BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to BIM 2018 Second Quarter Financial Results Conference Call. I will now hand you over to Mr. Haluk Dortluoglu who will take you through the presentation. Dear Mr. Haluk, please go ahead.

[Haluk Dortluoglu, executive]

Dear analysts and investors, thank you for joining us today, and we are all pleased to welcome you to our second quarter conference call 2018. As you might know that the results are better than our expectations and the guidance expectations of the market, in general. We hope you all have downloaded the presentation from our website, and now, let's have a little bit of the results.

For the headline slide, we would like to state that we have better growth than previous quarters, although we also had a strong base last year with 2.6% growth on net sales and 36% growth on EBITDA and 35% growth on net income related to the second quarter last year. CapEx was TRY 248 million, which is 3.2% of our sales. And also strong growth provided again some base for our expansions. And at the end of the quarter, we have -- we now have 6,465 stores in Turkey, 418 stores in Morocco and 277 stores in Egypt, which in quarter numbers represent to 208 new stores in Turkey and 19 in Morocco. Our FILE in Morocco again this quarter recorded positive EBITDA and the second quarter like they did in the first one. So we are happy that 2 operations have started to generate positive EBITDA in 2 consecutive quarters so far.

In the net sales and gross profit slide. On the net sales and gross profit, you can see the opposite trend continue. We have TRY 7.8 billion net sales, which represents 26% increase from the previous year. And although our base was higher in the second quarter compared to the first quarter, growth in the second quarter was better. And this is mainly attributable to the better saving during the Ramadan period compared to last year's and the effect of the higher inflationary environment, as you might guess. As you are familiar, there is an OpEx or cost improvement in our strategy, also it is used to pass the inflation pressures or any savings in the cost to the lower prices. But these inflationary times creates high -- sometimes higher sales and higher margins despite cost coming from the cost of goods sold as coming from the [indiscernible].

We would like to note that [indiscernible] what [indiscernible] didn't have any negative effect on the food consumption in the second quarter, yes? And the challenge in the third quarter is pretty similar to the second quarter and no -- this sort of inflation was observed so far. But of course, we are keeping our cautious stance due to the recent volatilities in the market. The gross margin improved as well in the second quarter. We have achieved 17.6% gross margin, and this increased gross margin is 50 bps higher than the same period last year. This is, as I mentioned, slightly due to the inflationary environment and the frequent price changes, which is high inflationary environment nowadays. It seems to be continuing on the coming times as well.

EBITDA and EBIT slide. In the second quarter, our EBITDA was TRY 442 million, which is -- correspond to 36% year-on-year growth, and EBITDA margins stood at 5.7%, exceeding our targets for the year. This is mostly due to the gross margin improvements since the second quarter last year. EBIT also increased to TRY 358 million, which corresponds to 37% increase on year-on-year. And the second quarter EBIT margin happened to be 4.6%.

On a semiannual basis, our EBITDA half year's figure exceeded the 800, TRY 806 million, which in terms means 28% growth in the half year -- year-to-date so far. The semiannual EBITDA margin was 5.5%. EBIT margin was 4.4%, which are in line with the upper end of our target range. And we didn't change so far the overall guidance for the year. But note that, as you might guess, that we are having some extraordinary times so far so -- but we are expecting higher than our overall 5% EBITDA. But still, we are in the guidance in total so far, and we will be following it closely in the coming quarters.

Let me move to the net income slide. The net income was TRY 293 million in the second quarter, which is -- which corresponds to 3.8% of net income margin. And we have reached 35% increase in net income in second quarter. This improvement is after strong gross margin growth and also from the minimum wage support paid by the government. Government paid all the 5 months incentive in May. So this incentive gain was recorded in the second quarter. Due to the [ rather ] delayed support of the first 5 months were, as I mentioned, were paid and recorded in the second quarter. The minimum wage support will continue until [indiscernible].

On the semiannual basis, net income growth was 27%, representing TRY 528 million in the first half of 2018.

Like-for-like sales. Like-for-like sales increased by 15.4% in the second quarter, which is slightly higher than BIM's internal inflation, which was 14.8%. And the like-for-like basket size increased by 14.5% in the second quarter and by 13% in overall half year.

