Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2022-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 2022. Today with me is Guilherme Loureiro, President and Chief Executive Officer of Walmart Mexico and Central America; and Paulo Garcia, Chief Financial Officer. The date of this webcast is July 26, 2022. 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 Wal-Mart de Mexico, 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 webcast may contain certain references concerning Wal-Mart de Mexico, 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 turn the call over to our CEO, Gui Loureiro.

[Guilherme Loureiro, executive]

Thanks, Pilar. Good afternoon, and thank you for joining us today to hear about our quarterly results. We are progressing against our long-term strategy, delivering strong growth and profit and making significant investments while we strengthen our value proposition and low price commitment. We're using our financial strength to balance the long term and the short term to balance growth and returns. It's during these times that our low-price value proposition becomes even more relevant. Customers are coming to us for value, and we are very pleased about how our teams are dealing with the pressure from cost of goods, inflation, with a customer-centric approach.

During the quarter, we were able to increase our price gap by 120 basis points versus second quarter '21, reaching an all-time high. Now let's talk about sales performance. Please keep in mind that when I talk about Central America, I'm referring to figures in a constant currency basis. During the second quarter of 2022, consolidated revenue grew 12%, 12.2% in Mexico and 15.3% in Central America. Each quarter has presented a unique challenge over the last 2 years and currently inflation is playing a role on the top line. Nevertheless, revenue growth has accelerated sequentially quarter after quarter, reaching a 26.7% 3-year [ stacked ]growth on second quarter '22. We are managing price strongly and strategically, taking a long-term approach to drive sustainable growth.

During the quarter, Walmex consolidated ticket grew 5.7%, while traffic grew 5.4%.

Now let's look at sales performance in Mexico. Our multiformat operation allows us to serve customers across different demographies and shopping occasions, which further increase our resilience and allow us to favor our customers with low prices. During the quarter, same-store sales grew 10.8%, driven by Bodega and Sam's Club. Bodega was the fastest-growing format. We've consistently expanded our price gap for the last 4 quarters and second quarter '22 was not the exception. We managed to increase our price gap to competitors by 140 basis points. To drive price perception, in addition to the investments we are doing in prices, we launched the Hay para mas campaign, which focused on reinforcing and unifying our communication with customers.

Fresh departments are very relevant among our Bodega customers and an important traffic driver for these stores. We tested a new layout to provide a fresher and simpler shopping experience on such departments. This change resulted in 160 basis points traffic increase. So we started a nationwide rollout of this new layout in June to drive traffic and sales.

Winning discount is one of our strategic priorities, and we are pleased with the progress we've made in Bodega. Sam's also delivered strong growth across all categories. Members are appreciating the value we offer through our Member's Mark brand. We are launching new and compelling items to enhance our catalog. A great example is our multivitamin, which offers better quality than branded options with a 20% value.

During the quarter, Member's Mark sales penetration increased to 120 basis points compared to second quarter '21. Membership performance has been healthy as well. During the Hot Sale event, Plus member penetration reached an all-time high at 40%. Plus member shopping frequency and average ticket is 2x higher versus Advantage members, and it is encouraging to see they are appreciating the value of the membership.

Regarding Wal-Mart, it's great to see how seasonal events are being implemented again at the stores at its true potential after 2 years of softer traffic due to the pandemic. As we enter the second half of the year, we are excited about the great merchandise we will offer our customers during the [ mask ] events such as Back to School, World Cup and Christmas, with an omnichannel scope.

So far this year, we've opened 5 new Supercenters to bring our assortment and price to more customers. And we are very excited to see all of them outperforming our sales and return goals. We are encouraged by the positive trend we are seeing at Walmart Express. After several quarters of disruption due to store conversion, we are resuming growth. During the quarter, we converted 2 more stores into Walmart Express and in the second half of the year, we will finish the 11 remaining conversions.

