Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2021-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 of 2021. Today with me is Guilherme Loureiro, President and Chief Executive Officer of Walmart de México y Centroamérica; and Milton Brandt, Interim Chief Financial Officer.

The date of this webcast is July 22, 2021. 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 México 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 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 CEO, Gui Loureiro.

[Guilherme Loureiro, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us today to review our results for the second quarter of 2021. As these unprecedented times continue, we have seen our associates adapting to changing customer needs, learning new skills and tackling new challenges while driving our strategy. We appreciate their hard work, and we are very proud of how they are helping customers save money and live better.

As I've shared with you on previous quarters, we defined 5 priorities to guide our decision-making during these times: supporting our associates, serving our customers, helping each other, managing the short-term operationally and financially, and implementing our strategy. The situation driven by the COVID pandemic improved during the last quarter. But now we are seeing an increase in the number of cases, so we can't let our guard down.

Support measures for associates such as discount for purchases at stores online, weekly payment or the medical support line as well as the safety and hygiene measures at our stores, DCs and offices continue to be in place. Additionally, we continue to find ways to help each other.

Together with World Vision Honduras, we are providing support across the 5 countries: Honduras, Nicaragua, El Salvador, Costa Rica and Guatemala to help purchase biosecurity equipment and distribute it to local health facilities and hospitals. We are also providing food and basic hygiene kits for vulnerable families. We donated cleaning products, fruits and vegetables for hospitals and health centers in Honduras, and fresh produce for vulnerable communities through the Honduran armed forces.

In Guatemala, we donated disinfectants, paper products and food for people in need and temporary hospitals. We have a commitment to continue to support our low communities as they respond to COVID-19.

Now let's look at our performance in the quarter. Please consider that when I talk about Central America, I'm referring to figures on a constant currency basis. During the quarter, total revenues grew 6.1% in Mexico and 10.1% in Central America.

On a consolidated basis, revenues grew 3.3% as exchange rate impacted negatively Central America's growth. On a constant currency basis, Walmex revenues would have grown 6.8%. Despite an atypical comp base, we see a healthy underlying trend in our top line. For the first half of the year, the 2-year stacked revenues growth was 13.7% in Mexico and 4.8% in Central America, resulting in a 12.9% 2-year stack for Walmex.

Let's look at Mexico's results. Same-store sales grew 4.7% during the quarter, reaching a double-digit 2-year stack of 11.3%. We hosted another edition of the Hot Days event. By leveraging our stores, e-commerce platforms and distribution network, we were able to delight customers with exciting merchandise at unbeatable prices. What I'm most proud about this year's event is that we improved significantly our service levels versus previous years. NPS improved to almost 2,000 basis points in Walmart and it's increased by 1.7x in Sam's, where 35% of the members who participated were new to e-commerce.

The evolution of our way of working is what drives these results. We look at process end to end. Data drives our decision-making, and we infuse customer centricity in everything we do, and that allows us to deliver value to our customers fast and often.

Looking at performance by format. Sam's had another great quarter. The merchants' deep knowledge of our members is crucial to offer great items and drive the club business. Member's Mark brand continues to perform well, and the membership value proposition is strong.

We rolled out Scan & Go to all our clubs, which will further improve our member shopping experience and help them save time. We are also pleased with the progress we are making in Bodega. Our goal is to win the discount, and we are deepening the execution of our value proposition to achieve this goal. We continue to increase the price gap and to consider new competitors in the sample. We are adjusting the catalog to make sure we have an efficient assortment that includes a relevant share of our private brands. And we are redesigning our customers' experience around fresh categories to continue to drive traffic to our stores.

Walmart and Superama faced the highest comp base as in second quarter '20, in-home consumption and pantry loading was higher among customers of these 2 formats. In 2020, Superama was the format that benefited the most from the fast shift to e-commerce. As vaccination progresses and operating restrictions ease, customers are going back to the stores more confidently, and we are there to serve them.

Being an omnichannel company allow us to adapt and serve customers, regardless of how they decide to shop. Additionally, we are progressing at a fast pace with Superama's conversions to Walmart Express. Typically, remodels have a temporary impact on sales that is later compensated by a better shopping experience for our customers. As we progress with the conversions, we expect this effect to continue.

Looking at the performance by region, the south posted the highest growth followed by the north and center regions. Sales growth in the metro area has been softer as the COVID-related restrictions have been stricter and the macroeconomic conditions have been weaker in the area when compared to the rest of the country. Apparel and general merchandise sales performance improved over the second quarter last year, when food and consumable sales were much stronger as customers spend more time at home. Our efforts in extended assortment and the Hot Days event supported general merchandise and apparel growth.

