BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2020-Q3

[Serkan Savas, executive]

Dear analysts and investors, thank you for joining us today for our third quarter results presentation. I am Serkan Savas, Reporting and Investor Relations Director, and I will be hosting today's call. I hope everyone is safe in these present times and in the second wave of COVID in all Europe and Turkey. I hope everybody is safe since last time. And I will be going through the presentation during the webcast and the presentation is also available on our website, if you want.

Please note that we will host Q&A at the end of the presentation and would kindly ask you to ask your questions at the end by raising your hand. We will not be able to take written questions during the call. And I now invite you to have a look at our third quarter results.

Let's look at our top headline for the third quarter on Page 3. Our quarterly net sales were TRY 13.6 billion. They are reflecting 30% year-on-year growth, which is in line with our full year outlook. EBITDA reached TRY 1.6 billion, with a margin of 9% and 44% year-on-year growth. EBITDA margin progression is on the upper end of our target range, as you see. Net income was TRY 654 million, which is 90% higher from previous year, and with corresponding 4.8% of profit margin. Capital expenditures, CapEx is slightly above our target at TRY 331 million, corresponding to 2.4% of our sales. On the store front, even in a COVID challenging environment, we have successfully added 226 new stores, and that brings us to 9,147 of total consolidated stores as of third quarter. Finally, as you see in all fronts, we are almost on the upper end of our target range, which was revised during the last quarter.

Moving on to quarterly net sales on Page 4, sales grew by 30% in the third quarter and reaching TRY 13.6 billion. As you know that we already indicated on the previous call that sales are normalizing after COVID period. But as you see, that it's still strong in Q3. And post Q3 is also stronger for the time being, considering the weak sales in Q4. As you know that the last quarter of the last year we had around 15% top line growth, which was one of the weakest quarters, so we will have a weak base in the last quarter, so it's going strong post Q3. So at the end of the year, we are confident to reach our sales growth targets, maybe on the upper end of our targets.

Gross profit and margin, on the quarter, the gross profit has increased to TRY 2.5 billion, with 18.5% margin. We mentioned on the second quarter call that gross margin has improved due to better purchasing terms as well as due to increased sales and margin improvements of spot products, which we expect to continue and is also continuing in third quarter and fourth quarter as well. So we are happy to see this trend continue in the third quarter as well, these strong margins. Going forward, we want to keep this trend. But as you're aware that there has recently been depreciation in Turkish lira, and this would lead to somewhat inflation. For example, although our internal inflation stood at 14.8% in Q3 year-on-year, October this internal inflation hit to around 19% level. And note that during the inflationary environments, we don't prefer to benefit from low-cost inventory. We will be passing the cost onto product prices with the new inventory entered to the system. So in inflationary environment, we don't prefer benefit from low-cost inventory. And additionally, we are doing our best not to pass full inflation to the prices.

So last quarter, gross margin may be slightly weaker than the previous quarters of Q2 and Q3, but not very material.

Moving on to quarterly EBITDA and EBIT figures in the next slide, Page 5. The positive effect of the increase in sales and gross margin also had a positive effect on realized EBITDA, which was TRY 1.2 billion and a margin of 9%, which is on the upper end of our target. Regarding the EBIT, quarterly EBIT was TRY 858 million and the margin of 6.3%. Now let's look at 9-month EBITDA and EBIT figures in the next slide. In the first 9-month period, EBITDA was TRY 3.5 billion, which is around 50% growth from the 9-month same period last year. In the first 9 months, EBIT was TRY 2.5 billion, which corresponds to margin of 6.3%, and year-on-year growth is 63%. As with quarterly EBITDA; EBIT, same goes for 9 months results, which are at the top end of our target range, which we revised last quarter. So we are keeping our full year target as is.

Moving on to net income slide, our quarterly net income was EUR 654 million in third quarter, which is 90% growth year-on-year. Net income margin was 4.8% this quarter staying in similar range to last quarter, almost similar range last quarter. In the first 9-month period, net income was TRY 1.8 billion, which is again 97% higher compared to the same period last year. And net income margin in the 9-month period stood at -- net income margin for 9-month period stood at 4.4%, which is 130 bps higher than the same period last year. As already mentioned, the main drivers in net income continues to be better gross margin and financial income due to strong cash and as well as some FX gain from foreign currency deposits.