We are focused on offering the right price and assortment to our customers. During April, we hosted an event focused on organic products, where customers could find around 100 browsing categories such as fruits, vegetables, groceries and consumables. Organic product sales increased to double digits during the event.

Maestros de la parrilla and the cheese, wine, and bread event were also well received by customers, as we drove triple- and double-digits sales growth, respectively, during the events. Look at the performance by region, growth was broad-based across all of them. The South delivered the highest growth as economic activity in the region continues to regroup. The Central and Northern regions also delivered above-average growth, while the metro area where macro conditions have been more challenging, delivered lower yet solid growth.

In terms of merchandise divisions, [ Bodega ] consumers continue growing strong. Consumer habits are constantly evolving, and their spending is somewhat shifting away from discretionary items given high inflation levels. This affecting general merchandise and apparel sales performance. We know high food inflation affects customers' budgets, especially the most price-sensitive ones, and we want to be there to support them. We reiterate our commitment to offer the lowest price and help farmers live better. We enhanced the basic basket offering with private brands product reach besides helping customers save money, help us to further increase loyalty.

During the quarter, Private Brand sales in self-service formats grew almost 2x faster than the rest of the business, increasing penetration by 100 basis points versus last year. Home & Entertainment and Seasonal Merchandise post the highest growth, increasing private brand sales penetration by 410 basis points and 355 basis points, respectively. Private brands play a clear role on our priority to win discount, and we have the vision to double current sales penetration by 2026. In April, we hosted our first Private Brand Summit, where our leaders and merchants shares with over 500 suppliers and commercial partners, our strategic and initiatives to reach our ambition.

Among other topics, we discussed the importance of sustainable packaging on our Private Brands products to meet our ESG targets. Another one of our strategic priorities is to lead in omnichannel. We want to serve customers how, when and where they want to be served. And we are focused on two initiatives to achieve this goal. On demand to drive frequency and external assortment to complement our store offering with a wider selection of products.

Regarding on-demand, we continue to grow strong by expanding the number of stores enabled with the service and by improving delivery time. So far, we have enabled on-demand service in 980 stores in over 200 cities. Bodega has been a key growth driver for on-demand. We are offering the service in 425 stores, 66% of the Big Bodega stores and 40 Mi Bodegas. By expanding the service to more stores, we are reaching more customers and our on-time indicators surpassed 90%. We also keep improving user experience on our apps and websites.

We enabled a new future called Forgot Something,, which reminds customers of items they might have for both. This new feature is helping us to increase average ticket and consequently sales. During the quarter, Despensa a tu Casa sales grew almost 180%. We are also making progress with on-demand at Walmart and Walmart Express. In May, Walmart Pass had a 30% penetration and Pass users shopping dynamics continue to show favorable trends. Frequency was almost 2x higher than that of non-Pass users.

We expanded our fast 60-minute delivery service to over 280 stores. We know that customers, especially in big cities, really appreciate the service, and we will continue to strengthen in by implementing technology and evolving our last-mile models.

Now let's talk about the extended assortment. The highlight of the quarter in terms of extended assortment is the launch of Sam's extraordinary assortment operation. The new fulfillment center started operations in April, providing service to 32 federal entities and over 32,000 ZIP codes with focus on the center and metro regions. This fulfillment center will allow us to offer a much wider variety of items to our Sam's members and to provide a better service by reducing delivery times, further enhancing the value proposition of the format.

We opened the fulfillment center just in time for the Hot Sale event and started strong. Almost 30% of Sam's General Merchandise volume was dispatched through the new fulfillment center. We moved 40% more and it's improved productivity by 50% versus last year event. We also decreased delivery times by 1 day and on time reached 98%.

Across our formats, we are investing in technology to improve user experience and service levels. Enhancements in search technology have resulted in a constant conversion growth, and we are implementing machine learning to provide a more accurate delivery promise, which is leading to better customer satisfaction.

