BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to BIM's First Quarter 2019 Financial Results Conference Call.

I will now hand you over to Mr. Haluk Dortluoglu who will take you through the presentation. Dear Mr. Haluk, the floor is yours.

[Haluk Dortluoglu, executive]

Thank you very much, Ms. Anna. Dear analysts and investors, we are pleased to welcome you to our first quarter results of 2019. We hope you all have managed to download our recent investor presentation on our website, and now we will go over these slides one by one.

In the first slide, the headlines for first quarter for 2019. As I think you are all aware, from January 2019, we have started to start reporting on IFRS 16 standards. We think it will take some -- take time to adjust to this in understanding and comparing the financials in general. It will take maybe a few quarters. But in this quarter, we will show you the differences, what happens starting in the first -- by first quarter of this year. Due to that, we have added a few more comparative slides to help you to understand impact of IFRS 16 that we'll have on our future reports.

In the first quarter, sales are TRY 9.025 billion and up for 29.5% from the first quarter last year, better than our full year outlook. And we reached EBITDA margin of 7.2%, which means 80% growth compared to last year. Of course, this is not fully comparable. The EBITDA has this IFRS effect. If you include -- if you exclude the impact of new IFRS 16 standard, then EBITDA is TRY 420.3 million and the increase is only 15.5% with a margin of 4.7% EBITDA. So last year, this was 5%, and this year, it's now 4.7%. And we will come to the details on this.

And the net income was TRY 215 million, which is 8% lower than last year. Again, with the IFRS adjustment this time in real terms, it's 265 -- or TRY 266 million with 13.4% increase year-on-year with comparison point. Again, we will get into the details shortly.

In the CapEx terms, we have TRY 268 million this quarter, which corresponds to 3% of sales. And we continued -- in terms of store opening, we continued new store openings with 235 this quarter, ending with 7,713 in total.

There's a slide about technical impact of IFRS 16. In this, you will see through the presentation that the changes that new reporting has on our EBITDA and EBIT terms, which I mentioned shortly before.

But we move to quarterly net sales and gross profit slide. Although there is a decline in the sales compared to the fourth quarter last year, we achieved almost 30% growth on the same quarter in the previous year, which is better than our new outlook. And overall, this deceleration in the sales trading from the last quarter is largely from customers not passing the full effect of food inflation onto their baskets. In other words, we can say, as you all know, there is a decline in Turkish economy in the last quarters and especially this quarter. And this has -- having some lowering the income of the people, and somewhat, we are affected by this. But this, I will mention also, this effect seems in the bottom line in the first quarter. The second quarter, we expect high top line compared to the first quarter.

And food inflation is higher than headline inflation. And we would -- we could not pass all inflationary pressures to the prices in Q1. And however, in the second quarter, there are signs of recovery in the gross margin. We have a lower than -- lower gross margin. We have communicated this -- the reasons of the first quarter gross margin being lower before. We had this, for example, visible issue, that fixing the prices before the election by the government. And that kind of other things affected also somewhat pressure on the existing passing of the increased buying prices to the sales prices have some effect. But now in the second quarter, there will be serious recovery, I can say.

In the EBITDA and EBIT slide, as you can see, we have a positive EBITDA mostly due to the IFRS 16 impact. Our EBITDA in the first quarter was TRY 654 million, but in the old financial standard, this is TRY 420 million, EBITDA without the IFRS effect, and that's instead of 7.2% in the first quarter, we would see 4.7% EBITDA if we had not made any change in this standard.

And when we move to EBIT terms. Yes, correspondingly, the EBIT increase, 41% almost in year-on-year but reaching to TRY 403 million here and reaching the 4.5%. But for the old standard, we can say this number is TRY 4 million lower, which is roughly TRY 390 million here, and this 3.5% of sales in terms of old standard terms in net profit.

Now we move to quarterly net income. As you have seen, the new IFRS 16 standard had a positive effect on EBIT and EBITDA, but it has a negative effect on our net income. This is mostly from around TRY 150 million interest rate charge and over lease liability, which is a result of this new standard.

