BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2023-Q1

[Serkan Savas, executive]

Dear analysts and investors, we are very pleased to welcome you to our first quarter results for 2023. I'm Serkan Savas, reporting as Investor Relations Director. I hope you have managed to download our presentation on our website, and I now invite you to have a look at first quarter results. I will be taking your questions at the end of the call.

We will first look at our highlights for the first quarter in Page 4. If you talk figures for the first quarter, of course, this is -- this is first quarter decently -- it's not an ordinary quarter, which was affected by one-off expenses. For example, the earthquake and earlier time scheme, devaluation of the Egyptian lira had negative impact on our profitability in this quarter. The good news is we fully reflected these issues to our numbers in the quarter. And we don't expect any significant additional negativity in the remainder of the year -- remaining of the year. We will discuss these issues in detail in the following pages.

Our quarterly net sales were TRY 51.3 billion, reflecting 88% year-on-year growth as high inflationary environment a little bit continues to support our top line. Inflation is a little bit easing, but still it's high. EBITDA margin was 6.1%, representing 36% year-on-year growth. Excluding one-offs, as I mentioned before, excluding one-offs, our EBITDA margin will be 6.9%, which is a good start for the year, considering the first impact of rising costs. For example, minimum wage increased 55%. And at the beginning of the last year, a 35% increase so 6.9% is the -- actually will start for the year actually in the rising cost.

Actually, in coming quarters, margins slightly improving by benefiting from operating leverage we expect. And net income was TRY 1.4 billion with corresponding 2.7% margin, net income margin. And excluding one-offs, our net income margin will be 3.9%. Capital expenditures was 3.2% of our revenues in first quarter as expected, expected level.

And in terms of expansion, the store expansion this year, this quarter, we opened 240 new stores for all operations, including BIM and FILE. But also, as you know, that we also had to close 225 stores because of the earthquakes. And looking at the total number of locations across all operations, we had 11,525 stores at the end of the first quarter.

So those are the highlights. Now we are moving on the operational performance and starting with the like-for-like sales slide. Like-for-like sales increased by 79% in the first quarter. Like-for-like basket increased by 86% is almost in line with our internal inflation, which is around 90%. And like-for-like traffic decreased by 3.5% this quarter due to a high base of the last year.

As you know, the last year, our -- as you see in our presentation, in the page, we had 11% traffic growth in the last quarter -- first quarter of the last year. So there is a very high base. But although there is a higher base in the second quarter, actually, there is not any further deterioration in our numbers post Q1.

And next, on store sites. In the first quarter, we are now in the expansion page, Page 7. On the store side, in the first quarter of this year, we have opened 207 new BIM stores and 9 FILE stores in Turkiye. As we mentioned before, we had 225 closings because of the earthquake. Even though we had 225 closures because of the earthquake, our store growth was down to 7%. In this quarter, store growth expansion rate was 7% this quarter. We are confident to maintain our 9%, 10% expansion rate for the full year, as usual. You know that in the previous years, we had 9%, 10% expansion rate. So we are confident to keep that, maintain this level at the end of the year.

And regarding the abroad expansion, we have opened 14 stores in Morocco and 10 new stores in Egypt. In total, we had, as I said, 1,525 stores by the end of first quarter, consolidated all across our operations. And a number of in-stores are going up. Those are 100, 150 square meter selling space they have. Today, we have -- as of first quarter, we have 169 -- 169 BIM Mini stores, and it's also -- we are also operating these Mini stores, which is progressing well.

And CapEx -- CapEx progression. CapEx was TRY 1.6 billion in the quarter, corresponding to 3.2% of net sales. What we have done in this quarter, we have acquired some land in the west side of the country to improve our logistic infrastructure. For example, [indiscernible] we acquired some lands and we will be starting construction in a few months' time. And second, our [indiscernible] subsidiary plant construction continuing in [ SPPs ] also. And to sum up, we are -- we maintain our 3.5% CapEx sales expectation for the full year as we maintain our appetite for investments.

