of products that meet the new norms and take the necessary measures regarding slow moving inventory to prevent having products with the previous labeling on our shelves. We know that the transition from the current rules to the new rules will involve costs that we cannot fully estimate. At Walmex, we support all initiatives that benefit the health of our customers and members, and we will continue working to be prepared to comply with these new provisions.

Now let's talk about omnichannel. Given the increased relevance of the e-commerce business in recent months, Ignacio Caride, our Head of e-commerce, is joining us on today's webcast, give you an update on our omnichannel efforts as we better serve our customers.

[Ignacio Caride, executive]

Thanks, Gui, and good afternoon, everyone.

Building and implementing a winning omnichannel strategy has been among our business priorities for some years now. Before this crisis, we were already seeing adoption of online delivery and pickup across our formats. And the pandemic caused by the COVID-19 significantly accelerated the change the retail industry was already undergoing. As social distance measures became stricter, customers adopted the delivery and pickup service even more, and we saw a 3x increase in e-commerce demand. We know this is an essential service our customers are looking for, so we reacted quickly to build additional capacity. We developed a fast track process to enable same-day delivery from stores in less than 72 hours. We doubled our last-mile capacity. We increased the numbers of available stocks by 40%, and we hired more than 2,600 pickers to help us come with the demand. Last-mile delivery is critical for our on demand services. So during the quarter, we launched a pilot test of crowd sourcing model that will allow us to improve service levels in an efficient way. So far, results are encouraging. We will continue to test and learn in order to fine-tune the model and scale. By the end of the quarter, 430 stores were offering same-day delivery. We also developed new features within their on-demand app to improve the customer experience. Among them, special delivery and pickup slots for customers at risk, improved order tracking and earlier visibility of slot availability. During the quarter, we launched new omnichannel solutions to serve different type of customers. We deployed on-demand delivery to 115 Sam's Clubs, and our members' response has been very positive. Sam's GMV for the quarter was almost equivalent to a GMV achieved during the full year 2019. We've tested the appetite for our Bodega customers for online shopping through our 892 kiosks with good results. So we decided to launch 1P general and merchandise operations throughout the bodegaaurrera.com.mx site. So far, results are encouraging. In additional to the extended assortment at great prices, our customers appreciate the flexibility on delivery options and payment methods we provide. We will continue to fine-tune our offering and to adapt to our customer needs.

Besides investing in tech and store omnichannel capabilities, we have also been working on the logistic network redesign. During the last 12 months, we opened 5 distribution centers that serves the e-commerce 1P operations, 3 dedicated fulfillment centers in Mexico City, Guadalajara and Monterrey, and 2 omnichannel distribution centers in Mérida and in Chihuahua. The omni-channel distribution centers are a great milestones in our network redesign. They are the first ones of their type in Mexico and are flexible enough to serve both stores and customers directly.

During the quarter, we have another addition of the hot sale event with good results and triple-digit growth. For the first time on an event of this type, we enable delivery for big and bulky items, such as refrigerators, stocks and washing machines from stores via On Demand with a great level of service. Bodega Aurreras website performance in hot sale was very good in terms of platform stability, sales, media impressions and brand sentiment. I want to thank our omnichannel team as they were able to launch the website in record time and added new and exciting merchandise for our customers at very low prices.

By making the right tech investments and by aligning omnichannel operations in previous years, we have the right capabilities in place, and the pandemic further accelerated demand.

During the quarter, e-commerce sales grew 217% and GMV by 207%. E-commerce sales represented 4.5% of Mexico sales and contributed 330 basis points to total sales growth. We know this figure are influenced by the current situation, and we will be much different once things normalize. We believe if we provide a good shopping experience, our customers and members will see and appreciate the benefits of the service and will likely continue to use it on going forward. So we believe it is critical to continue to invest and improve our service levels.

We will keep listening to our customers and members, adapting our operations, investing and innovating to serve our customers better.

Now I will turn it over again to Gui. Thank you very much.

[Guilherme Loureiro, executive]

Thank you, Ignacio.

In closing, I would like to say that the crisis is not over at this point. We need to keep learning and adjusting. And we know we will face even more challenging times going forward as we expect a sharp deterioration of the macroeconomic environment. Our priority remains taking care of each other, just as we always have in difficult times, and to help families across Mexico and Central America to save money so they can live better. I am proud of what we have done as a company over the past months, especially how our associates have stepped up. As we serve our customers and support our associates, we are also managing our business effectively, and we continue to make progress against our long-term stop.