As for our customer traffic growth, we maintained positive trend with 0.8% and 1% growth rate in the second quarter and the half year, respectively. And we had an average of 705 customers per store per day in the second quarter due to the same trend continuing in the third quarter as well in a positive manner. Processing fully in Turkey's total is 14% in the second quarter and margin lower than BIM's internal inflation rate as, obviously -- so far, the inflation trend is upwards, and the third quarter inflation will be somewhat more than.

In the CapEx slide, our CapEx in the second quarter was TRY 248 million, which is 3.2% of our sales, which is higher than our expectation. The reasons for the increase in CapEx are 2 warehouse openings so far in the second quarter. Two new warehouses opened in Istanbul and [indiscernible]. We have also rented some additional warehouse [indiscernible]. Moved -- we moved to -- from a rented warehouse to an owned warehouse in [indiscernible]. And we opened somewhat more stores than expected so far, so more store openings then predicted so far. Yes. So those are the main reasons, we can say. And we have acquired Turkey stores additionally in the half year. So those combined have some increase in CapEx, but it doesn't need -- necessary to change the overall year guidance in our view now.

Yes, store growth. As you might remember at the beginning of the year, we had set our annual target to [ 730 ] new stores in Turkey, and we are slightly above this target in the first half of this year. Remember that the 10% store growth from same quarter last year were 230 new stores in the second quarter, which brings total number of new stores to 7,211, including foreign operations. And [ 40 ] of those stores are seasonal stores. And in the first 6 months of this year, we had 446 openings, including these 40 seasonal stores.

Turning now to foreign operations in FILE highlights generally. Morocco operations realized an EBITDA positive second quarter, as we were expecting. And currently, we have 418 stores there with 19 stores opened in the second quarter in Morocco. And there were no new store openings in Egypt as announced in the previous quarter presentation. We are slowing down in Egypt, store openings, and becoming more cautious about market in terms of our operations there. FILE preserved a EBITDA positive position in the second quarter as well. By the end of the second quarter, we had a total of 51 stores. Meaning, we have opened 7 stores -- sorry, we have opened 7 stores in the half year. So we disclosed that we are aiming to go for 30 stores for the whole year. It seems that FILE will be opening less stores than expected. This may be 25 or something. This is mainly due to that -- because of the new project constructions and the slowdown in the Turkish real estate sector, slowed also down the new projects of construction. And this means -- allowed us to discuss to find bigger stores in FILE as well. But a lot of stores, maybe 20, 30 stores are in the pipeline. They'll be opened sooner or later. And also, when FILE is getting out of Istanbul region, there will be more stores available with no problem of this store opening target for the coming years.

Now we move to the contributions of EBITDA of -- and the foreign operations and the local. We would like to show the contribution of our consolidated sales where you can observe the positive increasing trend now. There was TRY [ 203 ] million increase in consolidated sales between the first half year and the -- last year and the first half year of this year and compares to TRY 94 million same period last year. In terms of consolidated EBITDA, although the contribution ratio looks negative, there's slight improvement since last year, which is mainly we took -- to go to Morocco operations and reaching breakeven this year. And concerning our EBITDA and multiples, I also want to add one thing, and now by this -- today's share prices and our EBITDA expectations, our EBITDA multiples have come down to 12, which is probably the lowest in the -- a very long period of time. So -- and I don't think this is sooner or later that -- then we will be the same on these multiples because this has nothing to -- on the financial ground here as so far we have seen and on the coming quarters' performances. So that's all I would say for the second quarter results of BIM, and we will be expecting your questions if any. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Mete Ozbek from Unlu & Co.

[Mete Ozbek, analyst]

I have a question with respect to the recent inflation trends and the impact -- potential impact on your company. When we look at your historic numbers, we see that's starting from third quarter of last year, your internal inflation have continuously been higher than the CPI inflation. And considering that starting from June, we were going to probably experience a spike in an inflationary environment in Turkey in the second half of the year and probably in 2019. As BIM, are you considering to keep your internal inflation higher than the CPI inflation? Because it also helps your gross margin and recover some of your OpEx pressure, considering that the personnel expenses, especially minimum wage is increasing beyond inflation, especially in the past couple of years? And what's your strategy there in the second half of this year and 2019? And also, could you please give some color about the trend in your rental inflation. It is pretty much in line with CPI, higher than CPI, lower than, considering that you're renting the new stores continuously? What pressure are you expecting from the rent cost part, especially in 2019?

