Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2019-Q4

[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 fourth quarter and the full year 2019. Today with me is Guilherme Loureiro, President and Chief Executive Officer for Walmart de México y Centroamerica; and Olga González, Chief Financial Officer. The date of this webcast is February 13, 2020. Today's webcast is being recorded and will remain 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 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 introduce our CEO, Gui Loureiro.

[Guilherme Loureiro, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us to review Walmex fourth quarter and full year results. 2019 was a challenging year. All of you know we dealt with adverse and uncertain socioeconomic conditions across the region. Nevertheless, we're able to deliver and create shareholder value for our customers, associates, shareholders, communities and suppliers. Overall, this past year has been a year of transformation investment. I'm very proud of our associates' hard work and progress. By executing against our strategic priorities and making the right investments, we are building a stronger and even more customer-centric business that is positioned for sustainable long-term value creation.

I would like to begin by discussing sales performance, and then Olga 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 fourth quarter, total revenue grew 4.7%, 5.3% in Mexico and 3.9% in Central America. For the full year 2019, Mexico grew total revenue by 5.7% and Central America by 3.4%, which resulted in 4.9% consolidated revenue growth. Same-store sales continue to be our main growth driver. For the full year, Mexico delivered 11.1% 2-year stack growth and Central America, 2.5%. In Mexico, all regions and formats delivered a positive performance. The north and south regions had their highest same-store sales growth, followed by the center and metro regions, which delivered softer growth due to the competitive dynamics and macro conditions in those regions. I will start with Sam's, our fastest-growing format for the last 4 years. In Sam's, we are focusing on improving our members' experience. So during the quarter, we had another edition of the Socio Fest event where we offer our members high-quality merchandise with great value, especially on Fresh items. During the event, we also reinforced the value proposition for Plus members by offering exclusive items and prices, which resulted in the sign-up of thousands of new members. I'm very pleased with the progress we have made with Walmart in terms of omnichannel. We have taken their leadership in seasonal events to the online world and successfully executed events such as El Fin Irresistible. We also leveraged our stores' network to serve customers in a seamless way and expanded the on-demand service to about 60% of our stores, covering 59 seats. We will continue to deepen our digital relationship with our customers to strengthen their loyalty to Walmart even further.

At Superama, through the holiday season, we're able to surprise our customers with special products and exhibitions, primarily focused on fresh categories. We are also enabling our stores with technology such as electronic pricing tags and self-checkout to improve the shopping experience and productivity. Another example of progress in technology is the launch of the new Superama app, which improved the conversion and overall customer satisfaction.

In Bodega, we are moving forward in terms of store expansion and omnichannel. In quarter 4 2019, we opened 69 new stores and closed the year with 2,035 stores, reinforcing Bodega's position as the leading retailer in Mexico. We also stepped up our efforts in omnichannel. We opened more than 300 kiosks during the year, taking our omnichannel offer to the most price-sensitive families with great results. Among our formats, Bodega suffered the greatest impact from the change in disbursement of government support programs, especially in the center and metro regions. The team is focused on reinforcing even further our price positioning and operating more efficiently to keep the productivity loop turning.

Now looking at the performance by merchandise division. The Food and Consumables division was our main growth driver, followed by General Merchandise and Apparel. As we have shared with you in past quarters, Apparel sales were impacted by operational difficulties that stemmed from the issues we experienced with the merchandise imports at the beginning of the year. This has taken us to accelerate the execution of markdowns in order to maintain healthy inventories and resume growth. Our merchandising team is already capitalizing the benefits of the adoption of an end-to-end and more customer-centric way of working. We managed to coordinate the Walmex exclusive omnichannel event called El Fin Irresistible, which included one more day of sales in record time. During the event, our customers found amazing merchandise at unbeatable prices across all our formats. We drove double-digit gross sales growth despite a challenging base and e-commerce sales represented 8% of total sales during the event. The team is also doing a great effort to improve even further our price position. During the year, we widened our price gap by 20 basis points to support our most price-sensitive customers in these challenging economic times.

In Central America, Nicaragua delivered the highest same-store sales growth, followed by Honduras, El Salvador and Guatemala. Sales performance in Costa Rica suffered the greatest impact from the unfavorable macroeconomic dynamics in the country. During 2019, we expanded Coyol's distribution center in Costa Rica by more than 44,000 square meters. With this expansion, the distribution center became the largest one in Central America. We are committed to continue to invest in Central America not just to reinforce our prices to better serve our customers, but also to enable key assets in the region to continue to win in the future.