Looking at the like-for-like sales slide, the high basket trend continues in Q3. But it is slowly normalizing. We indicated in the previous calls that we are likely to see further negative traffic environment going forward, but that it will be fully and overly compensated by larger baskets. After COVID, as we mentioned before, shopping had changed towards to less visits and much, much more basket. This is still going on. So this quarter, basket growth is, again, the main driver of like-for-like, which increased by 33%. And consequently, the sales were -- like-for-like sales were up 17%. If we look to 9 months like-for-like, basket increased by 39%, and the sales in 9-month period increased up by 27%. Basket growth surpassed the internal inflation at -- it is 14.8% in third quarter year-on-year, as I mentioned before, and processed food inflation in Turkey stood at 12% in Q3, so slightly lower than the internal inflation. But the September and October figures indicate that internal inflation is increasing in upper teens. As I mentioned before, in October, it is to 19%.

Moving on to the capital expenditure slide, our third quarter CapEx was TRY 331 million, corresponding to 2.4% of net sales, slightly above our target for the year. And we reported on the last call that we opened 1 new warehouse in August in Kastamonu and one of our warehouses in [indiscernible] also moved to new one, which is almost double the size. Actually, next month, maybe in January next year, we will be opening 2 new warehouses in Denizli and Anatolia, and 2 others are other constructions are also going on. So it will be opened maybe in the first or second part of the next year. So we are actually constructing our new warehouses, new CapEx and construction is going on. By the end of the year, actually, you know that our target for the CapEx is TRY 1 billion. Maybe at the end of the year, we may be slightly over this TRY 1 billion CapEx guidance at the end of the year because as of today, in the 9-month period, we already have TRY 876 million CapEx for 9 months period this year.

On the store side, we are continuing with the increased opening pace. We opened 213 new BIM stores, 10 stores in Morocco we opened and 13 FILE stores we opened in this quarter. In total, we had 9,147 stores by the end of Q3, including Morocco and Egypt consolidated basis. There is no change in our increased store opening plan in Turkey in 9-month period. In total, consolidated, we opened around 800 stores. And by the end of the year, it's likely to be close to 1,000 consolidated store openings in total. Also note that in the graphic, you have already mentioned that number of foreign operation stores have been stable in the last few quarters. This is due to the closure of 20 stores in Egypt this year. Openings in Moroccan operation has also been slightly impacted by COVID.

If we look at foreign operations and FILE slide, I want to start with the announcement that BIM Board mandates about foreign operation. As you are aware that BIM Board has mandated our CFO, Mr. Dortluoglu, to find strategic partner for Board operations in Morocco and Egypt. The main purpose of this mandate is localization in both markets, being perceived as local business in those markets. We believe that having a local or international strategic partners that is more embedded in those markets will help with expansion and localization of our business in a more healthy way. Of course, we are already receiving some nonbinding offers, negotiation proposals. So we just wanted to make it public and position to those negotiations in a more professional and serious manner.

And this is the general outlook about our mandate for those operations. There is -- actually, there's no time line. There's no schedule in the strategy. So we just announced it, and we are waiting for it. And now let's now also briefly look at the operational performance of the foreign operations and FILE. Morocco is continuing to contribute to our net income. And this quarter, Moroccan operation opened 10 new stores. We will be closely monitoring the sustainability of the EBITDA margin outlook in the next quarters, but I can say that Morocco is progressing better than our initial projections. It's going to cash positive, as you know that net income positive last year. So it's going to add this year. And we are targeting 40 or 45 new stores in 2020, new store openings in Morocco.

Operations in Egypt have been slowing down for the last year. This quarter, we again closed 10 nonperforming stores in Egypt. And as for our FILE operations, we have opened another 13 stores in Q3, which means we had 116 stores by the end of Q3. You know that FILE already reached net income profitably in 2020 and is getting stronger every quarter. And FILE online shopping platform is still on pace and is likely to be launched in the first quarter of the next year.

So thank you for your attention today. And I am sure you have some questions, and let's open the floor for Q&A.

[Operator]

[Operator Instructions] Hanzade, the floor is yours.

[Hanzade Kilickiran, analyst]

I have 2 questions. One question is about your spot campaigns. I can see this still continues like week -- I mean, twice in a weekly time. What is the share in total revenues at the moment? And do you see any sort of pressure on basket size next year because of the spot campaigns? Because I think these are driving to basket at the moment. And the second question is the FILE online operations is a big progress in my opinion. Would you please give us some more color about what type of platform you are preparing? Is there any CapEx associated with it? Is it going to be a quick delivery? Or it's just like a kind of click-and-collect version?