[Haluk Dortluoglu, executive]

We have in the past, maybe sometimes our internal inflation was higher than the processed food inflation CPI. But this is not now what we have targeted for. One reason is that there's not a perfect match between the CPI and our internal food basket. But it's -- in the long term, they are usually in line and it has to be in line. In the coming times, in the coming weeks or months, let's say, we know that there's an increasing inflation will be around. So far, we will try to be -- keep our inflation lower than this, internal inflation lower than this, but we know -- we also know that we will be passing through a lot of prices on the coming weeks and months due to this changing environment, after the FX exchanges especially. We will be changing that prices onwards, but we will also be targeting to do this, if possible, lower than the overall CPI, which we did in the second quarter this time. About the rent inflation, as you know or might know, that our -- all existing stores in Turkey, almost all of them are in this total CPI. Overall, CPI, yes, the average of the CPI and the producer index, this will affect us immediately and later on for the new store openings. This will affect us immediately because of -- immediately in one year, let's say, from start from the next month, higher inflation although it started in the last month, the higher inflation will be affecting the higher rent prices, but we also hope that our sales prices and the sales -- total sales, will be increasing much more than this. And it will be just pass through of the CPI to the rent prices. For the new store openings on this environment, we can save not a significant amount by increasing the -- or lowering the overall rent prices for the new store findings. But I can say there's nothing for now for us now that for the new store locations, that we -- to pay higher rent than the existing one. Because of the slowdown in the economy, I expect we will be finding better rent opportunities for the time being of the stores we are planning to open this year and also the next year.

[Mete Ozbek, analyst]

As you said that you are using CPI and PPI average for the rent, are you able to negotiate on the PPI component because the PPI part especially is increasing like rockets here recently, surpassing 20% in the recent months. So are you able to negotiate with your landlords with a more reasonable rate? Or are you just applying the CPI/PPI average?

[Haluk Dortluoglu, executive]

We are actually basically applying the same -- we are not making a renegotiation all the time. We are applying whatever the CPI and PPI average is. Unless it's the end of the period. If it is near the end of the period, let's say in 1 or 2 years before the end, then we go renegotiate for the new period, we renegotiate, yes. Maybe also I would mention that as I emphasized before that for the third quarter, we made a good start, which is on the top line, we can say near to [ 30s ] of increasing the sales. So I hope the third quarter the top line will be reasonably high so that our cost and especially, rent cost and others, will be lower in the turnover sale.

[Mete Ozbek, analyst]

Is it possible to share your internal inflation in July?

[Haluk Dortluoglu, executive]

I will share it soon -- in a minute after the question.

Okay. It's 16.8% now, 1-6 point 8 percent in July, annual inflation.

[Operator]

Our next question comes from Nida Iqbal from Morgan Stanley.

[Nida Iqbal, analyst]

Just given the recent macro environment, are you starting to see any change in the consumer behavior? From the sound of it, not as such. But given your experience in the past, how long does it take for you to start seeing weakening in the consumer in such an environment? And secondly, can you give some color on competition and if there's been a change there recently? Do you see this -- that competition does not fully pass on inflation, which could impact like-for-likes for the sector as a whole?

[Haluk Dortluoglu, executive]

In terms of behavior, the consumer behavior and consumer trend, how long does it take, how long people are cautious. Those are all dependent on the times. Usually, I can say that Turkish people adopt the new tax quickly, and their spending habits doesn't change dramatically during the times. But we didn't have such an experience before fully, and we will be seeing these times may be different experience. In the past, when there's a slowdown in the economy, this also reflected in the consumer sentiment. And also, it affected also the discounters, but less -- much less than the others, in general. So it's difficult to make a guess for the consumer behavior so far. But at least I can say that for the time being or for today or yesterday, there's no negativity in the consumption. And the spending in our stores, we don't see any negativities so far. Everything is like as usual in the retail sector that we are facing so -- as BIM FILE in Turkey. In terms of competition, there's nothing specific for the competition I can say. Maybe you will be seeing that because of these FX changes, currency rate changes as some of our competitors, which have since launch are affected on the balance sheet side, some might be affecting somewhat negatively. But on the ground, there is no substantial changes on our competition. In fact, recent changes in the macro, the possible things are so [indiscernible] it's a one-week or 2 week thing, that it may be too early to comment on the reflection on the consumer behavior or the effects on our competition or competitors so far. On our side, we can say there's no substantial change in our -- in the sales and the our consumers' behavior, any negativity so far. So we are doing fine. Our margins are fine, and the consumption and the traffic, nothing negative is reflected on BIM so far.