So those are general operational performance. Now let's look at financial performance of the first quarter. First, the sales, starting with sales progression. Sales grew by 88% in the first quarter reaching TRY 51.3 billion, which is in line with our year-end outlook. So we are not revising our year-end outlook. I prefer to follow postelection macro conditions and how the inflation will continue going forward.

And in terms of gross profit and gross margin, our gross profits has increased to TRY 9.2 billion, 18% margin. And because of the earthquake, you know we have lost around TRY 300 million worth of inventories -- TRY 300 million worth of inventories because of the earthquake. Those are not insured. And this, of course, has some impact -- negative impact on our gross margin. But this is less than our expectation, which we predict in the last quarter call. As you know, we announced that 0.25% we predict for the full year, but this is a little bit less than our expectation.

And excluding this one-off negative impacts, our gross margin will be around 18.5% in the quarter. And in terms of gross margin, what's going on after the first quarter, it's also progressing well, which is over 18% gross margin we have, maybe close to 18.5% is progressing after first quarter.

And revenue breakdown and by geography and formats in Slide 11. We provide the breakdown of our revenues in Turkish operations still has measured the share in total revenues. FILE is also contributing much better compared to last year and reached 5.5% shares in the first quarter. As you know, it used to be 4.2% last year, now it's reached the 5.5%, so it's progressing well, FILE operation is increasing share in total sales BIM Egypt and BIM MAROC contributions were nearly the same as the previous year's ends. Egypt is progressing well also as we announced before, but due to several devaluations in Egyptian pounds, Turkish lira equivalents of the sales still remains at the same level. But in the following pages, we will talk more a little bit about Egypt is also EBITDA positive in the first quarter. So it's progressing well.

And sales progression of the product categories, product label share decreased to 64% from 67% when compared to last year's same quarter, which was significantly high due to rush to basic products, including private label products directly or between Ukraine and Russia. So this is very strong in terms of private label. People are rushed [ to be loyal ] others, basic [ commodities ] last year in the first quarter.

But generally speaking, we are still seeing positive demand to product levels due to high inflation and the deteriorated purchasing power. And this is -- we see that it's a good chance for us. Actually, we are -- we have a chance or opportunity to recognize our product labels to some people, maybe high-income people. We are also seeing that high-income level people also visiting our stores more than the past. So it's a good chance for us to recognize our product label to some maybe newcomers.

And next -- on the next slide, we provide the evolution of the operating expenses on a quarterly basis. Actually, due to several hikes in the wages in the last 12 months, customer expenses more than doubled year-on-year. Of course, this puts some pressure on the OpEx this quarter. I think this quarter, it will be maybe the highest impact.

And earlier time scheme also increased other expenses in the quarter whereas the cash flow, cash outflow from early retirement scheme is TRY 400 million in this quarter, this is just the cash flow, but the profit loss effect was only TRY 90 million since the remaining has already provisioned previously. So of course, this is actually TRY 90 million impact. But going forward, there will be some new joining through early retirement, but this will be very, very gradually. And it doesn't have -- we don't expect any significant one-off impact like this quarter. So the worst is over in terms of early retirements.

And please keep in mind that one-off expenses and rising operating costs in Q1 likely to be offset throughout the year by operating leverage. We are seeing the signs of this impact in April and May, of course, but I'm ignoring any potential second minimum wage hike. There are some rumors, as you know that. But we also do not put this in our outlook and we are ignoring this. And if this is the case, of course, is we have some positive impact on consumption as well. So the first quarter in OpEx management will be the highest impact. So we will benefit from operating leverage going forward in the coming quarters.

Now let's look at our EBITDA and EBIT figures. EBITDA was TRY 3.1 billion, and EBITDA margin was 6.1% in the quarter. As I said before, at the headline page, excluding the one-off impact of the earthquake and earlier time scheme, our EBITDA margin would be 6.9%. Quarterly EBITDA was TRY 2.2 billion and the margin of 4.3%, excluding one-off impact of earthquake and the early retirements, our EBIT margin will be 5%. We keep our EBITDA margin guidance as is. But although there are some signs or upside risks in -- of the first quarter in April and May, we prefer to be on the safe side and follow macroeconomic conditions in the post-election period.