Switching topics. 2019 was a year of good progress in omnichannel. We know the world is changing. Customers are shopping in different ways, and we want to be there for them and meet their demand. We believe that in order to scale our omnichannel business and improve profitability, we need to leverage our strengths: our stores, our merchant DNA and our service culture. In line with this, we have been working to bring the best of the online and off-line worlds to better serve our customers. We're offering same-day delivery in thousands of everyday needs and about 12,000 general merchandise items through our on-demand service in over 256 Walmart and Superama stores. We are expanding our reach to new customers through an extended catalog, composed by recently reinforced 1P operation plus a marketplace, where we have enrolled almost 1,300 sellers. Our customers can find the extended offering on our online platforms and across the 894 kiosks operating in our Bodega and Walmart stores. We truly believe our physical footprint is a key competitive advantage and to benefit from it, we have now 1,115 pickup locations operating across our formats, where customers can pick up their grocery and general merchandise orders with no additional cost.

During the quarter, e-commerce sales grew 47% and GMV 53%. It represented 2% of Mexico sales and contributed 70 basis points to total growth. We still have a lot of work to do, but I'm pleased that our 2019 results demonstrated solid progress against our plan. For the full year, e-commerce sales grew 52%, accelerating from the 40% growth achieved in 2018, and GMV grew 61%, driven by Grocery. E-commerce now represents 1.5% of total Mexico sales and contributed 50 basis points to total sales growth.

Looking at performance versus the market. During the quarter, we outpaced the self-service and clubs market measured by ANTAD by 50 basis points. For the full year, we surpassed ANTAD by 90 basis points. This marks 5 years growing faster than the competition on every consecutive quarter. We have been able to capitalize on market situations and, more important, to keep the share gains by winning our customers' loyalty with a consistent delivery of our value proposition. I'm very proud of the team for this great achievement.

Moving to new store growth. During the quarter, we opened 81 new stores, 72 in Mexico and 9 in Central America. This compares to 57 stores opened in quarter 4 '19, '18. We continue to invest in the region despite an uncertain environment. In the full year, we opened 161 stores, which represents the largest number of new store openings in more than 5 years. In 2019, new stores contributed 1.7% of total growth, slightly below the guidance as 50% of the new stores opened during the fourth quarter, and sales contribution from store openings in Central America was lower given the market situation we are facing.

As I mentioned at the beginning of the webcast, this has been a year of investment, and we'd like to update you on one of our key projects, the logistics network redesign. In 2019, we opened 2 new distribution centers dedicated to e-commerce in Guadalajara and Monterrey, and we expanded Coyol distribution center in Costa Rica. Currently, 3 more distribution centers are under construction: one dedicated to e-commerce in Mexico City and omnichannel DCs in Mérida and Chihuahua. We expect to open the 3 of them in the first half of 2020.

To wrap up the first part of the webcast, let's talk about ESG. In October, we launched the Gigaton Project with the goal of avoiding emission of 1 billion tons of greenhouse effect gases in our value chain by 2025. Our suppliers are key for the success of this initiative. All of them are invited to be part of this effort. We also launched the second addition of Reciclamania, an event for focused on creating a culture of recycling among our customers. We are working to make trust a competitive advantage: building trust for low prices with our associates and for the way we engage with the community we serve. We believe leading on social and environmental issues is good for our business, for our shareholders and for the countries in which we operate, and we will continue to focus on these issues going forward.

In summary, we are building the right foundations to better serve our customers and to strengthen our business. As we begin this new year, we know we will face ongoing economic challenges. We remain focused on our strategic priorities, especially on growth and productivity, while getting all the ingredients in place for a strong omnichannel business. Now I'll turn it over to Olga, who will cover the financial results.

[Olga González, executive]

Thanks, Gui, and good afternoon to all of you. 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 the adoption of the IFRS 16 will 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 reference that I would do to last year results are based on the 2018 pro forma figures.

I will start by covering results in Mexico. We're facing a soft growth environment and more challenging competition. Nevertheless, we have been able to generate savings and apply them to improve our price position and maintain healthy inventory levels while outpacing the market and growing operating income faster than revenues. During the fourth quarter, total revenues grew 5.3%. We leveraged expenses by 60 basis points to compensate a gross profit margin contraction of 30 basis points, which stemmed from price investments and from additional markdowns to maintain healthy inventories in the Apparel division.