[Operator]

Our next question comes from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

My question is related to the supply chain. How do you see the environments in that sense because you're in close relationship with your suppliers and you have good communication? How do you compare yourself with others? Because we are hearing that in the market, the smaller supply stores are having difficulty about procurements due to higher committed prices and given the market is not moving anywhere in terms of the production or such kind of things. So how do you see this kind of changes or risks in the market and how do you compare your supply chain?

[Haluk Dortluoglu, executive]

Thank you very much. One thing I would emphasize is that the supply -- the relationship with our suppliers are very strong. And our, let's say, healthy and stable cash flow from our side to the supplier are having -- in a stable manner. And that our suppliers all are working and investing and confident around this. I don't think that there's any supplier, which is working heavily with BIM, will be affected negatively with the current environment, changing environment. But of course, the price changes will be coming there. And we will be supporting our suppliers due to and according to the market conditions, whatever it is. And we will be working in cooperation with our suppliers to carry on in this environment. But of course, all our suppliers are heavily working with BIM. And maybe some of them are waiting for some stability in the foreign exchange currencies or the interest rates or maybe some of them have some bank loans that this will affect them definitely, some of them. But what I can say is we don't have any problem with our current supply chain network, and we will be supporting and working with all of our environment and habitat that they can cope with their changing environment. And we are in very good coordination so far in the last few days with many of them. And these coming weeks will be a lot of -- let's say, a lot of communication and discussion will be carried on how we would cope at this time with our suppliers in a stronger manner.

[Cemal Demirtas, analyst]

And as a follow-up, you mentioned that the growth accelerated maybe in July and it's closer to 30% level. How do you see the picture in August? Because in August, consumer confidence might deteriorate further. Do you see any kind of change in the behavior in a pull-forward demand event in your area because of higher price expectations in all the consumer goods? Do you see any acceleration in the pace of growth in -- by mid-August?

[Haluk Dortluoglu, executive]

I can't say that -- also the growth rate in August is higher than 25. That growth is something within 25 to 30, which is some part is not caused by inflation but some part is also the continued spending in our sales.

[Cemal Demirtas, analyst]

So do you see any increase in your traffic compared to the second quarter because your first -- second quarter was a little bit slower than the first quarter but still strong compared to last year? Do you see any traffic increase in the third quarter so far in July and mid-August?

[Haluk Dortluoglu, executive]

The traffic growth?

[Cemal Demirtas, analyst]

Yes, traffic growth.

[Haluk Dortluoglu, executive]

As you see in the second quarter, we have our traffic growth in positive and exceeded the 700 customers per day, and the trend continues on the third quarter. The positive trend continues in the third quarter as well.

[Operator]

[Operator Instructions] Our next question comes from Berna Kurbay from BGC Capital Partners.

[Berna Kurbay, analyst]

I just wanted to just reiterate your outlook for the second half of the year. I mean in the first half, you had 24% revenue growth and 5.5% EBITDA margin, which is very strong performance and certainly -- bear in mind it's not above your guidance for the full year. And what I hear from what you've explained so far is that July and August are in line, both in terms of top line growth and in terms of margins, if I'm not mistaken. So it seems that at least from what we know so far, the second half of the year even if things go worse from this point on, unexpectedly, in terms of consumer sentiment or maybe some of your suppliers running into trouble, you have quite a strong cushion in terms of the original guidance you provided for this year. Should we -- I mean, is the second half -- do you expect it to be tougher? Or do you expect the impact of inflation, especially on your cost items on the OpEx side would be even tougher in 2019?