In the first half of the year, we surpassed ANTAD's self-service and club same-store sales growth by 350 basis points, 370 basis points in the first quarter and 340 basis points in the second quarter. It's been challenging to adapt so quickly to the change in the way customers shop, and it is encouraging to see how our customers are responding to our omnichannel offering and how they are rewarding us with their loyalty. We will continue to find ways to serve them better.

Moving to Central America. Same-store sales grew 8.6% on the back of a strong growth in Honduras, followed by Nicaragua, Guatemala and Costa Rica. We are further reinforcing our everyday low price value proposition for price point campaigns such as Super Bombazos, with special focus on everyday needs at the discount in Bodega formats. In parallel, we are transforming the way we operate by simplifying process and generating less friction, which will allow us to reinvest in the value proposition.

Regarding omnichannel, we relaunched our e-commerce platform and increased the number of stores offering same-day delivery to 117. E-commerce penetration reached 1.1% during the quarter. We believe the macroeconomic outlook in the region will continue to be challenging, yet I'm confident that our associates will keep adapting to the changing needs of our customers and managing expenses with discipline.

Now let's talk about our progress in omnichannel. I’ll start with on-demand, which is our online services from stores. Our customers can order from the thousands of grocery, fresh and general merchandise items available at our stores, and get their orders delivered to their homes or pick them up at the store. We have the on-demand service enabled in 737 stores in 118 cities, and we expanded the crowdsourcing model to 100 Walmart stores. This model complements our existing one and gives us flexibility to serve the variable demand in an efficient way. Our footprint is a key strength for this business, and we can deliver a full basket in less than 2 hours.

Despensa a tu Casa is now available in 209 Bodegas. And our customers' response has been quite positive. Pickup continues to be the preferred delivery method. NPS is higher than the average for on-demand, and ticket is almost 5x larger than the average ticket at the stores.

Last quarter, we reached a very important milestone, we launched Walmart Pass, our subscription program that allow customers to make unlimited orders of MXN 499 and up, with no delivery costs for a monthly or annual fee. Currently, Walmart Pass is enabled for a limited number of users, but towards of the end of July, it will be available to all users. The initial results have been positive. We are seeing a 15% increase in ticket and good feedback from customers. This initiative is the beginning of several benefits that we will be adding in favor of our customers. I want to congratulate the team for this achievement.

We are also accelerating extended assortment. In order to lead in omni, it's crucial to continue to expand our online offering, especially through the marketplace. During the quarter, we enhanced the user experience around search, tracking and returns. We also increased the number of SKUs by 30% versus last quarter through digital stores and sellers that are helping us to reach new customers with products and brands they search for, and we currently don’t have at our physical stores.

Despite a 207% GMV growth in the second quarter '20 base, we managed to maintain a double-digit growth driven by general merchandise. During the quarter, GMV grew 19% and net sales grew by 13%, representing 4.8% of Mexico sales, 30 basis points more than in second quarter '20. E-commerce contribution to total Mexico sales growth was 0.6%. For the first half of the year, GMV growth was 56%. Net sales grew 54%, reaching a 4.5% penetration contributing 1.6% of total growth.

Our omnichannel strategy continues to resonate with customers. Going forward, they will continue shopping at stores. But more and more, there will be occasions where they prefer to pick up an order or have it delivered directly to their homes, and we'll be there to serve them seamlessly.

Now let's talk about our new businesses. We're developing and launching new products and service and connecting them to work together in order to create deeper relationships with our customers. Cashi is an example of the new solutions we are creating. During the quarter, we enabled the digital payment of over 40 services such as utility bills, cable and mobile service, entertainment and transportation. We also enabled card on file, which means customers can now top up their balances by linking their cards to their cash account without the need of being physically at a store. This will save our customers' time and we will also enable a contactless experience.

The next step is to enable Cashi as an online payment method on our e-commerce websites. We know customers who appreciate this new feature and will help us to drive omnichannel sales.

Regarding BAIT, on the second quarter, we almost doubled the number of users, reaching 730,000. With this user base, we became one of the top MVNO players in the country. It’s encouraging to see how we can take our low-price value proposition beyond retail to help customers save money and live better.

Walmart Connect is our biggest monetization bet. Our goal is to become a leading media platform in Mexico, helping brands connect with our customers more often and more meaningfully. Knowing what customers buy and our physical and digital assets allows us to serve clients better than other players in this space. The number of advertising campaigns continue to grow at a fast pace. And for the full year, we are expecting a mid-double-digit revenue growth.

Now let's talk about new stores. Following authorities' guidelines for construction and making sure conditions were safe, we opened 25 stores during the quarter, 23 in Mexico and 2 in Central America. This compares to 12 openings on the same period last year. For the quarter, new store sales contribution to total sales growth was 1.3%, which is within the guidance we shared with you earlier this year.