And moving on to net income slide. Our net income was TRY 1.4 billion in the first quarter. Net margin was 2.6%. And below EBITDA line and EBIT line as well, there, we have some one-off expenses like, for example, donations because of earthquake, yes, some donations, you can easily have [ TRY 83 million ] in -- you can put in our footprint, you can observe it.

And second, the [ asset loss ] from our stores, those are the one-offs below EBIT line. And excluding the all one-offs and -- our net margin will be 3.6% in the first quarter. And additionally, there's another impact on net income. It's not one-off, but depreciation on the buildings. For example, last year, as you know, that we have revaluated our fixed assets, buildings and plans. So actually, our land and buildings increased by TRY 10 billion last year. So this actually quarter, the depreciation base is increased. So we have around TRY 100 million more depreciation this quarter because of this revaluation of buildings last year.

And moving on to quarterly free cash flow. On this slide, we wanted to show a more detailed picture of the cash flow moments in Q1. Despite the impact of earthquake and donations, we had strong cash flow from operations in the quarter. Rent expense to sales ratio remains at historic lows at 1.5% in first quarter. And contribution from net working capital is still negative since last year after Russian-Ukraine war and high inflationary environment we are still seeing, we deliberately invest in our net working capital through advanced payments and securing more stocks. So that negative cash cycle from net working capital is already expected and under control.

And as of, of course, at the end of March is just tied to Ramadan period. So we had stockpiles because for -- prepared for the Ramadan period at the end of March. So this is why our inventory amount is a little bit high, is another reason. And cash flow, as I said before, from earlier title screen, we had a one-off TRY 400 million cash outflow. In terms of cash flow, it's not a P&L effect, but TRY 400 million, meaning we had a cash outflow in the first quarter.

And next page about our FILE operations, which I said, is progressing well. We have opened 9 FILE stores in Q1. Our number of FILE stores reached 211 stores. Now FILE is expanding in the [indiscernible] side of Turkey. FILE online shopping platform, which was launched in May 2021, now available in 26 cities in Turkey. And in a short period of time, FILE online sales reached 5% of the FILE total sales. And in terms of FILE sales, FILE share in total consolidated sales increased 5%, thanks to its better performance in the first quarter.

And if you look at the foreign operations in the next page, we have opened 14 new stores in the quarter in Morocco. And our total number of stores reached 641 in this country, 4 out in Marrakesh still will be opened in June and July. We are also working on finding various location for the fifth warehouse in the north of the country.

In Egypt, we continue to open new stores. We opened 10 new stores in -- first party number of stores in Egypt, reached 221. Operational improvement continues in Egypt. We have explained operational profitability lately in the last 3 months in the first quarter. So we will continue [indiscernible] in Egypt for the rest of the year.

And foreign contribution to sales and EBITDA on the next page. The revenue contribution of foreign operations was TRY 2.6 billion, 5% of our total sales, while EBITDA contribution was TRY 157 million in the first quarter. This corresponds to factors of our total EBITDA. And the good thing is that, as I said before, TRY 40 million of -- out of TRY 157 million EBITDA is coming from Egypt, TRY 40 million is coming from Egypt.

And this is all my presentation. So as I said before, to sum up, this is a quarter which the starting point is the one-offs and higher-rising op costs. Hopefully, the worst is over. We believe that the coming quarters, we will have more to see from operating leverage.

Now it's time to take your questions, if any. And please raise your hands if any questions, then we will be giving you the floor.

[Serkan Savas, executive]

Yurtcan, the floor is yours.

