BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2022-Q3

[Serkan Savas, executive]

Dear analysts and investors, welcome to our third quarter results for 2022. I'm Serkan Savas reporting, and Investor Relations Director. I hope you have all downloaded our presentation on our website. And now, we know that it is a very busy season. The last day, the deadline -- today is the deadline for the third quarter results. So actually, I will be quickly summarize our presentation.

So you might need to have look at our third quarter results. We will first look at our highlights for the third quarter.

And now we are at Page 4 of the headlines page. Actually, our top line growth accelerated in the third quarter on the back of the high inflation and positive traffic momentum.

Our quarter net sales increased by 135% year-on-year to TRY 41 billion in the third quarter of this year. With the contribution of the higher inflation, the basket size grew by 102% year-on-year. Meanwhile, the customer traffic increased by 8% year-on-year.

Here, I would like to highlight that our market share -- in FMGC market, our market share increased by 1.7% in the first 9 months period of the year. So we are continuously increasing our market share since the beginning of the year in the 9 months period. It's likely to continue going forward. And the share of the product label products declined slightly to 63% in the third quarter from 64% of the last previous quarter.

And in terms of EBITDA, EBITDA increased by 90% year-on-year in the third quarter, while our EBITDA margin was around 7% There is slight weaknesses in our profitability in this quarter. But what I want to highlight here is that they are profitable. We are profitable. They already improved back to our expected level in October and November so far and after a temporary weaknesses in Q3.

We will discuss and elaborate the details in the following slides about our gross margin development and also OpEx developments.

Net income was TRY 1.8 billion, which represents 101% year-on-year growth with corresponding 4.3% margin. Capital expenditures goes in line with our guidance. It's 3.2% of our revenues in Q3 as well as 9 month period 2022.

We have added 109 stores, 109 stores, new stores across all operations in Q3. That brings us 209 stores in new stores across all operations in Q3, and that makes up around 11,274, consolidated stores by year-end.

And moving on to operational performance. The next slide, the Page 6. Starting with the like-for-like sales slides. Like-for-like sales increase by 118% compared to previous year. And customer traffic increased by 8% in the quarter.

Trading down to the counters set a positive impact on our customer traffic in Q3. I'm glad to mention that we are seeing more new faces in our stores and from all income level segments. And this is actually -- market's survey also say that we are all -- all income levels are also shopping from BIM.

And [ lowering ] traffic growth from previous quarters is due to ongoing normalization of the base after COVID. We have around 8% traffic growth in this quarter. So it's also in line -- in October it's also -- this growth is also in line with the Q3.

Our internal inflation reached 119% in third quarter while like-for-like basket size increased by 102% in Q3. Basket sizes are still going up together with rising inflation.

And on the store expansion side. We have opened 188 new stores, BIM stores and 11 FiLE stores in Turkey. The number of Foreign operations stores had increased slightly with 6 new stores in Morocco and as the recovery in Egyptian operation is promising, we have opened 4 new stores in this country in Q3. We will continue to open new stores in Egypt.

In 9-month period, we have opened 785 stores consolidated basis and reached 11, 274 stores. And at the end of the year, likely to reach around 1,000 new stores at the end of the year in consolidated basis.

Now we are at the capital expenditure page. Page 8. CapEx was TRY 1.3 billion in the quarter corresponding to 3.2% of net sales. If I elaborate about the warehouse CapEx [ collaboration ] in this year, what we have done so far and construction works of 2 new warehouses in Alize and Samsun still continues. After opening those 2 warehouses, we will reach [indiscernible] warehouses in Turkey.

And additionally, our new biscuit and chocolate factory in [indiscernible]

Is also under construction and likely to be finalized in the mid of this year.

Another investment is the secondary [ synergy equivalents ] of our packaging companies is almost finalized in Mersin and to be opened [indiscernible]. Indeed [indiscernible] continue to be impacted [indiscernible] CapEx sales expectations for the full year.

Now moving on to our financial performance, Page 10. Net sales and gross profits. On quarterly basis, sales increased by 135% in Q3 and reached TRY 41 billion, rising inflation and trading down supported top line growth and our internal inflation has continued its upward trends in the third quarter of 2022.

