BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to BIM's Third Quarter 2018 Results Conference Call.

I will now hand over to your speaker, Mr. Haluk Dortluoglu. Sir, please go ahead.

[Haluk Dortluoglu, executive]

Thanks very much, dear analysts and investors. I hope you're all fine. Thank you for joining us today, and we're pleased to welcome you to our third quarter results in 2018 that again outperformed the market expectations. We hope you have downloaded the presentation from our website.

And now let's take a look at our results. I will start with the first slide, which is headlines for the third quarter. We have -- let's have a look at the figures.

We would like to start that we have had a record-breaking sales growth in the third quarter, and we will cover various reasons for it on the next few pages.

That, the result that we have achieved 35% growth on net sales and 64% on EBITDA and 60% on net income relative to the third quarter 2017. Almost all retailers have expected higher revenue and inventory gains so far, but there's a lot of unexpectedly high inflation going on. The same goes for BIM, that price inflation is the main drive. And for these unexpected high results, we are confident of meeting a lot earlier the guidance for 2018.

CapEx was brought around TRY 200 million, which corresponds to 2.4% of our sales. And also, strong growth helped our expansion. And at the end of the quarter, we had reached 6,556 stores in Turkey, 430 in Morocco and 282 stores in Egypt, which in quarter numbers represent 91 new stores in Turkey, 12 in Morocco. And our FILE and Morocco operations, again, 3 quarters positive, this quarter and as they did in previous quarters of 2018.

Now to net sales and gross profit slide. We have -- looking closer to our quarterly net sales and gross profit figures, you can see that we have reached the highest growth as a result of the high inflation. But especially in the last quarter, in addition to high inflation, Turkish lira also faced one of the worst depreciation over the summer, which had positive impact on our foreign operations, the contributions to overall consolidated figures.

We had TRY 8.5 billion year-to-date net sales, which represents a 35% increase from previous year. And also, let's have a look at the reasons why. As already mentioned, the high CPI increase in 2018 made baskets go up. And although there's no decline in customer traffic, the basket growth was directly reflected to the sales. Additionally, contribution from our foreign operations also increased as Turkish lira conversion of total operations accounted for a greater share given Turkish lira depreciation.

If we look at the gross margin progression, gross margin increased to 18.7% in the third quarter, which is 110 bps higher than last quarter. In the third quarter, we benefited from low cost in material respect. During the recent period of high inflation, costs are mostly passed through the customers. However, the inventory that was purchased in previous quarters had a lower cost base in Turkish lira terms, which was constantly sold at higher price. I want to remind you that our inventory days are only 20 days of total inventory. We have count here of 20 days and not longer than.

We want to stress that while only temporary and we do expect a reverse effect on -- once inflation starts stabilizing after the third quarter and October gross margin is about coming to normal at -- levels, lower than September, I can say, when we look at the year-to-date figures, we had 28% growth from the previous 9-month, reaching almost TRY 23.3 billion in the sales.

And fight against inflation campaign, we are sure that you have heard about this government's fight against inflation program, and we have -- in the mid-October by Turkish government and the -- one of the ministries for retailers. Participation from companies is voluntary for this. However, most have joined in. Being the biggest retailer in the market, we have more responsibilities to devote to the program, we thought. And we have already had approximately 40 to 50 products priced 10% lower as of October 16 due to this support for the campaign of the government. We do expect that tour de force will help -- somewhat help to normalize the fourth quarter inflation figures.

And what's the net effect? The net effect is, approximately speaking, is 0.25, 0.30 -- or let's say 30 bps lower in the gross margin, of the support of this government campaign.

We have -- obviously, as you know, that we have already been doing our best in terms of lowering the inflation and keeping prices as low as we can, and we will continue to be the price setter in the market, obviously. We used to say in many conferences, including the press conferences in the last 20 years in Turkey, that BIM is the main suppressor of inflation because of our lowest prices in the price index compared to the market, makes all the market cope with us and that those have -- generates a lot of pressure on the downside on the inflation rate overall. So we will continue to do our job as is within the -- our concept and perception.