[Can Yurtcan, analyst]

My question is regarding the developments on your customer traffic front. You said there is no further deterioration in the second quarter so far. Could you please quantify in numerical terms as should we compare it with the second quarter of last year or first quarter of this year? I mean are we talking about 550 customers per store or 600 levels?

[Serkan Savas, executive]

Thank you, [indiscernible]. I mentioned that in terms of growth, traffic growth is, as I said, we have a 3.5% decline in traffic growth in the first quarter. And the base is still growing from first quarter to second quarter basis, growing base is stronger. But as I -- actually I mentioned that the decline, the growth is almost the same as the first quarter. So 3.5%, 3%, 3.5% as of April. But in May and June, we -- there will be some kind of improvements going forward. So it's around 500 -- 400 to 550 levels.

[Can Yurtcan, analyst]

Okay. Now it's more clear. Do you attribute -- I mean, it seems, a little weakness when compared to your previous performance. Could we attribute this as market share losses to your main competitors? Or are there anything playing behind that?

[Serkan Savas, executive]

Actually, last year, the first quarter, as you remember, we realized 75% top line growth, which is far away from the others, other competitors. So it's also a strong base we had. So -- and this is maybe one of the reason. There's, of course, some kind of -- this quarter, some kind of minimal -- some market share -- minimal market share losses. Maybe it's flat, we can say almost flat to last year. Last year, it was 16.8% market share we have. This quarter, 16.5%, something like that we have in FMGC site. But last year also was a very strong quarter in terms of top line and for traffic levels. This is the one of the reason we can elaborate on this.

Hanzade from JPMorgan, the floor is yours.

[Hanzade Kilickiran, analyst]

Serkan, I just want to understand the second quarter and the rest-of-the-year trends actually. You sound positive and give the message that you have the capacity to offset this rising OpEx pressure. Is it -- sorry, is it possible to run over the internal inflation trends currently? Sorry, I keep receiving messages. Okay, okay. So now I think it sounds better, sorry, for taking your time with this.

So okay, I just want to understand the internal inflation and whether you can reflect this into the basket in the second quarter. And how should we think about your EBITDA margin progress on a quarterly basis so that you can -- I mean, do you see any downside risk on your EBITDA margin guidance for the full year?

[Serkan Savas, executive]

Thank you, Hanzade. Internal inflation, as I said, are up 90% levels in the first quarter. It's because of the base, it's a little bit in actual, it is running -- coming to 80% levels, 80% is a little bit -- of course, it is still higher than the announced, disclosed the food inflation by [indiscernible]. So it's a little bit running to 80% levels in April.

But we are still facing some kind of cost pressures from suppliers. So maybe after -- we have to follow after the election period. So we cannot say anything post-election period. There may be -- there will be some kind of price -- actually cost pressures on some there. But today, as of April, we can say that it's running around 80% internal inflation. So we are -- and also we are able to pass to our product prices because, as I said, our gross margin is also evolving around more than 18%, close to 18.5% in April.

So it is not a dilution in our gross margin after first quarter. So EBITDA margin, you can actually make your model through this actually delta. In the second quarter, in the following quarters, we don't expect any significant one-offs, EBITDA line. And actually in staff cost, employee costs are benefiting from the operating leverage. And as of April, energy price is down 15% by the government. So we will have some kind of energy down prices actually -- cost savings as well in the second and following quarters.

So in April also, May, we are facing some operating leverage, strong reworks in our sites this quarter. So EBITDA margin guidance, we are keeping 7%, 7.5% between, as I said, in our presentation. Actually, this is -- personally, I don't expect any downside this -- in opposite, I expect the upside risk in terms of EBITDA margin, but a case in point actually, it's better to be in a safe -- on the safe side than actually follow the post-election period and macro conditions. So in the following quarters, we may more elaborate on this.

[Hanzade Kilickiran, analyst]

Okay. I mean what could drive the upside risk? I mean do you think that the growth will be the main indicator for the upside risk? Or you are looking for -- according to OpEx?