For now, we do not revise our sales growth guidance for now. And we expect the top line growth for 12-month periods would like to stand at the upper end of our target range. You know that we already set our revision in the last quarter, 100, 110.

So now today, trading shows that we are likely to be stand around 110 at the end of the year. Of course, we will be judging if there's a significant outside risk, we will be judging the new revision in the coming months.

And we are also happy for the back to support season tradings in Q3. As I mentioned before in the previous slide, we have gained around 1.7% market share in FMGC markets which goes to sales.

On the gross margin side, gross margin declined to 17.7% in the third quarter. If I elaborate the reasons, the first, the sales mix is more in favor of the basic products, which have naturally lower margins. This is also -- we already mentioned in the previous quarters as well. So people are more attending to basic products, basic quantities and they naturally have very low margins.

The second, regarding inflation, you are strictly following the inflation in Turkey. The purchasing price index is much higher than the consumer price index. So the cost of the products, the cost of the suppliers goes up much faster.

And sometimes, we prefer to wait for a while to pass these costs on shelf price and put a time line. And this sometimes led margin division. But after Q3 or post Q3, we took some actions, some preparations on gross margin. And our gross margin already reached back to our expected level in October and November so far.

And the third reason I have to -- I want to mention that we are paying fewer advanced payments after Q1. This is also evidenced by stabilized net working capital. In the following slides, you will clearly see that. And please also note that, yes, this week -- this quarter is a little bit weak in terms of gross margin side, but not that this kind of -- in this kind of high inflationary environment, it is sometimes normal to face some volatility in gross margin progression.

But recovery is immediate after weaknesses. And you also experienced in the last 20 years, we have full of capability to take immediate actions and for immediate recovery, which we are doing right now in October and November. This is why we do not revise our EBITDA margin guidance, and we expect the full year EBITDA margin likely to start at around the lower end of our target range at the end of the year.

And now Page 11 is about the breakdown of our revenues both in terms of geography and category. Foreign operations and FILE together corresponds around 10% of total revenue.

On the foreign operations, itself has around 5.9% share in total. It's almost stable compared to same quarter last year. Foreign operations share is stable second quarter last year. But it's a little bit coming down during the last few quarters due to dilution impact of having higher growth in Turkey.

And the share of FiLE products declined to the [ 63% ] in Q3 versus [ 65%] same quarter last year. Actually we had share of some brand products in some big categories. For example, sugar [indiscernible]. Some kind of slight shortage in sugar product [indiscernible] sometimes we prefer [indiscernible] declined in 6% third quarter versus 6.3% [indiscernible].

Opex management, next slide. Regarding the change in operating expenses as personnel expenses [indiscernible] compared with the second quarter last year. [indiscernible] but for sure it's putting more pressure on compared to Q2 and previous quarters.

On the other hand, due to rapid increase in energy prices, utility expenses as a percentage of sales growth in this quarter. Likewise, vehicle fuel and maintenance expenses also rose in the quarter.

Of course, these figures include IFRS 16 impact, that for that are excluded in this chart. If you wonder about the rent cost, it's almost historic low levels. Rent-to-sales ratio declined to 1.4% in Q3. It used to be 2.1% in the same quarter last year.

As you see, operating leverage is still working. But of course, it is less than the previous quarters due to the minimum wage hike and higher energy cost.

But for the last quarter, for the Q4, we expect operating leverage would work better and contribute positively to profitability since we don't expect any big additional OpEx pressures. And also, we are taking some actions in terms of some cost levels in personnel costs.

For example, in personnel costs, our number of employees increased by 18% in this quarter. This is a almost double of our store network growth. So now, we are adjusting it. So we are moving some -- we are adjusting our number of employees. So we like this actually saves something from adjusting our employees going forward.

So in the fourth quarter, we also expect the operating leverage will work harder in the last quarter. And EBITDA and EBIT. Now let's to get EBIT -- quarterly EBITDA and EBIT slides. Our Q3 EBITDA was TRY 2.9 billion and margin is 7%, which was below our EBITDA margin guidance. The first reason is, of course, lower the gross margin in Q3, which I mentioned this as at the first slides.