And EBITDA and EBIT slide, let us now move to this one. Both, obviously, benefited from the high gross margin, and we are above our annual target in this quarter. In the third quarter, EBITDA was TRY 562 million, which is a 64% year-on-year growth. And EBITDA margin stood exceptionally high at 6.6%, exceeding our target for the year. This brought us to a 9-month EBITDA margin average to 5.9%, which is higher than our target -- I mean, guideline. Again, we would like to reiterate that this is mostly due to the gross profit increase and is driven by inflation. We are expecting EBITDA to normalize in the fourth quarter somewhat.

And EBIT was TRY 470 million, which is a 71% higher than year-on-year. EBIT margin of 5.6% and 9-month average margin of 4.8%, which represents a 43% higher EBIT compared to last year.

The net income slide. Our net income in the third quarter increased from previous quarter to TRY 363 million, which is 60% higher compared to the same quarter previous year. Compared to the third quarter 2017, net income margin also increased from 3.8% (sic) [ 3.6% ] to 4.3%. And the year-to-date net income is TRY 891 million, which is 3.8% of our sales.

There are some one-off extraordinary charges that we have recorded to have -- keep our prudential positioning on this extraordinary times. As you know, that we always prefer to be conservative in general. And all this times, the advances and receivables, some of it, have become -- might become docile, not yet. So we take this opportunity to record some of those, given -- advances given and receivables recording as doubtful and having some accruals for them. So this has some declining effect in the net income. Those are one-off. And if not, those accruals are realized in the future; they will be reversed or be recorded as income.

The like-for-like sales increase, this number is a, I would say -- sorry, this number is, in total, roughly TRY 30 million.

And like-for-like sales increase -- like-for-like increase in sales, 23.3%, which is [ better ] BIM internal inflation, which is 20.9%.

And like-for-like basket size increased by 20.7%; and year-on-year, this is 15.6% in the 9-month period also.

And it is great to see that customer traffic growth is far better than previous quarters, which is 2.2% year-on-year and 1.5% in the first 9 months, respectively. And we had an average of 700 customers per store per day in the third quarter. And it's good to see that customers' demand had not decreased due to the high inflation environment. Customer traffic is still improving in the fourth quarter. And processed food inflation in Turkey is -- stood at 18% in the third quarter, just as a reminder for that.

But -- so let me move to the CapEx slide. CapEx stood at TRY 200 million in the third quarter, which represents 2.4% of sales. And 9-month CapEx is TRY 640 million, and this is slightly more than our expectations. It is likely we finish the year about -- slightly higher than TRY 750 million CapEx, which was our target for the year.

As of today, we have 60 warehouses: 54 for BIM, 1 was -- 1 for FILE, 3 for Morocco and 2 for Egyptian operations. We have mentioned at our previous call -- in our previous call that we have opened 2 warehouses in Istanbul and Giresun in August. And we have moved one of the rented warehouses in Egypt to an owned one in the 1st of August. Syria construction is ongoing now, and we are also purchasing some stores, which accounted for TRY 30 million in the third quarter. Also, the second warehouse of FILE is about to be opened in the coming months.

So store growth continues. As you might remember, at the beginning of the year, we had set an annual target to 730 new stores in Turkey, and we are on track but likely to be slightly lower than our target due to lower store openings in Egypt and FILE operations. And the numbers, this represent 10% store growth from same quarter last year and 112 new stores in the third quarter, which brings total number of BIM stores, as I mentioned before, 6,556 stores at the end of the third quarter. And in the first 9 months of this year, we have 558 new openings and 651 new stores annually. 712, of -- 323 stores are from overseas operations. So in our opening, you can total, it is 712 stores.