[Serkan Savas, executive]

Okay. Spot revenue is still going on since last quarter. Last quarter, as I mentioned, that it's reached to 10% of total sales. It's still there. Still there, maybe sometimes reaching to 11% spot revenues. So as you know that in last 2 years' time, we increased our spot assortments, weekly assortments products with the business, so both to share revenue, share in the revenue and the margin improved well, and this is also contributing to our gross margin. So of course, my colleagues are still working on it to improve further. But don't think that today, at 10%, we don't expect to 20% spot in short period of time. But of course, we are improving day-by-day in margin side and also revenue side. I don't expect any pressure for the next year in terms of the basket because day by day, we are improving.

My colleagues always are trying to find new products, new products to be listed weekly basis. So day by day, we are improving in both items. And FILE online, also FILE online, my colleagues are working on FILE. Actually, this is -- first of all, in the first, we start from the store delivery from store to home delivery. And maybe in the first quarter, we will start some online test shoppings, but in limited region, a small part of the region, we will start. And in the first phase, we don't prefer to use the [ dot ] stores. So in the first phase, we will directly deliver from stores and to the homes. So actually we will start from the basic and test in the first phase. Then we will evaluate and improve further.

But actually, in FILE sites, we don't think that the online would be the first alternative. No. Actually, we will, again, awaiting for the customers to do the physical shoppings to the stores. The physical shopping will be our main preference. But of course, second is online is an alternative way for shopping because some of our customers demand -- FILE customers are demanding online because they do not have enough time to visit the stores, businessman, businesswoman. So they are demanding. So we are just meeting their expectations. So physical shopping will continue going forward.

[Hanzade Kilickiran, analyst]

I just want to have a follow-up on the spot. I mean, when I check your website, I can see that these spot companies are like electronics, I mean white goods. Are these products imported or they are domestically produced? I mean do you carry any sort of currency risk on this inventory?

[Serkan Savas, executive]

Actually, they are mostly local produced. Most locally produced. Of course, some technological, I think you are saying that the big refrigerators or something like that, they are local.

[Hanzade Kilickiran, analyst]

Yes, I saw some campaigns like -- very attractive campaigns actually on your website. So I'm trying to understand if these are imported products.

[Serkan Savas, executive]

Some technology items imported, of course. But some big items, refrigerators, actually we have some negotiation with the local producers. We are using their second brands. And actually, there are -- some are locally produced. But tech products are imported.

[Hanzade Kilickiran, analyst]

And you don't carry much inventory for these spot products, right? I mean, these are you prefer -- do you keep inventory on the spot products? Or you don't keep inventory, you just sell it and don't put any stuff on your...

[Serkan Savas, executive]

For big items, if you mean the big items, the refrigerators for example, we don't keep those in the stores. For example, what's our -- it's not online. But for example, the customers are ordering, filling the form in the stores. And those products, the big items, of course, not all, are directly delivered by the producers' warehouse to the customers.

[Hanzade Kilickiran, analyst]

I didn't mean the store. I just mean that is there any inventory on spots on your balance sheet?

[Serkan Savas, executive]

Of course, yes. Of course, we have inventory in our balance sheet. It's not consignments.

[Operator]

[Indiscernible], the floor is yours.

[Unknown Analyst]

My question is mainly on the gross margin side. I mean, for the past 2 quarters in a row now, you are achieving about 18%, in fact, 18.5% gross margin. Should we think that it's going to be the new normal considering the sales mix and the improvement in the spot and [indiscernible] procurement? Or the previous year, 17.5%, 17% gross margin is more of a normalized level?

[Serkan Savas, executive]

Yes, we are trying to keep the current level of 18% or something like that gross margin, because we almost improved our spot items and margins, this contributed well. And other products, actually, we have some new contributions. So we are doing our best to keep that 18%. But for the following years, I cannot guide anything. But yes, we want to keep this as a new normal. But as I said, post Q3, there's somewhat inflationary pressure, and we don't benefit from the low-cost inventory. So we are passing the inflationary pressures on product prices after a while, whenever the new inventory, new post inventory enters the system. But actually, yes, this 18%, we want to keep that level going forward.