We have, in the net income terms, without this standard change, our net income would be TRY 266 million. However, after all the net effect of the IFRS changes, this number has gone to TRY 215 million with a net effect of TRY 51 million. And this makes us to 2.9% net income margin here.

Okay. Let me move to like-for-like sales slide. Like-for-like sales increased by 18.6%, which is lower than the internal inflation, which is 26%. And like-for-like basket size also increased by 17.9%, almost 19% here and remaining under the BIM internal inflation rates. As mentioned in previous slides, the like-for-like is improving in the last 2 months, in April and May, where January and February were under more pressure due to customers not passing the full inflation effect onto their baskets and the uncertainties before the election.

Processed food inflation in Turkey stood at 20% in the first quarter, under BIM's internal inflation rate, which is 26%.

Capital expenditures. CapEx has increased from -- in the first quarter last year by 39%, and it's 3% of sales, in line with expectations for the remainder of the year, TRY 80 million. CapEx is coming from store openings acquisition in the first quarter. We have opened 3 warehouses during the first 4 months of the year, which is Izmir , Batman and in -- and through the provinces. We will be opening a double warehouse or twin warehouse in the European side of Istanbul in late 2019, and the construction is going on there.

And when we move to the next slide, number of stores. We will continue to expand in the near years and plan on opening 820 stores in total, which is 700 of which are BIM's Turkish stores. At the end of the first quarter, we had 235 stores opened, and this corresponds to a 10% growth in year-on-year in BIM store format.

Foreign operations and FILE. In Morocco, we have opened 14 new stores in the first quarter. And we have now 456 stores in -- to date, achieved EBITDA positive in the -- in 2019 here. And also, we have -- we will be reaching 500 stores until the end of the year. This is our expectation or near -- to be near that in Morocco.

In Egypt, we have slowed down our operations and store openings, but we have opened only 1 store in Egypt in the first quarter, reaching 301 stores by the end of 2019 -- by the end of the first quarter '19.

At our FILE operation, we have opened 7 stores this quarter. By the end of the first quarters, we have reached 71 stores as of previous 74 stores. And we have continued the EBITDA positive level in FILE.

About the first quarter presentation, this is the end of our presentation. We will go for your questions if there is any. Please go if there is any questions for us.

[Operator]

[Operator Instructions] We have a question from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

The line was not very clear about -- I couldn't hear the price inflation at BIM. That's my first question. And the second one is related to your employee costs. We see higher number of hirings in first quarter. What could be the trends in the following quarters? Because there was significant increase made because of the -- some factors. But I'm trying to understand what could be the trend is starting by second quarter. And did you benefit -- are you going to benefit from any incentives from the government side given to the new hirings of -- for several incentives we see in the sector? Are you going to benefit from those incentives in the following quarters?

[Haluk Dortluoglu, executive]

Thank you very much. Our internal inflation rate was, end of the first quarter, 26%. 26.

[Cemal Demirtas, analyst]

How much?

[Haluk Dortluoglu, executive]

26%. 2-6.

[Cemal Demirtas, analyst]

2-6. Okay. But the baskets were mostly on...

[Haluk Dortluoglu, executive]

And the basket -- our basket growth is lower than that. Our -- in like-for-like terms, our basket growth is 17.9%, which is almost 18%, so much lower than this our internal inflation.

In terms of employee costs or personnel expenses, if you look at last year first quarter, our personnel expenses was 6.8% of our sales, and now this number is 7.1%. I think there's only a 30 bps difference, and the main reason is coming on 2 sides. One, as you know, we have a minimum wage hike, which is 26% starting from the 1st of January. Second, the incentives are not fully paid or received in the first quarter yet. So we will be expecting more employment incentives from the government on the coming quarters. And also, some of them will be related to the first quarter, which is done, already accrued there. So this is the only difference. So there is a minimum wage hike plus unpaid on an accrued incentives, which we will be expecting from the government, some of it. Okay?