Let me move to the second to last slide, the foreign operations and FILE highlights. Morocco operations realized again a positive EBITDA and in line with our expectations. And currently, we have 430 stores with 12 new stores opened this quarter. So we are now becoming more happy for the Moroccan operation. And there were 5 new store openings in Egypt in the third quarter. As announced in the previous quarter's presentation, we are slowing down store openings in Egypt to see the possible prospects for the future. And the macros, maybe the macros will be better or worse for the coming times in Egypt. And FILE, EBITDA positive in the third quarter as well, and with 4 new stores openings and a total of 55 stores to date.

So on the targets, 2018 targets. We want to conclude this presentation that we wanted to touch on year-on-year expectations and revisions here. We are revising our gross profit to roughly 30%, plus or minus 2 bps (sic) [ 200 bps ] for the year, from 20-plus -- it used to be 20-plus at the beginning of the year. This is because of the better realization of the 9 months, and obviously, as you might have guessed, from high inflation.

And the full year EBITDA margin target was also revised to 5.5%. This is likely to be something between 5.5% to 6% of the year as EBITDA. And so by this, we would probably be -- this will be the first year in the last 12 years that we ended the year after IPO that we are exceeding our EBITDA margin, which is around 5%. We are still around 5%, but -- so because of this unexpected times, our EBITDA on this quarter -- or throughout the year will -- is likely to be higher than 5.5% [ stat ]. But keep in mind that those targets are just for 2018. And 2019 target will be finalized beginning in the next year and will be disclosed by the fourth quarter's releases. Besides -- and all the other targets, we keep the same, and we don't expect a major change on those targets.

With this, we would like to conclude our presentation for the third quarter and take your questions. Please go on if you have any questions to ask.

[Operator]

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

[Mete Ozbek, analyst]

I have 2 questions, if I may. First of all, with respect to your CapEx guidance. You are guiding slightly above TRY 750 million of CapEx for the full year, but it seems you have already reached TRY 640 million. So you are guiding approximately TRY 100 million of CapEx for the fourth quarter. Is this correct? Or is there an upside in your CapEx guidance for this year? My second question is about your gross margin outlook and the like-for-like outlook for the fourth quarter. When we look at your historical results, there's an actual decline in your gross margin, like, in the first quarter of the year when compared to third quarter due to the seasonality of your basket. And this decline is, on average, around 30 to 40 basis points quarter-over-quarter. You already mentioned around 30 basis points of impact coming from the campaign regarding the fight with the inflation. And also, you mentioned at the beginning of the call some inventory gains helping your gross margin. Could you please give us some color about the potential margin correction -- gross margin correction in the fourth quarter of this year? And also, considering that your internal inflation for the third quarter was around 21%, I assume that your September internal inflation would be more like 25%-ish levels. After the campaign regarding the inflation, what are you seeing as internal inflation in October and November? If you please give some color on the like-for-like trend for the fourth quarter as well.

[Haluk Dortluoglu, executive]

In the CapEx spend, and which -- I think I wouldn't say we are revising the CapEx. It might be slightly higher than the guideline. And the reason is, of course, well, keep in mind that everything, especially the store CapEx, machinery, is also increasing by the FX revaluation and Turkish lira lost value. So this will have effect, which is, everything same, this will increase the CapEx spend just somewhat, especially in the last quarter of the year -- third and fourth quarter of the year. So this might increase the CapEx, but it is not likely to exceed too much of our overall guidance there.

In terms of the gross margin decline. We have -- we will have some gross margin decline because some of the increase in our buying prices, we didn't reflect them fully on the selling prices. Yes. So this will have effect on the gross margin, and downwards, but not the sale -- the prices. Especially the raw material prices and our buying prices is still not normalized yet. So we can't say this is the definite gross margin expectation for the fourth quarter because now we have the -- also, the devaluation of Turkish lira started in last week. So a lot of things are still not very certain. So there is changing price levels in the market. So it's not easy to say what level. But we expect lower gross margin than the third quarter, that's all I can say for the fourth quarter. This is where we are heading for now.

