BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2023-Q2

[Serkan Savas, executive]

Dear analysts and investors. Hi, everybody, analysts and investors. We are very pleased to welcome to our second quarter results. We hope you have managed to download our presentation in our website. If everyone's ready, I know invite you to have a look at our second quarter results in brief. And I will be taking your questions at the end of the call via raising your hand via zoom.

And first, actually, top figures for this quarter, the highlight of the first quarter, I will be actually touching on the part. So net sales were TRY 58 billion, reflecting 70% year-on-year growth and high deflationary environment still continue to support our top line growth. And I can say that there is an acceleration in sales so far this quarter of the second quarter. We will be more elaborating actually in the coming slides on the sales progression. And another highlight is EBITDA margin was 7.4%, representing 53% year-on-year growth.

After the weaknesses in EBITDA margin in first quarter due to some -- a lot of expenses, there is a recovery in profitability in the second quarter as expected. As you remember, during the last call, I indicated that the worst is over. And this quarter is a very strong evidence, the bad -- the worse is over. And broadly speaking, we can say that our first half results were consistent with our full year guidance. Net income was TRY 2.8 billion with a corresponding of 4.9% margin. Apart from the improvement in operational profitability, there is a one-off gain in this quarter.

Capital expenditures was 3.5% of our revenues in second quarter, which was in line with our full year guidance. In second quarter, we have opened 293 new stores, and we had total 11,818 stores at locations across all of our operations in the first half of 2023. So store opening, store expansion is on track and good. We will be more elaborating with details of the expansion in the coming slides.

And another highlight of this quarter is strong cash flow. Cash and cash-like assets, the cash at banks and financial investments, short-term financial investments stood at TRY 6.5 billion, which corresponds around 172% year-on-year growth. So this quarter, we also improved our cash cycles, strong cash flow.

And about operational performance, if we start with the like-for-like sales slide, Page 6. Like-for-like sales increased by 64% in the second quarter, and basket size, life-for-like basket size increase was 67%, which is in line with our quarterly average internal inflation. Our internal inflation year-on-year is -- in this quarter is 69% in second quarter year-on-year 69% are in internal inflation. And like-for-like, the customer churn decreased by 1.7% this quarter. This is negative because we still have some base effects. But I can say that like-for-like, traffic has started to pick up in this quarter, as you see in the graph. And in the early stage of the third quarter, there is a positive momentum in traffic figures.

On the store side, store expansion. Store expansion progressing well. In the second part of this year, we have opened 259 BIM stores and 8 FILE stores in Turkiye and in Morocco 18 stores, we opened 8 new stores in Egypt. In total, we had 11,818 stores by the end of second quarter. We consolidated all -- across all our operations. As of June, we are almost in line with our expansion plan, except the losses -- store losses occurred in the earthquake.

In summary, in the 6 months period, we have opened 533 stores. As you see in our presentation, we have opened 533 stores and closed down 225 stores because of the earthquake. And this is in line with our expectations, 550 stores is in line with expectations, but we couldn't recover our losses in the earthquake, 225 stores. So we plan to accelerate store openings in the second half of this year and expect to reach around 900 or maybe 1,000 new stores for the full year in net terms.

As you see, actually, this is 7%, this correspond to 7% of store growth. You know that we generally target about 9% or 10%. So in second half, we tried to improve to near to 9% growth store expansion rates. And number of new stores, which have around 100 or 150 square meter selling space and has lower SKU range exhibits around 185 stores as of June. Mini stores are also doing well and help us to penetrate the city centers. But of course, this is -- this doesn't have a significant portion yet. So it's slowly expanding.

And CapEx, capital expenditures slide. CapEx was TRY 2 billion in the quarter. It corresponds to 3.5% of net sales. There are 3 warehouse today. There are 3 warehouses under construction and one of them we will open this year in [ Esenyurt], 2 of others will be opened probably next year. And additionally, our biscuit and chocolate factory construction also continues in Eskisehir likely to be productive late this year in the last quarter of this year.

And there were some also land acquisitions for upcoming warehouse investments. We are also looking for new lands and buying new lands. So our appetite for CapEx continues and we are almost in line with our full year guidance, which is 3.5% of our sales.