[Operator]

[Operator Instructions] Our next question comes from [ John Thompson ] from [ One Capital ].

[Unknown Analyst]

I just have 1 question regarding the EBITDA margin. You announced in your 4Q '18 presentation that you expect a 5% EBITDA margin, plus or minus 50 bps, excluding IFRS 16. What will be the impact of IFRS 16 on your EBITDA margins if we include it?

[Haluk Dortluoglu, executive]

Thank you very much, John. I think with the effect, we have a 7.2% EBITDA. And without IFRS 16 effect, our EBITDA is 4.7%, which is in line with our target, which is around 5%, plus or minus 50 bps. So it's 4.7% now. And maybe I would also underline that in terms of gross margin-wise, in second quarter on coming quarters, we are expecting an increase rather than decrease. And same is true for EBITDA because in the first quarter was really different and some specific conditions. And second quarter, we will be expecting higher gross margins, yes.

And I would also want to add one more thing about the dividends. There was some discussions whether the dividend payment will be continuing as is. We don't have any doubts that our dividends will be paid in cash as projected. And I think we disclosed it to be 2.4 -- or 240% of our paid-in capital. So our expectation to be -- this to continue as expected before.

[Operator]

[Operator Instructions] We have a question from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

I have a question on IFRS adjustment. What is the cost of debt you are applying for the rent capitalization in the IFRS?

[Haluk Dortluoglu, executive]

Cost of debt?

[Hanzade Kilickiran, analyst]

Cost of debt. Yes, the interest charge. I mean what type of interest rate you are applying to calculate the present value and also...

[Haluk Dortluoglu, executive]

20% in Turkish lira. 20%.

[Hanzade Kilickiran, analyst]

Okay. And is there any sort of risk on the rent -- I mean financial expenses going forward? I mean is this related to the interest rate environment in Turkey? So basically, I just wanted to understand if you are going to see any sort of rate increase or rate decline in Turkey. Should we also assume lower financial expense or higher financial expense on your side? Or this is a fixed rate that you will always apply?

[Haluk Dortluoglu, executive]

I think it will be -- there is not a change in the financial expense in the existing contracts. But for new rent contracts, there will be possible changes. But existing contracts will be -- remain as is.

[Hanzade Kilickiran, analyst]

Okay. It's 20%.

[Operator]

We have a question from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

Another question about the international operations. We see you have only 1 store opening in Egypt. How do you -- I think there's a slowdown in that front. How do you see the outlook there? Do you make any profits in the Egyptian operations? Could you give some figures on your international operations in terms of net sales and EBITDA?

[Haluk Dortluoglu, executive]

Thank you very much, Cemal. In terms of Egypt, I can say Egypt is still a loss-making operation for us, and we need to inject cash in Egypt unlike Morocco. But I can, generally speaking, say in terms of budgeting terms, Egypt is performing more than our expectation for this year, doing somewhat better performance. But for the overall, Egyptian investment environment is negative, and the political environment is negative. So we have question marks on whether to increase store openings or not for Egypt. So that's -- for a while, we prefer to keep existing stores and concentrate on them rather than open a vast number of new store openings there.

[Operator]

Our next question comes from [ Grishan Ayas ] from [ Bennet Invest ].

[Unknown Analyst]

I have got 2 questions. One of them is on the gross margin. You said that you're seeing improvement in your second quarter margin. Is that just because you stopped [indiscernible] sales? Or are there other drivers there that is driving this positive momentum there?

And the second question is on the like-for-like basket growth, which you mentioned is much lower than your BIM inflation. What were the drivers there? I mean did you see more frequent shopping from the customers? Is that the explanation? Or were there other drivers there? And would that mean that your underlying traffic growth was actually negative?