As I mentioned earlier, we are making progress with Walmart Express conversions. So far, have turned 25 Superamas into Walmart Express, which is 26% of the store base. Customer response has been positive. They are appreciating the lower prices in basic products and an enhanced fresh offering. Our plan is to finish all the conversions from Superama to Walmart Express by the end of the year.

Our strategy translates into shared value for all our stakeholders. We value and respect our associates, and I'm pleased to see that our efforts to improve our associates' value proposition and to make Walmart that place where you can learn, grow and be themselves are being recognized.

We were included in the top 5 of LinkedIn's Best Companies in Mexico ranking and in the top 10 of Super Empresas ranking by Expansion. Another great achievement was that we were included in the Mexican Stock Exchange Sustainable Index for the second consecutive year. We also received the Empresa Socialmente Responsable, ESR, distinction. We are the only self-service retailer in Mexico, who has received this distinction for 21 years in a row.

I'm also proud to share with you that in May, we removed plastic bags from 100% of our stores in Nicaragua, and we launched our "Sin bolsa por favor" campaign in the 5 countries where we operate in Central America, showing our commitment with sustainability.

I want to thank our associates for their incredible work. They're implementing our omnichannel strategy and creating value for all stakeholders.

To finalize. On our press release, you saw the designation of Paulo Garcia as Walmex' new CFO. Paulo has vast experience in finance, building global consumer and retail companies. He has held several functions in areas such as finance, strategy and mergers and acquisitions. And I'm sure that his leadership, experience and dynamism will add value to the vision of Walmart de México y Centroamérica.

I want to thank Milton for his support on the past 15 months, during which he acted as Interim CFO of Walmex. He made an extraordinary job amid unprecedented situation our company went through. His ample finance experience and leadership were instrumental to balance the long-term and short-term focus, while keeping our associates safe and delivering for our customers and shareholders. I wish him success as CFO of Walmart Centroamérica. His support will be key to accompany Flavio and the team in the execution of our strategy.

Thank you for your interest in our company. Now I will turn it over to Milton, who will cover the financial results of the quarter.

[Milton Brandt, executive]

Thank you, Gui, and good afternoon, everyone. Thank you for joining us today to review our results for the second quarter 2021. I will start with Mexico. Please consider that I will refer to figures excluding last year's one-off effect to make them comparable.

During the quarter, total revenues increased 6.1%. Gross profit margin increased 50 basis points. General merchandising sales this year were stronger compared to second quarter 2020. And categories such as seasonal and entertainment, apparel and home, support this gross profit margin dynamics. We also continue to work with our suppliers to provide the lowest price to our customers. We are driving operating efficiency improvements around the company, and we are using those savings to self-fund our strategic investments.

During the quarter, expenses grew 10.8% as we continue to invest in our Associates Value Proposition, technology, e-commerce and our logistics networks redesign. These investments are part of the long-term strategy we shared with you earlier this year, and will allow us to position our company to continue to win in the future.

Part of the investments in our associates value proposition reflect the implementation of certain changes we made to adapt to reforms to the federal labor law and other labor, tax and social security laws. In the following quarters, we will continue to implement these changes and to invest to improve our associates' quality of life.

We reiterate that the implementation of such reforms does not change our financial expectations for the year or our ability to deliver our strategic plans. Despite these investments, the resilient nature of our business allowed us to increase operating income 40 basis points ahead of total revenues growth and to reach a 10.7% EBITDA margin.

Now I will talk about results in Central America. I will refer to figures on a constant currency basis. As Gui mentioned, top line growth reached double digits driven by same-store sales growth. We worked together with our suppliers to offer the lowest prices to our customers and improved inventory management, which led to a gross margin expansion of 30 basis points. SG&A increased 10.4% as we continue to invest in our associates value proposition, and operating income grew 16%, almost 600 basis points ahead of total revenues growth.

Looking at Walmex' consolidated figures. Total revenue increased 3.3%. Gross profit margin was strong in both regions and increased 50 basis points in total, reaching 23.3%. Operating income was up 5.2%, 190 basis points ahead of revenues and EBITDA margin remained at 10.4%. Net income represented 5.6% of sales.

Now moving to the balance sheet. Our cash position increased 35.7%, reaching MXN 41.8 billion. Inventories increased 5.2% to MXN 68 billion and accounts payable increased 1.9%. We continue to invest in the business, balancing the long and short term while generating returns for our shareholders. In the past 12 months, cash generation reached MXN 67.2 billion. In Central America, cash generation was negatively impacted by exchange rate fluctuations. After investing MXN 17.9 billion in strategic projects, we returned MXN 26.3 billion to our shareholders in the form of dividends.

In closing, we are very proud of the team, and we appreciate their hard work. It's really exciting to see the progress in the business as we execute our plan to win.

Thank you again for joining us today. As always, we will make ourselves available to answer the questions you may have.