Despite strong growth last year and changing customer habits, the e-commerce business continues to grow strong. During the quarter, e-commerce GMV grew 22% and sales increased 18%, resulting in a 0.9% contribution to total sales growth. E-commerce sales represented 5.2% of total Mexico sales.

Now let's talk about another one of our strategic priorities to become the ecosystem of choice. For us, creating an ecosystem is shifting from transactions to relationships. It's about building meaningful connections between people, adding consistent incremental value. I'm encouraged by speed in which this product is progressing. One of the verticals of our ecosystem is cash. The number of cash users doubled during the first half of the year, reaching 3.4 million. We keep adding new features to the product. One example is a reminder for sales payments that automatically notifies our users, they have a due payment coming, helping them organizing their finance.

We also keep reinforcing our digital credit marketplace by leveraging e-commerce kiosks at Walmart and Bodega. We are offering customers that use our kiosk, as a fully digital credit option that can use either in store or online. This is helping us to expand our customers' wallet, as Cashi credit uses average ticket is around 5.3x higher than the average user ticket. Another one of the verticals of our ecosystem is Bait, our MVNO. We continue to add the users at a fast pace. By the end of second quarter '22, it reached more than 4 million accumulated Bait users. This position us as the top MVNO in Mexico by number of users.

It's amazing to see how, by leveraging our brands, our reach, our scale and the trust customers have for us, we can drive exponential growth on the new business we are creating and give millions of customers access to the benefits of the distal economy.

Besides our prepaid data and mobile offering, we are starting to test a business-to-business model through which we can provide strategic partners a reliable and low-cost service. Another one of the verticals of our ecosystem is Walmart Connect, our advertising business. During the quarter, we enabled a self-service option for sponsored product search that will allow our clients to highlight their products and maximize sales. We leveraged these tool to support small and medium client on our first sponsored product campaign.

We also launched a new product to provide an even wider selection of an advertising solution, mobile advertising through Bait. Our Walmart Connect clients can reach millions of Bait users through SMS and push notifications. They really appreciate this product as it allows them to target specific customer segments and thus increase the efficiency of their investments. We are connecting the verticals and the core business in a mutually reinforced way in order to better serve customers. This year's Hot Sale event is a great example of this. It starts with strong stores. We executed omnichannel event, which means customers could not find great deals both online and at stores.

By leveraging our stores and distribution centers, we significantly improved our service levels. Almost half of the orders were delivered either same day or next day on the top cities and countrywide average delivery time was around 3 days. 96% of orders were delivered on time, which led to an all-time high NPS score increasing 1,030 basis points versus last year event.

The Marketplace business continued to show traction, and we almost 50% during the event. We leveraged Walmart Connect to provide customers a unique entertainment options, such as Margarita la Diosa de la cumbia for Bodega customers, which reached over 80,000 people. And the banking customers don't have access to credit card promotions that typically takes place in this types of events. So we leveraged Cashi to provide a unique value for Bodega. Sales paid through Cashi increasing more than 60% in value during the event. Bait also joined the event, offering even lower price and granting Cashi users an extra bonus. We know customers are going through tough times, and we're working relentlessly to strengthen our value proposition and to simplify our business in order to reduce the impact of the macroeconomic on them. We are glad to see customers are appreciating the price gap expansion of 120 basis points, and all other efforts we are doing to reinforce price leadership and thus rewarding us with their loyalty.

In the second quarter '22, we resumed our growth leadership versus the market, growing 10 basis points ahead of self-service and club segment measured by ANTAD. Being true to our purpose, we will continue working every single day to reduce this impact and to help customers live better.

Now let's talk about Central America. Same-store sales grew double digit across all countries, resulting in a 14.6% growth in Central America and market share gains in the region. We remain focused on 2 initiatives: to drive growth on the Bodega and Discount formats and to simplify our business. There are several actions we are implementing to improve shopping experience. We are standardizing communication for all our campaigns to give a clear message to our customers and further enhance price perception.