Secondly, the higher tax due to minimum wage hike and credit costs. As I already mentioned, we expect a positive progression on -- of 2 regions in Q4. In 9-month periods, EBITDA margin stood at 9.7%, which is lower than our guidance, but with our EBITDA margin guidance as we put that we will be able to reach to the low end of our EBITDA margin guidance end of the year or full year.

Quarterly EBIT TRY 2.2 billion and margin is 5.4%. Moving on to net income. Our Net income more than to TRY 1.8 billion in Q3 versus TRY 884 million in the third quarter of last year. And there is not any significant one-off in our expenses in this quarter having come from a fixed project deposit is TRY 67 million in Q3.

In the next slide, we provide quarterly cash flow bridge. As you see, there is improvement in our cash generation. Net working capital is almost stable in the last 2 quarters after the decline in Q1. And it is not that cash flow in the chart -- cash flow from other investment activities is not a real cash outflow. It's just so called, I won't like securities deposit to banks as cash.

So to sum up, actually, net cash position ex-IFRS 16 -- before IFRS 16 is around TRY 3.2 billion in this quarter, and it was TRY 2.3 billion in the last quarter. So we are generating more cash and we are improving our cash position.

And also, we would like to highlight decline in lease payments as a percentage of revenues, which declined to 1.5% from 2.2% in the same period of last year.

If you look at the brand operations, we opened 6 new stores in the last quarter in Morocco and our total number of stores reached 610 in this country. Now we are working to accelerate growth in this country, accelerate store openings. And also to do this, we have to actually improved our logistics structure there.

And now, the fourth warehouse is under the construction in Marrakesh in Morocco and to be opened in early 2023. And the fifth warehouse, this agreement already signed and to be open to the end of the next year. So we plan to improve our logistic infrastructure further and then extend the store openings in the country.

In Egypt, we continue our operations with 306 stores and 4 of them are newly added in this quarter. Even though Egyptian operation is not profitable yet, we are now more hopeful to reach [indiscernible] in a few years' time.

And dear earnest investors, this is end of my presentation. But before Q&A, I would like to reiterate that yes, the profit is a little bit weaker in this quarter. But in October -- I have also reiterated that October and November trend shows that there will be recovery in both gross margin and operating leverage in Q4. And I would like to thank you for your attention today and would like to open the floor to Q&A.

[Serkan Savas, executive]

[Operator Instructions] And first question is from [indiscernible].

[Unknown Analyst]

[Foreign Language]. My question is regarding about your guidance. Even if you achieve the low-end target of your guidance, you should still post at least 8.6% EBITDA margin in the last quarter, which is roughly 1.6% quarter-on-quarter improvement.

Can you -- you already mentioned some of your measures, but can you still provide us whether this will come from -- mainly from gross margin improvement or your measures on the OpEx front?

And also about your internal inflation for third quarter and also for your expectation for the last quarter?

[Serkan Savas, executive]

Thank you, [indiscernible]. Of course, we are waiting for the improvement in both sides, both the gross margin and you know the October is almost done and November is also -- 10 days also passed.

So we are seeing that we are improving our gross margin to our expected level. What's our expected level? We already mentioned before, 18, 18.5%. Now approaching 18.5%, something like that in our gross margin hopefully. But of course, December is not over yet. We will look at that.

On gross margin side, so we have actually improved in gross margin side, we improved our right now. In operational expenses, of course, we do not have any one-off hikes in fourth quarter and employee costs or something like that.

For example, in third quarter, you know actually, there's a minimum wage hike. And we already actually have the wages more than the minimum wage. So in our case, it's almost 38% minimum wage hike fully included in the third quarter.

But in the last quarter, we don't expect any hike. We don't have any hike. But inflation is going up. Inflation will be actually accelerating sales, but we don't expect any employee cost pressure further and pressures in OpEx side.

And as I said, actually, today, if you look at our reports, our number of employees increased by 18%. This is a double of our store -- actually store growth. Our store growth is 9% -- around 10%, and we have 18% employee growth.