[Unknown Analyst]

And as long as you can keep the gross margin above 18%, should we expect that above 6% EBITDA margin, I mean, pre-IFRS records, should be maintained at this for the next year?

[Serkan Savas, executive]

This year, actually -- this year, actually, we changed our EBITDA margin target to 6% from 5% to 6%. But this was valid for this year, and next year target we haven't set yet. We are still keeping the 5% long-term target in terms of EBITDA margin. But of course, at the end of the year, we will get together and discuss whether to review our EBITDA target or invest in lower prices. This is not actually clear yet. So we haven't started our new year budgets. So this will be all clear during our next conference call, new year targets. But for the time being, I can say that we are still keeping the long-term 5% EBITDA margin target. For this high gross margin, we will judge whether to invest in lower prices or take our EBITDA targets slightly worse than our magic number, 5%. But for this time being this year, 6% EBITDA margin. For the following year, we will actually explain during our next quarter call. So I cannot say that we changed our long-term target. We are still keeping the 5% long-term target.

[Operator]

Regiane, the floor is yours.

[Regiane Yamanari, analyst]

Can you just confirm -- just to confirm about the CapEx for online -- for the online platform, do you see any marginal increase next year regarding the EBITDA adjustment is confirmed? And can you just repeat also the inflation, the internal inflation that you're seeing in October and that you had in the third quarter? And the last one is regarding dividends. Do you have any sort of clarity if you're going to pay a dividend next year, any indication?

[Serkan Savas, executive]

Last question is divided, right?

[Regiane Yamanari, analyst]

Yes.

[Serkan Savas, executive]

Yes. Okay. Let me start with last, dividend. Actually, you know that until year-end, there's a restriction about the dividend payments, so by the ministry. So this year, actually we cannot spend anything. But of course, if the restrictions is lifted next year, you know our policy. We are doing our best. We don't want to stand on cash. So next year, it depends on the Board decision or it depends on AGM decision, but we will actually pursue our strategy as this -- what's that? A dividend as much as we can, because we don't want to stand on cash. In terms of dividends, it's like that. If the restriction is lifted, we will -- it depends on Board decision, and we will do our best.

And online CapEx, FILE is pricing online. So it wouldn't have any material CapEx burden to the capital expenditures. So it wouldn't have any material component of the CapEx for next year, I don't think so. In terms of internal inflation, October, as I said, it's around 19% in internal inflation. So it's likely the last quarter overall internal inflation will be higher than Q3. So this is Turkish lira is depreciated. So it's likely to lead to somewhat inflation, of course. But to what extent, we are not sure. And our pulse is to -- it depends on passing inflationary pressure and inflationary cost on the product prices, but we don't prefer to benefit from low-cost inventory.

[Regiane Yamanari, analyst]

Quarter? Sorry. What was the average internal inflation the last quarter?

[Serkan Savas, executive]

Sorry?

[Regiane Yamanari, analyst]

What was the -- yes, the last quarter internal inflation?

[Serkan Savas, executive]

Third quarter is 14.8%. Overall, year-on-year, 14.8%.

[Operator]

Berna, the floor is yours.

[Berna Kurbay, analyst]

I have a couple of questions as well. The first one is about the guidance for this year. I apologize. I missed the first few minutes of the call. And if you mentioned this already, I'm sorry about that. But as of the first 9 months of the year, you're ahead of the guidance in terms of the revenue growth and also EBITDA margin. And you've already mentioned that October internal inflation is higher than third quarter and is likely to stay that way in the quarter. So would it be fair to expect maybe slightly higher than 34% revenue growth this year and then EBITDA margin higher than 8.7%, which are the high end of the ranges that you provided last quarter? That's my first question.

And my second question is about the cash position and the instruments that you have employed over the course of this year. As I understand, you haven't paid dividends. And also there has been some tax deferrals to the fourth quarter. So you've been sitting on a lot of cash than you normally do. And you had a number of instruments you invested in, including FX deposits. Is this something that you're going to continue to do going forward non-TL is my question?

[Serkan Savas, executive]

Okay. First of all, the guidance in the first slide, as I mentioned that post Q3 is also going strong. Because we have the weaker -- the base is weak, we have the weakest base in Q4. So it's going strong post Q3. So today, we have in the 9-month period, [indiscernible] today and our top end of the target range is 34%. So actually, today, for the time being, it's not needed to revise our revenue growth target. But of course, in the following months, we can judge it again. But today, maybe we will be at the end of the year at the top end of our target range likely. EBITDA margin is also the same. We are now at the top end of our target range in the first 9-month period.