Operating income increased 8.1% and EBITDA margin expanded by 20 basis points, reaching 12%. Now let's move to Central America. Please consider that when I'm talking about Central America, I am referring to figures on a constant currency basis. Total revenues increased 3.9%. Gross profit margin improved 10 basis points, driven by more efficient negotiations with suppliers. As we announced on the November sales release, we reached a new agreement between our subsidiaries in Central America and Walmart, Inc. for the payment of intellectual property royalties. This agreement is effective beginning in 2019, but the charge was registered in November, affecting fourth quarter 2019 SG&A by MXN 1.6 billion. However, the underlying performance of the business remained healthy. Excluding this impact, we leveraged expenses by 30 basis points as a result of a very disciplined productivity agenda that we're implementing across the region, and EBITDA improved 100 basis points, reaching 11.5%. Please remember that royalties will be recorded as expenses on a quarterly basis going forward. At a consolidated level, total revenues grew 4.7%. Gross profit increased 3.8%, resulting in a 22.7% margin. The net result was impacted by the payment of royalties by MXN 1.1 billion. Adjusting for the impact of the payments of royalties on the fourth quarter 2019, we continue to build on our financial strategy. We leveraged expenses by 60 basis points and funded strategic investments in prices, salaries, logistics, e-commerce and new stores. Operating income grew 8.7%, ahead of total revenues growth of 4.7%. And EBITDA increased 8.3%, reaching an 11.9% margin.

Now let's review the results for the full year 2019. Mexico total revenues increased 5.7%. During the year, SG&A grew 3.5%, 220 basis points below total revenue growth, reflecting our productivity efforts and expense management. Gross profit grew 5.3%, and gross profit margin decreased by 10 basis points to 22.6%. As a result, operating income increased 8.3% and EBITDA 8.6%, resulting in an 11.4% EBITDA margin.

In Central America, total revenues increased 3.4%. Gross profit margin remained stable at 24.2%, as the team was able to reinforce our price leadership without reducing profitability. SG&A grew 10.8%, impacted by the new royalty charges. Operating income represented 5.8% of sales and EBITDA margin was 9.1%. 2019 results were solid. In both regions, the team made good progress on cost controls, and we were able to maintain expenses growth below total revenue growth. This allowed us to invest in prices, to keep winning our customers' loyalty and to further improve our competitive position. Consolidated revenues increased 4.9%. SG&A increased 4.6%. Gross profit margin decreased 10 basis points to 22.9%. As a result, operating income increased 4.7% and EBITDA margin expanded by 10 basis points. Capital allocation is aligned with the long-term strategy.

During 2019, we made strategic investments to better position our business while continuing to generate returns. In line with the guidance we gave at the beginning of the year, we invested MXN 20.6 million, 14.7% more than in 2018. 40% of the investment was allocated to the remodeling and maintenance of existing stores, 28% to the opening of new stores, 20% to the logistics network redesign, 11% to technology and e-commerce, and 1% to Fresh upstreaming projects. In addition, we're reducing our base expenses by implementing technology to operate more efficiently and becoming more productive in our remodels and new store investments, thereby freeing capital to build strong foundations.

Moving to the balance sheet. Our financial strength gave us the ability to deliver short-term results while we build structural competitive advantages to position the business for the long term. We closed the year with a cash position of MXN 30.9 billion, 20.5% less than last year, given that the dividend paid in 2019 was 41% larger than the one paid in 2018. Inventories increased 6.6%, primarily impacted by the opening of 81 new stores in the quarter, 24 new stores more than in fourth quarter 2018. Cash generation increased 5.4%, ahead of total revenue growth, reaching MXN 63.7 billion. After investing MXN 20.6 billion in higher return projects, we returned MXN 36 billion to our shareholders in the form of dividends. We're committed to delivering consistent return to shareholders while investing for the future. Today, the Walmex Board of Directors agreed to recommend a proposal to shareholders for an ordinary dividend of MXN 0.87 per share and an extraordinary dividend of MXN 0.92 per share. Total dividends add up to MXN 1.79 per share. We expect the Annual Shareholders' Meeting to be held on March 24, 2020, to vote on the proposal. The proposed schedule for dividend payment is as follows. Ordinary dividends will be paid in 3 installments. The first one of MXN 0.27 per share in June, and the second and third ones of MXN 0.30 per share in November and December 2020. Extraordinary dividends will be paid in 2 installments. The first one of MXN 0.45 per share on November 2020 and the second one of MXN 0.47 per share on December 2020.

In closing, I would like to summarize the highlights of 2019. Despite a challenging environment, our operational standards and clear value proposition have allowed us to continue to grow ahead of the market. We're driving profitability improvement while transforming our company to position it for the future. We remain confident that the investments we're making in our business are key to balance short and long-term results. We know 2020 will present new challenges, and all of us at Walmex are committed to delivering for our customers and shareholders. Throughout the years, we have built a resilient business capable of adapting to changing economic conditions.

To finalize, I would like to invite you to our Walmex Day, which will be held on March 18 and 19 in Mérida, Yucatan. We will be visiting our first omnichannel distribution center, which will further strengthen our network capabilities. You can register for the event with our Investor Relations team.

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