And moving on to our financial performance, starting with the sales progression. Sales grew by 70% in the second quarter reaching TRY 58 billion. As I mentioned before, there is an acceleration in sales in the third quarter along with the minimum wage hike and rising inflation. So starting from July and also August somewhat positive momentum we are seeing in the sales. And in the late August or early September, we will have school season and people come back from vacations. So our expectation is better in September as well. So from now on, we are -- actually, we are a little bit cautious on the sales improvements in the third quarter.

And also, we are taking some pressure about the sales target revision. Since the 6 months sales growth, which is 78% is in line with our full year outlook, full year guidance, we maintain our full year guidance for now. But we will be strictly following the trends, as I said before, to August -- July, August and September to understand whether there will be an upside risk. There will be some -- there may be some upside risk but we will be able hit this in the third quarter to what extent we will evaluate this. So for now, we are keeping our guidance as is.

Gross profit and gross margin progression, our gross margin stood at 18.5%, which is 50 bps better than the Q1. As we have indicated in the last call, in the first quarter call, we had around 50 bps one-off impacts in Q1. And our gross margin reached to our normal levels if we ignore our one-off. So it's 18.5% is the normal levels, expected levels of gross margin. And after second quarter, post Q2, gross margin is almost progressing slightly better, slightly better than Q2.

So after the sales and gross profit, I will touch on the revenue breakdown to Page 11. We are now at Page 11. We provide the breakdown of our revenues and Turkish operations still has the majority share in total revenues. FILE is also contributing much better, also doing very much -- doing especially well compared to last year and reached 5.5% shares in the second quarter.

Egypt and Morocco contributions were also near the same as the previous year's end. And sales progression of product categories, we have share decreased to 62% from 64% when compared to last year's same quarter. But this doesn't mean there's a decline for private label demand from consumer side. There's still high demand. The traffic flows is still high.

There are some seasonal reasons and dilution impact in profit. For example, we see a slight increase in demand of spot products, and this quarter also, you know that we expanded our number of SKUs to 900 from 850 at the beginning of this year. So some of them -- most of them are branded products we have listed.

And in addition to the permanent SKUs, increased branded product offerings, with attractive prices on Tuesdays, we announced, on Tuesday, we announced, contributed to the branded product share in total. We call it spot -- group spot products. Most of them are branded products. So it's also share is going up. This a little bit diluted product table share. And also, this is -- this doesn't mean that decline in consumer demand. So it will be progressing like in these levels going forward. And this is also product category are quite nice.

And now OpEx management. We are now in the next slide. The graphs also show that in the presentation, the change in the operating expenses as a percentage of revenues by item. We continue to see the impact of high minimum wage, high on the margins. The impact in Q1, you know from the previous call was much higher, but now, and we also indicated in the last call, we are expecting some operating leverage before. And now we are seeing operating leverage is working in the second quarter, somewhat working in second quarter. But of course, there's another rate hike in the third quarter so that we have another impact, but a rapid increase in the inflation may offset the negative impact of the wage hike in the third quarter. Additionally, as I said before, the gross margin is slightly better going and progressing better. And better gross margin would also help us in Q3 and somewhat offsets the minimum wage impact, we hope.

Coming back to second quarter. Utility expenses started to ease after the last year's 5 days. And finally, if we ignore the IFRS 16 accounting, maybe you all wonder the land cost, land cost share inside is still progressing stable at historic low levels at 1.5% still, we have running costs historic low levels.

And now, let's look at the quarterly EBITDA and EBIT. As indicated in the last call, the first part of the call, we have been already expecting the rapid improvements in product margins as after several one-off expenses. So EBITDA was today 7.4% in this quarter. It increased to 7.4% from 6.1% in last quarter. And EBITDA in nominal terms, TRY 4.3 billion. In 6 months period, EBITDA margin stood at 6.8%. And we maintain our EBITDA outlook for the full year. As you know, it's -- our take is 7% to 7.5%. And although there is some second minimum wage increase as of July, there are some offsetting factors as I indicated in the previous page. First, improving sales, given the high inflation is the first offsetting factor, and full season starts in early September. As I said, we are expecting to be better, actually, the sales progression in August and September. And second offsetting factor, actually better gross margin progression after Q2.