And then your -- about the inflation figure. If you look at -- I said that it's roughly 20% end of September, the inflation, our internal and also the overall in turn. But If you look at the end of October, it's higher. It's higher, so roughly coming near to 30%. So our internal inflation, end of October, is at 28% in 12-month backwards. And if you look at food inflation with the non-alcoholic beverages in Turkey disclosed by the [ TWEK ], it is 29.3% increase in the consumption prices. So in end of October, the inflation has jumped from to 20% to 30%, roughly speaking, in Turkey. So -- and the effect of the campaign is not around yet. But on the opposite, we still see continued increase in the inflation compared to September and October, I can say.

[Operator]

Our next question comes from Hanzade Kilickiran, JPMorgan.

[Hanzade Kilickiran, analyst]

I just want to ask another question about the high like-for-like basket size. So you mentioned that inflation and also the inventory had cost of impact. But is there also any basket size structure change in the third quarter which could see a trigger behind the basket size growth? I mean, is basket size staying in terms of non-growth products? So there were some changes as well is my first question. And the second question is, I'm trying to understand how we are doing with the rent cost. I mean, I figure that you are rolling over some of the rent as for rents. So do you see increase in line with the inflation or below the inflation?

[Haluk Dortluoglu, executive]

Okay, thank you very much. About the basket size, I don't see anything there especially changing in the mix, but maybe only one thing that I can say, and it has worked for a temporary time, one, there's a sudden increase in the FX revaluation. And there was a time that the prices were low, but the expectation for increase in the prices were high. So there was a time that people rushed into the stores not only for beef but for many others, retail. So they're expecting that higher prices will come very soon, and this is only a few days or weeks, let's say, 1 week or 2 weeks max. By the time, there was an increase in the -- especially in the commodity products and imported products to increase the prices. This might have some effect in -- only in -- mainly in September there or August. So helping increase the sales and supported the basket size and like-for-like there somewhat. But it's only temporary times. On the rent cost side, we are now fully...

[Hanzade Kilickiran, analyst]

And before basket size -- I mean, before rent, I just want to ask, normal, did you also include meat in the basket? I mean, last year, was there any meat in your basket? And this year, there's meat in the basket?

[Haluk Dortluoglu, executive]

Yes, of course. Of course. We have, Hanzade, the meat, especially the government meat in past sales is only 2%. Yes, that's all. So of course, we include everything in the basket size.

[Hanzade Kilickiran, analyst]

What it also in your basket last year same period?

[Haluk Dortluoglu, executive]

Last year, it was in the basket. But last year, we didn't have the government campaign for the meat. So maybe last year, the turnover share, maybe 1%, now it's 2%. So it increased, let's say, its -- per store sales increased maybe 100% doubled because of the low price. But it's in the basket. 1 year ago, it was the same product but was not supported by the government to keep the prices low. But now because of the support by the government, the subsidies or the import, we keep the prices lower still. And this increases the quantity sold on those meat products.

[Hanzade Kilickiran, analyst]

Okay. So it was included.

[Haluk Dortluoglu, executive]

Yes. And then speaking of rents, we are -- our contracts are bind by the inflation, generally speaking. But I can also say most of our landlords are open for, let's say, increasing their rent prices lower than the inflation because we all know that inflation is very extraordinary in these times. And so we are, let's say, basically, on average, increasing the rents lower than the inflation.

[Hanzade Kilickiran, analyst]

And is it reasonable to assume that next year, in 2019, this could give you a sort of operational leverage, positive operational leverage because I heard -- if the inflation continues to stay at these levels, let's say?

[Haluk Dortluoglu, executive]

So you mean, the lower rent sales percentage, Hanzade?

[Hanzade Kilickiran, analyst]

Yes, because your rent cost is actually -- I mean, I think this is a general trend in Turkey. What I understand, the rent cost is increasing behind the inflation. And so I presume that this could give you some cost advantage in 2019 and sort of margin room.