We are constantly optimizing our catalog by reducing SKU account and increasing inventory turnover. Private brands play a key role in providing the lowest prices for our customers on the Bodega and Discount formats. Sales penetration increased 180 basis points versus second quarter '21, continuing with the double-digit growth trend. The execution of commercial companies, such as Quetzales Campeones and Lo que necesitas pagando menos were well received by our customers and sales grew 25% during such campaigns. I'm encouraged by how this strategy is resonating [ customers ]. We will continue to listen to them in order to serve them better.

Now let's talk about new stores and supply chain. We continue to expand our capabilities to serve our customers better across both regions. During the quarter, we opened 20 new stores, 19 in Mexico and 1 in Central America. New stores contribution to consolidated total sales growth was 1.2% during the quarter. We continue investing in our logistics network to take our competitive advantage even further. During June, Villahermosa Distribution Center for fresh merchandise started operations. This new distribution center is bringing us closer to customers by serving 7 states and almost 230 stores. It has the capacity to move more than 1 million boxes per month, and it will handle over 10% of fresh merchandising volume.

Additionally, we continue with the construction of Tlaxcala and Baj韔 distribution centers. These 2 projects are very special for us, and we will start operations in 2024 and 2026, respectively. We're investing in state-of-the-art technology to increase productivity and efficiency. Our strategy translates in shared value creation for all stakeholders, and we are on our path to become a regenerative company. We were included in Expansion's Super Empresas ranking and we ranked among the top 5 in the top companies for women ranking.

We received the Empresa Socialmente Responsable distinction, making it 22nd consecutive year we received such distinction. It recognizes Walmex's long-term commitment with Environmental, Social and Governance matters.

In May, we hosted our first Sustainability Summit, where our leaders and key suppliers shared the different initiatives we are implementing as a company to help mitigate climate change, drive a circular economy, and protect and restore natural capital.

On June 29, we rang the Mexican Stock Exchange's opening bell to celebrate the 45th anniversary of the listing of our prior company - Cifra - and the 25th anniversary of trading as Walmex.

In closing, I'd like to recognize the outstanding job our associates are doing to serve the customers and to implement our long-term strategy. We have the best operators and merchants in the region. We have an experienced management team that has gone through even tougher inflation scenarios that other countries. And I'm sure that together, we'll continue to navigate successfully through this changing environment and further increase our resilience.

We remain focused on what we can control, delivering the best value proposition for our customers. We will further strengthen our company by driving a disciplined acceleration and by making the right investments. We will preserve cash by managing expenses efficient, and we'll continue creating shared value for all our stakeholders. Thank you very much for your interest in our company. Now I'll turn it over to Paulo, who will cover the financial results of the quarter.

[Paulo Garcia, executive]

Thanks, Gui, and good afternoon, everyone. Thank you for joining us today to review the results for the second quarter 2022. Let's look at Mexico financial results first. Total revenue increased 12.2%, driven by double-digit same-store sales growth of 10.8% and a 0.9% contribution from e-commerce to total sales growth.

Gross profit margin expanded by 30 basis points to 23.4%. Efficiencies and leverage in logistics and new revenue streams supported gross profit dynamics and allowed us to expand our price gap by 120 basis points, while further improving profitability. Expenses grew 14.9%. We are experiencing higher cost of doing business. Yet, we have managed to reduce base operating expenses and to invest behind strategic priorities. We will review the SG&A's breakdown on the next slide.

Considering these results, operating income grew 10.8%, and EBITDA also grew double digit, resulting on a 10.6% margin. Let's look at the expenses breakdown. High inflation levels are not only affecting our customers' budgets. They are also pressuring expenses. We are managing expenses efficiently and focusing on simplifying our business in order to offset this impact. And as a result, we were able to maintain our base operating expenses level when compared to second quarter 2021.