[Serkan Savas, executive]

Both, I can actually say that. OpEx will be maybe operating leverage and gross margin progression will contribute more maybe. Growth is also somewhat contributing because inflation is still high. And maybe post-election period, it will be a little bit higher. So -- but operating leverage will grow and one-offs also will be missing going forward.

And next question is from Cemal Demirtas. Please go ahead.

[Cemal Demirtas, analyst]

Serkan, my first question is about the good market conditions, but you mentioned about the market share, some maybe slight losses, but you don't see any -- as far as under -- do you see any trend change on your side? Because during the last 2 quarters, we see a little bit slower pace of growth on your side versus the other listed national food retailers. So I would like to understand, do you see any specific reason besides the base effect? That's my first question.

And the second question is about the financial lease expense side. As you mentioned, due to asset revaluation, we see increase in that front. Could we expect that amount to decelerate going forward depending on the interest rates or other factors? Just could you give us some color about that, the depreciation side, should we expect the expense to stabilize, increase or maybe some decline during the following quarters?

[Serkan Savas, executive]

Actually, first of all, first question, there's no change in trend. Actually, as I said, we -- last quarter -- same quarter last year, we had stronger sales. This is one of the reasons. And maybe in the competitive environment, there will be some kind of temporary actions, promotions, more very short-term promotions would be in the case and to grab some sales is also the case in the competitive environment.

Actually, maybe this focus on temporary, but there's not any trend change in the markets, actually. But sometimes, in some quarters, we may have some kind of some flat market shares or flat traffic growth or negative of growth, but then we recovered immediately. So as you said, in today, the modern retailers, especially BIM is still getting market share from the traditional part, and there is one way to go.

As I said, we'll still continue expansion, 9% expansion in the following years, actually, we would like to keep that. So the trend, there's no change. There's a big potential in the market and we'll be -- continue to be the biggest winner in the market in terms of trends. But in some quarters, there will be some kind of changes, then immediately recover going forward, so -- which we expect in the coming quarters.

And financial lease expense, financial losses, I think you mean to find interest expense from lease payments, is that right?

[Cemal Demirtas, analyst]

Yes, yes, yes.

[Serkan Savas, executive]

Actually, financial expenses, there's not -- we don't have any interest rate change in our calculation. But as we open more stores, as we open more stores, so there is more contribution from financial leases. As you know, this is IFRS 16 calculation. So this is not a real interest rate. There is no indication outflow from this interest. Main cash outflow is with lease payments. This is 1.5% historic low levels. So we are just looking at that. We are not looking at the financial expenses because this is future expenses, which doesn't have any cash outflow.

But going forward, this will be almost [ supplies ]. The growth rate will be in line with growth rates of the financial expenses first -- actually the expansion because as we open more stores, more lease payments will be on the table. And of course, to pay lease inflation hike or hike of rent costs in this segment. These are 2 components. But those are all at historic low levels. We don't expect any downside in these financial expenses.

[Cemal Demirtas, analyst]

Serkan, as a follow-up, regarding the earthquake effect, you mentioned about some cost impact. But did you see any revenue impact? Or did you have any calculation on that? Because you have much more stores in that region maybe compared to peers. So could we say that, you, as the biggest player -- did you -- are you affected more from this earthquake, both on the revenue side and the cost side? Or could you give us any number for -- just a rough number or percentage for any revenue loss in the region...

[Serkan Savas, executive]

Actually it's very difficult to give some numbers. But generally speaking, I can say that, of course, we have lost 125 stores. And the population in earthquakes is decreased too much, maybe 30%, 40% population now kept in this city. So the remaining stores also, sales decreased somewhat in the -- today, in these earthquake cities. But the people who move to other states, other resting parts, other cities. And so those are offset more than our loss.

In the first weeks of -- after the earthquake, we have seen a jump in our sales because people try to donate, buy something from BIM and donate to earthquake, to donate to actually earthquake people regions. And then after, we are facing that the other regions sales going up and offsetting the losses in the earthquake regions.