[Haluk Dortluoglu, executive]

Hanzade, if -- of course, if you have like-for-like higher than inflation throughout in 2019, this is so. This might be, you said so. But we don't know yet because high inflation and also -- and a somewhat slowing economy cannot take everything as like as usual. So we might have slowing somewhat in the economy, and this might affect also the overall like-for-like in the market. But so far, we are happy to have higher like-for-like than inflation.

[Operator]

[Operator Instructions] Our next question comes from Cemal Demirtas, Ata Invest.

[Cemal Demirtas, analyst]

My first question is related to your international operations. What was the contribution of your international operations in your total revenue? That's my first question. And the second question is about owning of new stores. What portion of stores are owned by you? And what portion was already rented? And what was the reason behind the increasing ownership, if there is any?

[Haluk Dortluoglu, executive]

Okay. Yes. Actually, still the stores owned are very low. We have roughly 130 -- 120, 130 stores owned by BIMAS FILE in Turkey, and this is a pretty low percentage compared to 7,000 stores we own so far. But it's increasing now that we are more focused in making acquisitions because especially those times, people are more willing to sell their real estate to have more cash necessities, fulfill their cash necessities. And if there is a relo opportunity, we go for it. But still, I can say only maybe 2% of our stores are owned by BIM. And the sales contribution of Morocco and Egypt is, generally speaking, I can say, 120 -- sorry, TRY 1.2 billion, roughly speaking, in the 9 months together, Morocco and Egypt. It's near the -- if I may give you the right number fully, yes. TRY 1,190,000,000 -- sorry. Yes, TRY 1,190,000,000 total sales of Morocco and Egypt together in the 9 months of this year.

[Cemal Demirtas, analyst]

Haluk, I mean, what was it for the third quarter? And I would like to understand the growth contribution of that for the third quarter, if possible.

[Haluk Dortluoglu, executive]

Of course. In the third quarter, TRY 500 million exactly, Egypt and Morocco, TRY 500 million contribution to sales in the third quarter.

[Cemal Demirtas, analyst]

And you remember -- do you remember what was it last year in third quarter?

[Haluk Dortluoglu, executive]

Last year, we have the figures, yes. In the third quarter of last year, it was TRY 280 million, TRY 280 million to TRY 500 million. So it's like 78% increase in Turkish lira. Obviously, the reason you might get, depreciation in the Turkish lira. Yes, currency.

[Operator]

Our final question comes from [ Yals Miguel, Chronicle ].

[Unknown Analyst]

I have a question. I don't know if I understand correctly. I mean, the euro declined to Mete's question on this inflation, BIM inflation in October. I heard it was 28%. And you were saying the gross margin in October is lower than the September's gross margin. So I mean, how is it likely to -- and what were the reasons behind that? I mean, because the average inflation was 21% in third quarter, BIM inflation was 28 something. So the September BIM inflation was 30 or something, I mean. What was the reason behind this gross margin contraction from September to October, although your inflation was 28%?

[Haluk Dortluoglu, executive]

Okay. Of course, we are having a somewhat confusing times. But note that end of October, inflation overall CPI disclosed was 25%. And production inflation was 45% in Turkey. So the production inflation was much higher than the CPI overall in Turkey. So there is -- our cost base is more increasing than the overall CPI inflation, generally speaking, in food and others, especially coming from this imported petroleum-based products and fully imported products, imported ingredients. Plus, we have now revaluation of Turkish lira starting last few weeks. So all these things, we will see the effects. All those things, we will see the effects. Plus, we are -- as I've said, we, in the 1st of September, early September, we increased our prices due to the coming higher buying prices. But since then, we are not making too much change in our price as well. And so also, this make us to keep the shop prices flat but incur some of the buying prices inflation there. So those things have some effect on the gross margin. But of course, we will not let it go down dramatically. But it is something that we can see for a while because now all the inventory at hand is a bit high for us now, high buying prices. Am I clear?

[Unknown Analyst]

Thank you.

[Operator]

Our following question comes from Berna Kurbay, BGC Partners.