And in terms of this EBIT, EBITDA figures, it's going well at 6.8% for the 6 months period. And likely, we will jump ourselves over 8%, 7% in the coming quarters for the year-to-date figures. And quarterly EBIT was -- EBIT margin was 5.6% and with TRY 3.2 billion.

Moving on to net income slide. Our net income was TRY 2.9 billion and net margin was 4.9% in second quarter. In 6 months period, net income was TRY 4.2 billion and margin was 3.8%. In addition to the improvement in operational profitability, there were some one-off gains in this quarter. For example, the TRY 360 million gain from restructuring of the competition penalty, as you know, the half of the penalty we get back from the tax restructuring legislation. And we have some TRY 80 million net FX gain mainly coming from our loan to Egypt operations, contributed to the bottom line positively in this quarter. But if we look at the FX gain and loss in 6 months period, there's almost no gain and loss, because, as you know, in the first quarter, we had loss from -- coming from -- right from the each operation because Egyptian pounds devaluated. Now Turkish Lira devaluated. So in 6 months period, we had almost no FX gain or loss. But if you -- this is a little bit more actually complicated, so we are now trying to convert those loans share capital from Egypt. So hopefully not including gain or loss, hopefully going forward.

And quarterly cash flow we reached, is if we look at positive cash flow, as I said, this is strong. This quarter is strong cash flow. I wanted to show a more detailed picture of cash flow. And that expense to sales ratio remained at historic low levels 1.5%. And regarding net working capital management, free cash flow contribution from net working capital improved well since the first quarter. But since the inflation is again rising and our priority are still to secure product availability first. We want to secure our product availability. Sometimes, we have faced some kind of problems or other retailers also faced some problems.

The second and protect ourselves and our customers from rising cost and inflation by invested net working capital and stores. So as we approach in the last few quarters, we prefer to make advance payments or early payments to sustain those product availability and also secure ourselves from rising costs. This is our strategy for cash use going forward.

And now FILE operations in summary, very shortly. We have opened 8 new FILE stores in the second quarter, and number of FILE stores reached 219 stores. FILE is now expanded in the Egypt and interior side of Turkey. And we are -- in the next year, we would like to open the 4 actually warehouses in nearby [ Yesilyurt ]. And for the online shopping platform, which was bought in May 2021 now available in 26 cities in Turkey. In a short period of time, FILE online sales reached 5% of the FILE total sales. And FILE total -- FILE's share in total sales exceeded 5%, takes through a robust performance. So FILE is doing well, is progressing well in this quarter as well. The traffic growth are very positive. Maybe double-digit traffic growth we are generating in FILE so far.

And if you look to foreign operations, we opened 18 new stores in the second quarter in Morocco and total number of stores reached 659 in this country, and 4th warehouse of BIM Maroc in Marrakech, will open soon. And we are also working on the finding warehouse location for 5th warehouse in the north of the country.

In Egypt, we continue to open new stores, 8 new store opened in the second quarter, and the number of stores in this country reached 329 stores. The operational improvement continues in Egypt since beginning of the last year. In some exceptional months, we are operational profitable in this country. And -- but of course, the operation is not fully cash positive, right, yet. But the progression is good, and we expect cash cost since late next year. So we will continue store openings in Egypt for rest of the year. And now we are also looking for new warehouse locations for [ Turkey ] warehouse location in Egypt land location. So we are pushing -- in some area, we are pushing the [ boat ] actually for operations.

And about foreign operation contribution, the revenue contribution of foreign operations was in the Page 18, TRY 5.6 billion, 5% of total sales, whilst EBITDA -- while the EBITDA contribution was TRY 315 million in the 6 months period. I can say that. This is the actual contribution from foreign operations, Morocco and Egypt to our consolidated sales.

This is now our presentation, but before Q&A -- to sum up before Q&A, what's the highlights. The margin improvements on [indiscernible] we improved the margin is the first. The second, it is now time to improve the sales and market share, which the indications are positive in July and August, and July and August are promising. And for now, we don't have any full year guidance change revision so far what we will be evaluating in the coming partnership. So this is the end of my presentation.