[Haluk Dortluoglu, executive]

Yes. In terms of -- traffic growth is not negative. It's flat in the like-for-like terms, traffic, as you see. But the like-for-like is -- while not positive in real terms. But please note that we are making our internal inflation calculation on 150 SKUs, not full 750 SKUs. And it is a limited part of our total number of SKUs comparison. And it may vary quarter-by-quarter in terms of reflections. So -- but in general, in the medium-, long-term, it gives out opinion, but it's not a full match compared to this.

But what we can say in the first quarter and overall, retail environment in Turkey was poor than previous quarters. So we have some effect on this. But despite being the one of the most defensive retailers and sector being put, we have been somewhat affected negatively in terms of top line growth side. And this is also true for the gross margin-wise, as I explained, due to relevant reasons. But I can generally say that starting from April and May, our top line is -- seems to be going higher than the first quarter. Also, our gross margin is -- seems to be going higher than the first quarter. Both of them in percentage-wise gross margin and the top line percentage-wise growth is doing better than the first quarter. The other question -- is there other question beside that?

[Unknown Analyst]

No. I mean I was wondering what was the reason behind the gross margin improvement, but I understand that it's the sentiment that you're seeing being better. Am I correct? Or are there any other reasons why you...

[Haluk Dortluoglu, executive]

The gross margin increased...

[Unknown Analyst]

At the beginning, I was thinking that it was because of the [indiscernible] sales that stopped in the second quarter. But...

[Haluk Dortluoglu, executive]

This is part of it. The [indiscernible] sales is an important part of it. We have received some losses because of [indiscernible] sales, and we were buying much lower than our acquisition price on this [ deducted ] 5 6 [indiscernible] items in the first quarter.

But also, as you might know, that the other prices, increase in the other prices had some pressures also. And because of this pressure also, the passing through of incurred SG&A costs -- sorry, the cost of goods sold costs are -- could not be passed through to the prices fully because of these pressures felt by all the retailers in Turkey. So you can call it mainly [indiscernible] or [indiscernible] related thing. Yes, that's true. But after the first quarter, that pressure is less or somewhat lifted. And we will be passing more and we had passed more prices until -- since the 1st of April, I can say.

[Operator]

Our next question comes from Berna Kurbay from BGC Partners.

[Berna Kurbay, analyst]

I have a question about the regulatory developments since the elections. There was the talk of a new retail law, and there were certain articles that were mentioned in the press with respect to the opening of new stores, how close or how wide apart they should be from one another or things like limitation on private label sales. I was wondering if there is any development on that and if there is any sort of negotiations or talks going with the retailer organizations and the government with respect to that and what your expectations are on that front. And also, a separate but related issue, are there any developments on the Competition Board's probe into retailers?

[Haluk Dortluoglu, executive]

First, retailer issue. As you might know, this retailer issue for long been sometimes discussed usually before the elections to give some populace idea for the electors, voters. But of course, you never know when it's serious or not. What it did was we expressed our views through the Retailers Association and also had indirectly also and how would it affect, let's say, the restriction of private labels and restriction of store opening, think how will it affect the overall economic conditions, which is already not doing well, and how will it affect the inflation and how will it affect the overall retail performance or -- and welfare of the people.

At the end of the day, any kind of free market interference is negative for the economy, negative for the country as macro and also in the micro side. So those are the things we underlined. So the government bodies and in clear term through association and through as a single retailer. And we will be expecting other results there.

My personal opinion, I don't think there will be a direct, let's say, free market interference thing on this retail law change. But we never know in Turkey what happens in recently and last few years.

And in terms of inspection thing. All these inspections, including tax inspection, including Competition Board, including Capital Market Board inspections, they seem to be coming to a near end, and we don't expect any negative effect on our side. We will be -- we will not be receiving any serious findings on those things. But we had all this inspections carried on. It's almost all of them are being closed recently.

[Operator]

We have no more questions for the moment. Mr. Haluk Dortluoglu, back to you for the conclusion.

[Haluk Dortluoglu, executive]

Thank you very much for joining our conference call today. We hope to see you in the second quarter results as well, and we hope to see you in better economic conditions for Turkey by then, hopefully.

Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.