So it's very difficult to give numbers. But in general, all in BIM Turkey, we are all in line with our expectations and outlook, which we defined before the earthquakes.

And is there any question? Please, if you have, raise your hands. Yurtcan, please go ahead.

[Can Yurtcan, analyst]

It's not a large number, but just to clarify, there's a sizable increase in your deferred income stemming from these gift cards income, close to TRY 1 billion, not very usual when compared to previous periods. Is it something to do with the earthquake or any different subject?

[Serkan Savas, executive]

Yes. You are right, it's earthquake, from some foundations, foundations, they are actually -- BIM, they are actually demanding BIM card and then providing it to the earthquake regions as soon as they actually realize in our BIM stores, it is recognized and is deducted from this line and then recorded to sales. So it's actually -- as of March, as of end of March, it's not Ramadan period, and it is likely to actually provide it during the Ramadan period, so the earthquake region. So it's not fully used.

But going forward, in -- in second quarter and third quarter, you will see that it is much more deduction and it is more reflected to our sales in -- so this is just in accounting. Yes, this is mostly earthquake and some foundations demanded BIM cards to provide to the earthquake region.

And Hanzade, please, the floor is yours.

[Hanzade Kilickiran, analyst]

Serkan, I just want to get some sort of update on FILE. It is now materially important because it's over 5.5% of your revenues. I mean is the revenue share -- I mean is the EBITDA share similar to revenue or they generate higher EBITDA on your consolidated numbers? And could this also be a trigger on your gross margin in the rest of the year? Because I presume they may have higher gross margin than a typical BIM store.

[Serkan Savas, executive]

Thank you. Actually, in terms of -- gross margin is higher than the BIM because the cost is much higher, much higher. So it's actually -- of course, this is making a higher gross margin than BIM.

And in terms of EBITDA level, this is almost a little bit same as BIM in terms of EBITDA at the margin that was in the first quarter, it's almost around 6% EBITDA margin level. It has -- but of course, this is not an expected level. We still have room to go because as you know, the FILE operation is a CapEx value too, actually, a very high CapEx and ROE value to business. So we prefer higher EBITDA margins for FILE going forward.

But of course, it takes time because we are still opening stores. New stores are cannibalizing the old stores. But it's just been on progress and progressing well. I can say that's better than our expectations, it's going through well. So today, it's almost the same as EBITDA margin, but going forward, we expect it to exit the EBITDA margin in midterm.

[Hanzade Kilickiran, analyst]

You said that it is cannibalizing old stores. I mean is there a cannibalization in FILE? Because it's just -- I mean you are just ramping up on this expansion...

[Serkan Savas, executive]

No, not cannibalizing -- I don't think -- sorry, I used the wrong word, but I don't think all stores of the FILE, of course. Of course, net store BIM as well in the FILE, in -- all operations, new stores have a little bit lower performance in the first years. So it's diluting...

[Hanzade Kilickiran, analyst]

The younger stores are generating...

[Serkan Savas, executive]

Yes. That is offset -- it's not targeting BIM. There's not any evidence for that.

Thank you. And I think Cemal has another follow-up question. Please go ahead, Cemal.

[Cemal Demirtas, analyst]

Serkan, you mentioned about the upside risk to the EBITDA margin. But do you also see any upside or downside risk to your top line growth guidance considering the trends in the second quarter?

[Serkan Savas, executive]

Actually, second quarter is almost in line with our expectations, with our outlook today. But we have to actually follow the postelection macro conditions, inflation -- inflation, we have to follow up going forward. So in April as well, it's in line with our full year outlook, which is 75%, as you know. Maybe after -- in the second half, there will be some kind of upside risk, depends on inflation.

And I think there is no question -- further questions. And thank you for participating in our call today. As I said, this is the -- it's not an ordinary quarter, lots of one-off expenses and rising costs. But hopefully, the worst is over, worst is behind going forward. Hopefully, we will have -- we will join you -- meet you in the next call with better results. Thank you very much, and have a nice day.