And if you have any questions, please raise your hands, and then I will give you the floor.

[Serkan Savas, executive]

[ Rajat ], the floor is yours.

[Unknown Analyst]

I just wanted to ask -- great gross margin. How is the competitive positioning, the price gap versus peers? How would you feel about it? And then secondly, it was interesting to see you're adding more SKUs, but it sounds like you're adding more branded, so what is the logic? What's the rationale for that?

[Serkan Savas, executive]

Thank you, [ Rajat ]. First of all, actually, price competitive, actually, the price gap between the other discounters show and one of them is almost 0 because the competition rights, actually -- generally speaking, the competition is mostly following the BIM prices. And the supermarket segment, actually in store margin segment has around 5% to 10% price gap -- 5% to 10% price gap from BIM. If I can index, if [ BIM 100 ], the other discounters is 100 again and supermarkets is diversified from 105 to 110. So just the price gap is stable. There is not any change in the last few years. But of course, the price gap is a little bit -- actually, a little bit shorter, actually tighter when compared 5, 6 years ago. But in the short period of time, there's not any very significant change in the price gap.

Actually, we are -- there's no certain change about the branded products. We are -- also in some categories, we are also listing some branded products, for example, cosmetics, nonfood sites, in detergents. We also have some kind of more availability in branded products. But this is, for example, at the beginning of the year, actually we increased our number of SKUs from 850 to 950 new SKUs listed. For example, in the previous strategy, if we had -- we used to list only 5 levels. But now we also have some branded products listed in these 50 products. I can say that this is just for some categories which the brand conscious is high in consumer profile. This is just -- we are still actually pursuing the profitable strategy. And trying to -- and doing our best in terms of drive share in sales.

[Unknown Analyst]

Okay. And just so I understand, it sounds like you're comfortable with this price gap versus traditional supermarkets, even though it's quite a lot lower than 4, 5 years ago.

[Serkan Savas, executive]

Actually, we never target any price gap between competitors, we are different from market, actually. Of course, the other supermarket -- in supermarket players also matching nowadays in the last few years, nowadays matching the prices with the discounters. They are more listing private labels, and they are trying to match their prices with discount product labels. This is the result, the result of the price gap. So of course, the competition is getting tough in the last 5 years. And the price gap -- tighter price gap is a result of this tough competition. But actually, this is just a visible price gap. As I said, actually, the price gap is almost 0 between the other discounters and 5% to 10% in other supermarkets. But this is just a price gap, but the perception in the market, the perception in consumer side is much, much wider, because of the BIM name, BIM perception, BIM product label, reputation is much wider.

[Unknown Analyst]

Yes. No. But eventually, perceptions change, too. So it's just something that I guess be conscious about. But great job, guys.

[Serkan Savas, executive]

And the next question is from Hanzade Kilickiran. Now the floor is yours.

[Hanzade Kilickiran, analyst]

I also have a question about your gross margin performance. I mean what is boosting this performance while the sector is facing a significant pressure actually in this quarter? I'm trying to understand what differentiated you in this quarter from your peers.

And the second one is about your space expansion. You said that you have a target of around 900, 1,000 stores opening for the full year. Does this include the closures in the earthquake zone? Or that's a net store expansion? And on the minimum wages in the past the government was subsidizing the companies through some sort of repayments. Is there any support from the government that you are expecting on the minimum wage in the second half of the year?

[Serkan Savas, executive]

Thank you, Hanzade. The first gross margin this quarter is 50 bps higher than the last quarter. This is -- as you know, from the last quarter, 50 bps, it was coming from the one-off expenses. So when we eliminate the one-off expenses, we are almost getting to 18.5% in the second quarter. And in third quarter, also progressing well, is -- maybe slightly better, as I said before, than 18.5%. But we just -- we eliminate the earthquake losses, stock losses as the first part of TRY 300 million. We had some stock losses impacted our gross margin. But in second quarter, there's no as we all incurred all of -- all kind of one-off expenses in the first quarter. So that's just one-off expenses eliminated and then we actually came to our expected gross margin level.