Thanks again for the opportunity to serve you. Rest assured, we will continue to do everything we can to provide a safe shopping experience for our customers and a healthy environment for our associates and communities.

Now Milton will cover the financial results of the quarter.

[Milton Brandt, executive]

Thanks, Gui, and good afternoon to all of you.

Before I start covering the financial results of the quarter, I also want to appreciate our associates' hard work and dedication. You are really making a difference.

I will start by covering results in Mexico. As a reminder, on May 25, 2020, we agree on and made a payment to the Mexican tax authorities in the aggregate amount of MXN 8.079 billion to finalize substantial tax matters, which included the previously disclosed sales of the Vips restaurant division and other substantial tax matters. This payment impacted the second quarter 2020 figures in Mexico in 4 concepts: general expenses, financial expenses, taxes and income tax paid in advance. According to the accounting standard, IAS 12, the income tax is recognized as an expense and included in the year it is expensed or accrued. According to the accounting standard, IAS 34, the tax effect of onetime event should not be included in the likely effective annual rate, but it should be recognized in the same period as the relevant onetime event.

During the second quarter, total revenues grew 7.7%. Despite a challenging environment and a sales mix shift to lower margin categories, strong volume growth of certain subcategories within grocery with higher profitability and more effective negotiations with suppliers led to a gross profit margin expansion of 20 basis points. General expenses increased 17.4%, affected by the aforementioned payment to the SAT. Operating income decreased 7.6% and EBITDA decreased 5%, resulting in 130 basis points EBITDA margin contraction. Excluding the payment to the SAT, we were able to keep expense growth below total revenue growth. Despite incurring higher operating costs, given the measures taken to handle the pandemic that Gui mentioned earlier, managing expenses remains a top priority for us. We are being disciplined where we need to be, and that allows us to continue to invest in strategic areas of our business. Operating income increased 9.9% and EBITDA margin expanded by 10 basis points.

Now I will discuss the results in Central America. Please consider that when I talk about Central America, I am referring to figures on a constant currency basis. Total revenues decreased 4.1%. As Gui mentioned earlier, sales were affected across the region, primarily due to operating restrictions. Gross profit margin contracted 20 basis points to 23.6%, as mix shifts negatively affected profitability. General expenses increased 2.3%. The royalty payment agreement, which we previously announced and became effective beginning in 2019, impacted expenses by MXN 417 million. Operating income decreased 25.3% and EBITDA margin reached 8.7%. Excluding the payment of royalties, EBITDA would have expanded 20 basis points on the back of a strong everyday low costs and productivity mindset.

At a consolidated level, figures were impacted by nonrecurring items. Total revenues grew 9.5%. Gross profit increased 10.4%, resulting in a 22.8% margin. And expenses grew 19.2%. Consolidated EBITDA margin contracted to 9.3% and net income decreased 81%. However, underlying results were positive. If we exclude the payment to the SAT and the royalties in Central America, expenses growth would have been similar to total revenue growth. Both operating income and EBITDA would have posted a double-digit growth of 10.8% and 10.4%, respectively. EBITDA margin would have reached 10.6% and net income would have increased 14.9%.

Now let's see the results for the first half of 2020.

In Mexico, total revenues increased 10.1%, gross profit margin expanded by 20 basis points to 22.6% and expenses increased 13.1%. Operating income grew 7.1% and EBITDA margin contracted 40 basis points to 10.5%. In Central America, total revenues increased 1.5%, gross profit margin remained stable at 23.9% and expenses increased 7.3%. Operating income decreased 15.7% and EBITDA margin contracted 100 basis points to 8.9%.

At a consolidated level, total revenues increased 11.2%, gross profit margin reached 22.8% and expenses increased 15.2%. Operating income increased 5.6% and EBITDA margin contracted 50 basis points to 10.2%. Net income decreased 33%, affected by the payment to the SAT and the royalties in Central America.

Now moving to the balance sheet. Our financial strength allows us to invest in the business and generate returns. Our cash position increased by 15.8% to MXN 30.8 billion, MXN 4.2 billion above last year's level. Inventories increased 7.2%, significantly below the 9.5% total revenues increase.

We are focused on delivering shareholder value. Over the last 12 month, cash generation increased 5.1%, reaching MXN 65.3 billion. After investing MXN 18.3 billion in the business over the last 12 month, we returned MXN 24 billion in the form of dividends to our shareholders.

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