[Haluk Dortluoglu, executive]

Berna, as you know, if you look at the OpEx side, the main cost is coming from the employee expense and the rent. The employee expense increase in OpEx will be reflected in January with the inflation -- and all inflation mainly. After them, no increase there. And the rent cost and inflation increase will be a gradual pass-through. It will not be affecting in the first month, second month. It will be end of the year contract, which -- so it will take at least 6 months that the new inflation environment is affecting our rent contract cost increasing. These are the 2 main cost items on our behalf. But on the other side, we will be also -- I hope we will be enjoying and expecting that despite there will be passing through the prices and sometimes investing at the lower prices, which to be in the targets of the lower than inflation CPI. But this will, at the end of the day, will bring us high gross margin because of inflationary environment times. So I don't expect any in the profit side or on the top line side. I think negative in the next 6 months. And I believe by the time we have will facing higher salary cost and higher rent cost and our sales will be -- come to the level of the competitors, which is in a higher stage.

[Berna Kurbay, analyst]

So there is no reason at this point to assume that you will invest in prices to the point that this will bring the second half EBITDA margin to 4.5%, which ultimately will still get you to 5% for the full year. Would that be correct to assume?

[Haluk Dortluoglu, executive]

There is no reason that we -- for us to have less than 5% EBITDA in the third quarter, fourth quarter so far.

[Berna Kurbay, analyst]

And one final question again on the OpEx side. You mentioned that the 2 key items on the OpEx is the staff cost and rent cost. And I noticed that the other items like advertising, transportation, energy fuel, those items actually have increased much faster compared to your top line growth in the second quarter. Is there anything that stands out over there? Or is this a general trend that you would -- we should expect to see?

[Haluk Dortluoglu, executive]

There will be, of course, increases on this -- not on the rent -- sorry, not on the advertising, but on the, let's say, logistic cost will be increasing slightly. But overall, it doesn't represent the main cost item in our case, so it will not be affecting our OpEx, our SG&A to this area to our profits, no. Also, as you might know, that in Turkey, the oil cost has a nominal tax part, which makes Turkish oil expensive, very -- let's say, increases the volatility because of the external growth items because there's a fixed nominal cost there. So if oil prices increase, let's say, 50%, our internal price increase, let's say, is 15% so much lower than this. So I don't think there will be also coming any material increase in our logistic cost there.

[Berna Kurbay, analyst]

And one final question. On the government support for the employee costs, you said that for the first 5 months it was all received in May. So for the first half, we shouldn't assume that there is any one-off that inflates your margin. But for the second quarter, what is the impact of that one-off component?

[Haluk Dortluoglu, executive]

Overall, 610 bps. So in second quarter -- second half also, it will be 10 bps in the margin.

[Berna Kurbay, analyst]

So in the first half, there is a 10 bps gain because of...

[Haluk Dortluoglu, executive]

Yes, yes. On the third quarter, it will be 10 bps. And in the last quarter, so far, it will not be any subsidy or incentive for the last quarter.

[Berna Kurbay, analyst]

Okay. But this subsidy was there last year as well. So in comparison with last year, there isn't any...

[Haluk Dortluoglu, executive]

Any change, you're right.

[Operator]

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

[Cemal Demirtas, analyst]

My question is about your growth prospects in Egypt. We see no store opening. How do you see the outlook is there? And you mentioned that you're going to be cautious. Are there any specific reasons behind that? And what was the share of your Moroccan and Egyptian revenues in first half?

[Haluk Dortluoglu, executive]

In the first half, our total sales in Morocco was TRY 560 million, and Egypt is TRY 130 million. The reason we are not pushing more on Egyptian, more stores, is we are not EBITDA positive there, and the overall macro environment is not promising in Egypt. So far, we decided to reduce the store growth but wait for the existing stores to improve rather than spend more. So this is the main reason we are not opening -- we didn't open any stores in the second quarter, but we will keep watching the overall performance in Egypt. And we -- if things, especially the macros are more positive in Egypt, we may start pushing more store openings also. But so far, we slowed down in store openings in Egypt. That's the reason mainly.

[Operator]

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

[Haluk Dortluoglu, executive]

Dear analysts and investors, thank you all for joining us -- our second quarter conference call. We hope to meet you in the third quarter results in good and better results, hopefully. Thank you very much.

[Operator]

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