So actually, we are managing our portfolio, and we are also negotiating with the suppliers. You are right, the market is suffering about the gross margin because they are more investing -- actually involved in campaign promotions -- very heavily involved in campaign promotions. This is the reason, I think, which we have limited in our case. We have limited promotional campaigns. Maybe this is the general answer for your question. And [ third ], well, is also going well, about gross margin you mean?

[Hanzade Kilickiran, analyst]

Serkan, I just want to ask something about this gross margin. So you highlighted that peers are investing in prices -- I mean through promotions, or campaigns and you are not participating. I mean do you plan not to participate in the third quarter, I mean -- and still grow the traffic?

[Serkan Savas, executive]

Actually, we are somewhat participating, we are somewhat participating in spot side, group spot in Tuesday, for example, we -- as I said before, in Tuesday, we have group spot items, FMGC branded products. We are listing to attract more customers, [ out sorting plan ] and the share of this Tuesday offerings, in a lot offerings are going well. We are not -- I don't mean that we are not doing anything. We are not promoting. This is name of the game, actually. If you are in the retail business, you have to be a part of this game. So together with our Tuesday offerings and also new store openings, we are doing some campaigns, but actually, not as heavy as the others, of course. And so -- but our traffic growth is progressing well in the third quarter.

[Hanzade Kilickiran, analyst]

And the space expansion, is it net or gross expansion that you are targeting 900, 1,000?

[Serkan Savas, executive]

Net terms -- in net terms, we are trying to reach that level. Actually 900 actually plus 200 we lost stores. So in 900, we will be actually adding to our portfolio at the end of the year. So last -- for example, last year, what we have in the last quarter, we -- last year, we find -- finished the year 11,500 stores. So if we add around 900 stores, it means that 12,400 stores, we want to be approaching at the end of the year, of course, the total in consolidated all across the operations.

[Hanzade Kilickiran, analyst]

And the minimum wage, I think you are going to?

[Serkan Savas, executive]

Minimum wage is subsidy in minimum wage. In our portfolio, actually, there are some thresholds on it. And in our portfolio, I can say that it generally, there's still like 10 bps. You can consider that 10 bps subsidy from the government we will have going forward of our sales.

And next question from Cemal Demirtas.

[Cemal Demirtas, analyst]

Thank you for the presentation, Serkan. My question is again about the market conditions and the competition. And over the last 3 quarters, we see that based on the way we listed food retail companies, your rate of growth is slower than other -- even the supermarkets and the other discount stores. But historically, we got used to that you have been growing faster in almost all times, I remember. As a management, are you relating to this situation? Is it something temporary or we are looking from outside. And we see that normally BIM should be growing faster than the peers in normal times, even if we take the base factor into consideration.

So I would like to understand, what's the perspective inside BIM regarding this issue, is it something to do -- take some control? Or it's just like the temporary thing? I would like to understand that. And the other issue is the pricing side, what was the price inflation in the second quarter?

[Serkan Savas, executive]

And the last question -- from last question, our BIM internal inflation year-on-year is 69% in the second quarter, the first. About the competition, yes, you are right. Actually, in the last few quarters, actually, the supermarkets and other players are a little bit growing faster than BIM but this is mostly coming from the base effect. And it's not just the BIM, other discounters are also slightly losing the share in the last few quarters. But we are now actually -- of course, this is sometimes in discussion point, hot topic in our sites, and we are taking some actions. But now those kind of actions are now working since July.

In July, we are seeing some upward trends, in July and August as well. In our case, as I said before -- as I said before, in the second quarter is the margin quarter, margin improvement and now it's time to improve the sales in the third quarter and the fourth quarter as well. So July and August a little bit promising and market share gains and better progression is on the way. We can say that we are taking some actions. We are listing some more in and outs in our stores and expansion is also on track.

So I can say that going forward in the third quarter and the fourth quarter, hopefully, it is the BIM partner. And we will have actually market share gains going forward. Of course, this is a discussion and we are taking actions. And now it's sorted.

If you have any questions, please raise your hand via zoom.

I think there is no questions. I think it's a tough day. Marketers and most of calls. The market is a little stressing. So everybody is tired. So thank you very much for everybody for joining our call, and we hope to see you in the next quarter's call with better results and better sales. Thank you.