Before IFRS 16, it is 6.6%, and our top end of target range, 6.5%. So for the time being, actually, it's not needed to revise again the targets. But in the following months, we make [indiscernible]. In terms of cash position, today, of course, whenever -- if you want to take the cash position, you have to take the cash at banks and also financial instruments, financial investments short term. Those are also cash-like assets. In total, today, we have TRY 3.6 billion cash at hand. Sometimes, actually, we are doing some diversification at placement of the cash amounts. Sometimes, we are investing in financial instruments like lease certificates or real estate bonds. Those are stated as financial instruments, not cash, per IFRS. And sometimes we are investing in demand deposits in banks.

In the recent quarters, actually, we are investing in more of those kind of financial securities, rather than the bank deposits. These totals depend on the rates, on the market rates. Yes, in the following quarters, we likely invest more in financial instruments rather than the bank deposits, but we still have some fixed bank deposits at hand in our balance sheet, FX deposits we already have. But if you want to calculate the total cash, we have to take both the cash and cash equivalents plus short-term financial investments. So we continue to invest in financial instruments in the coming quarters as well.

[Operator]

[Indiscernible], the floor is yours.

[Unknown Analyst]

My question is about your international operations. What was the contribution of Morocco and Egypt in the third quarter? That's my question.

[Serkan Savas, executive]

Actually, in the first 9-month period, the total Moroccan and Egypt operations were around TRY 2.6 billion in total, the sales, Morocco and Egypt. Those were the contribution to our consolidated revenue, TRY 2.6 billion first 9-month period, and around TRY 220 million EBITDA contribution we have together in the first 9 months.

[Operator]

[Indiscernible], the floor is yours.

[Unknown Analyst]

I might have missed, so regarding the inflation momentum, if anything, Q4 inflation would be higher than the Q3 trends, given the PPI. And Q1 2021 would be higher than Q4 for 2020. So if this assumption is correct, and I'm not sure whether you would agree with this. If this is correct, you would still incur sort of [indiscernible] costs that would back your gross margin, at least 2 quarters down the road. Is it fair to assume something like that?

[Serkan Savas, executive]

Actually, as inflation is increasing trend, to what extent, actually, it's not clear yet. In October, it's to 19%, internal inflation, 19%. So in the coming months, maybe it will go up further. But actually, we don't prefer to our gross margin to be affected dramatically from those inflationary pressures. So we will have EBITDA margin targets for the full year. We are almost at the upper end of the target rate. But following here, in the first quarter of next year, we haven't set our targets yet. Of course, we are now discussing our budgets, which inflation rate we will take for our assumptions, for our targets and also for revenue growth. It's not clear yet. We are still discussing it. But inflation momentum is going on, but we don't expect our profit margins to be affected actually dramatically.

[Unknown Analyst]

And just to understand it right, when you mentioned your inflation at 14.8% year-on-year. This is for Q3? Or this was for September for the 9 months?

[Serkan Savas, executive]

It was Q3, 3 months average internal inflation, year-on-year, of course. Yes, it is 14.8%. This is the average of Q3, average of July and August and September. But September is around 16%.

[Unknown Analyst]

September is 16%, and it's now 19%, you're saying?

[Serkan Savas, executive]

Yes, yes.

[Operator]

We are able to take 1 or 2 more questions. If there are no further questions, this will conclude the Q&A section of the presentation.

[Indiscernible], the floor is yours.

[Unknown Analyst]

One follow-up question, maybe Serkan. You had a buyback program and already acquired 5.7 million shares, if I'm not mistaken, from the market, then you stop. Following this result, do you consider to resume that buyback program?

[Serkan Savas, executive]

It's still active today. We allocated TRY 700 million cash allocated and be used almost half of it. But it's still active. There's not any -- of course, it depends on Board decision. But there's not any intention like this. So it is still active today.

[Operator]

Dear Serkan, we still have some questions, but I think we have now past our time for the call. So I would encourage every investor and analyst to reach out to Serkan with individual questions. And that concludes our third quarter announcements for BIM. Thank you, everyone, for participating, and we wish you a great day. See you at the fourth quarter some time in February. Goodbye.

[Serkan Savas, executive]

Thank you, everybody, for your participation and see you on the next conference call. Thank you. Bye.