As we've shared with you before, we are going through an investment phase to reach our long-term goals. But you can rest assured we are investing with discipline and investments won't be linear. The level of investment Will depend on the projects we are implementing and our business needs. Talent continues to be the main area of investment and we are encouraged by the returns of this investment, like turnover rate, reduction rate. We know happy associates provide a better service, better service creates happier and more loyal customers and happy customers help us drive topline growth.

We will continue to implement our associate's value proposition in order to be at that place where associates can themselves grow and belong.

In addition to talent, on the 2Q22 we opened 20 new stores, including 4 Walmart Supercenters. These Walmart stores, as Gui previously mentioned, are surpassing our internal plans. In order to continue reducing the impact of the macro environment on our customers, we are stepping up our efforts in terms of simplification and productivity. During the first half of the year, we delivered almost MXN 630 million in savings through our Smart Spending program. This is a zero-based budgeting project, enabled by data capabilities that will allow us to continue to reduce our expenses. We continue using technology to help associates to do their jobs more easily. We added 30 self-checkout stations, including the first one at Bodega Aurrera Express. Currently, 530 of our stores are enabled with self-checkout. We implemented SAP CAR technology in almost 140 stores to transform the month-end accounting process, generating additional productivities.

Additionally, we are evolving our HR teams at stores through a digital ecosystem that promotes self-management by improving and digitalizing the associates' experience and HR core processes' automatization.

Now let's review Central America's results -- please consider that when I talk about Central America, I will refer to figures on a constant currency basis. Total revenues increased 15.3%, driven by a 14.6% same-store sales growth, supported by double-digit same-store sales growth across all countries. Gross margin decreased by 30 basis points to 23.6% as a result of price investments to enhance our value proposition at Bodega and Discount formats. Our focus on simplifying our business and driving productivity continues to deliver results.

Initiatives such as self-checkout stations, flexible associate profile, digitalization and automation of processes allowed us to leverage our general expenses by 100 basis points, which represented 17.7% of revenues. With the above-mentioned results, operating income grew a solid 32.2% and EBITDA margin stood at 8.9%. All in, consolidated revenue increased 12%. New stores contributed 1.2% to total growth. Gross margin increased 10 basis points to 23.4% and expenses grew 13%, driven by strategic investments in Mexico, partly offset by leverage in Central America. Operating income grew 12.7%, above total revenue growth. and EBITDA margin stood at best-in-class 10.3%. Consolidated net income do strongly despite the challenging environment we are experiencing, posting an 11.5% increase.

Now moving to the balance sheet. As a result of strong top line performance and best-in-class margins, cash position increased 16.1% to MXN 48.5 billion. Inventories increased 24.5%, ahead of sales to MXN 84.7 billion, partly because seasonal events are now being executed at full capacity. During the last 2 years, we were not buying all the assortment and volume, we typically buy for the seasonal events such as Back to School. Due to remote school and work or due to other disruptions the pandemic brought. this year, we are excited to have these events back at full capacity, and our inventories are reflecting it.

We know inventory increase might sound high, and in some few categories, inventory levels are somewhat higher than normal. But in the context of global supply chain disruptions and regularization of seasonal activity, we do not foresee the need for markdowns on top of the regular commercial activity. Finally, accounts payable grew 13.6% and to MXN 88.6 billion. In the last 12 months, our strong performance generated MXN 76.9 billion in cash, inventories impacted working capital, which we required of MXN .5 billion. This allowed us to return MXN 28.2 billion in dividends and invest MXN 20.2 billion in projects aligned with our growth strategy. We paid MXN 15.8 billion in taxes and ended the quarter with a cash position of MXN 48.5 billion.

In closing, I would like to emphasize the key message of the quarter. Number one, strong and accelerating double-digit top line growth, underpinning market share growth in both regions, price investments to reinforce our value proposition in tough inflationary times, and further accelerate growth; three, best-in-class margins, double-digit operating income and EBITDA growth supported by productivity initiatives, which partly offsets strategic investments. Thanks again for your interest in our company. As always, we'll make ourselves available to answer the questions you may have.