[Berna Kurbay, analyst]

I have 2 questions also on the revenue growth and the margins. On -- in terms of revenue growth, if I calculate it correctly, in the third quarter, domestic revenue, excluding Morocco and Egypt, the growth rate was 33% year-on-year, 33.1%. Is there any reason for this level to come down in the fourth quarter? I mean, at least so far, with what you have seen, I understand that Turkish lira is now appreciating and there may be other reasons to perhaps go ahead with lower prices. But do you think that it's possible at all to see a lower year-on-year revenue growth in the Turkish operations in the fourth quarter? That's my first question. Now on the -- my second question is on the gross margin side. You've explained that the fight against inflation program would have -- or has already had around 30 bps impact on your gross margin, if I understood correctly. Is this impact -- do you share this with the suppliers? And how do you see that evolving from this point on? And this 30 bps is only related to the 10% price reductions or at least 10% price reductions on 40 to 50 articles, as you mentioned. But aside from that, there is also the impact from the lack of the inventory gains that we observed in the third quarter. So would it be -- when you said you would go back to your normalized gross margin levels, are we talking about 17.5%? Is that the sort of normalized level that you think of?

[Haluk Dortluoglu, executive]

Okay. Berna, in terms of revenue growth, I can say the trend is upwards and higher in the fourth quarter rather than lower in Turkish operations. So we might surprise you on the upper side in the revenue growth in the fourth quarter. As for -- speaking for October at least, it's clearly soft. So there is no reason since on the coming times, in the fourth quarter, we have lower top line. In the net effect of this campaign, I'm showing this 25%, 30% is also net effect. Yet, some of the 10% price decline off the 50 products is supported by the suppliers. But this is a net effect. When we deduct the supplier support, this is the net effect, I can say. And you had an internal gross margin. We have a declined gross margin in October, but this is not lower than 15%. So we will be -- in the fourth quarter, there will be some dancing of the gross margin. But the only thing I'm saying is that so after this inventory passage, after this slowing of the price passage, after this campaign support, the gross margin have deteriorated somewhat compared to September, which is -- which we have the gross margin much higher than the normal times. But -- so in October, we have slightly lower gross margin, which is still higher than 16%. But -- and I think in November and December, we'll be in -- keep our overall levels in a more normalized manner.

[Berna Kurbay, analyst]

Maybe the 16% is actually a level that we haven't seen in a long time, so that's actually pretty low. Do you mean more like 17% perhaps? Because, I mean, fourth quarter of 2017, you had 16.7%.

[Haluk Dortluoglu, executive]

Yes, yes. You can take it as 17%. Yes, that's correct.

[Berna Kurbay, analyst]

17%. And if I may, just one final question. I know that you haven't finished the budget for 2019, but in broad terms, where do you see the biggest pressure on the margins to come from next year? Should we expect more on the gross margin side because of CPI or salary increases? What is your broad view on -- looking into 2019? Where do you see the most pressure?

[Haluk Dortluoglu, executive]

The salary increases, rent pressure, all this will have effect. Then 2019 is a question mark. But I can tell you that our trend in opening stores in overall Turkey and Moroccan operation in FILE still have a slowing effect that will keep on as is, and this is my guess. We didn't have the prepared budget yet in FILE, but the trend of store openings in Turkey and Morocco and FILE will go on, keeping the value in Egypt. And I don't think there will be any dramatic change in overall P&L and balance sheet trend in our terms. We will have this 5% average EBITDA approach, try to keep this also on the coming years. This quarter and this year will be an exception, in my general view. So we will be around this 5% to 5.5% EBITDA also on next year. So we will be as stable as possible also in 2019 and 2020, I can say.

[Operator]

We have no other questions. Dear speaker, back to you for the conclude.

[Haluk Dortluoglu, executive]

Thank you very much all. Very nice questions and very nice to see this third quarter, better-than-expected results, which we'll share this with you. We hope to meet in the fourth quarter and also the 2019 guidance and of the release of the fourth quarter results. And we expect to meet you also with as good as this time results by then. Thank you very much, and bye-bye.

[Operator]

Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.