So we are now also adjusting actually. So we are opening new stores, and we are moving our employees, and we are changing our criteria. Performance criteria of employee side -- store employees side. So it's also making sense and it's also working right now.

So I can say that in both terms, we are improving ourselves in October and November. And internal inflation, the internal inflation has reached 118% year-on-year in Q3.

[Unknown Analyst]

Just a follow-up question about this last thing you mentioned about your employee, number of employees. Is there a particular development for this quarter because the number of store openings do not deviate much from previous years or previous quarters. So is there any new development on that front or just coincidence?

[Serkan Savas, executive]

No, there's new development. But actually, it can be our -- BIM has some criteria, internal criteria. For example, our number of -- we have some kind of thresholds about the number of employees per store. For example, if the sales is [ something ], you can recruit 4 employees. If their sales actually exists to some levels, maybe some levels, you can recruit 5.

As the inflation hikes, actually, this gives the regional directors more room to actually recruit more employees. But this sales increase is more coming from the inflation.

So actually, now we are revising -- of course, if they have room to actually recruit more employees and with boost sales -- boost traffic. Of course, they prefer to recruit more employees. But now we are changing our performance criteria.

So together in line with the inflation. So they will be much more ready for the new year about number of employees.

So there is not any specific issue for this quarter in terms of employee -- number of employees.

And the next question is from Ali Karim, [indiscernible].

[Unknown Analyst]

Serkan-bey, my question is more on 2023. Where do you think your margins would be? I don't know whether we should say, on a sustainable basis, what should we assume going on for next year?

[Serkan Savas, executive]

Thank you Ali Karim-bey. Actually, in the next year, the budget, we haven't started yet, actually you know there's very high inflation environment. So next year, our target guidance will be actually disclosed at our fourth quarter conference call.

So from now on, I cannot specify anything about the next year guidance. But actually, there's no reason to actually decrease our expansion plan and also decrease our gross margin progression. There's no reason for now, but I cannot give any specific details for the next year.

And next question is from Cemal Demirtas from Ata Yatirim.

[Cemal Demirtas, analyst]

Serkan-bey, my first question is about marketing expenses. When we look at your marketing expenses, we see that your electricity, water and communication expenses almost doubled Q-over-Q just from TRY 264 million to TRY 603 million. And it's a very significant number.

Although it looks like a small item, but there is a big jump on that. So does that continue in the following quarter or there was one jump for the time being?

And the other question is about the like-for-like sales growth. When we look at the traffic, the pace of traffic growth is lower in the third quarter compared to the second quarter.

How do you see the picture on that front? Do you see any weakness in consumer visits or traffic? How do you see the traffic in October and November? Already inflation is high but could we assume that this traffic trend will continue on the positive or negative side?

[Serkan Savas, executive]

Thank you, Cemal-bey. Actually, first, in marketing expenses, this is the ex the water and communication expense, it's mostly 90% includes electricity cost.

As I mentioned that electricity cost, energy cost, unit cost price increased significantly in this quarter. This is the main reason of the hike. But actually, the amount, of course, not very low. Do you mean this line is TRY 1.3 billion, right?

[Cemal Demirtas, analyst]

It's in the -- for the third quarter, my number is TRY 603 million. And it's around TRY 300 million more expenses, I see, Q-over-Q?

[Serkan Savas, executive]

Yes, you are right actually. There's a great [indiscernible] hike in the last part -- in the third quarter. So this is also affecting our actually energy cost [indiscernible] most in-store level. This is mostly coming from energy hikes. So this is the general problem for all the sectors.

But I can say that since we are a discounter, we have very low exposure on refrigeration in our stores. So refrigeration cost is lower than the other [indiscernible] formats, other supermarket and hypermarket formats, but it's likely to continue going forward. Basically in energy costs, we will suffer more.

Unfortunately, today, the energy electricity costs became the second component after employee costs. You know that we used to have first employee cost; second, the rent cost. But rent cost is now lower than the energy costs. But this is the general problem of all the country of the work. everybody is actually challenging in this energy cost. It's likely to continue.

Obviously, it depends on whether there will be a new hike in electricity prices for commercials. This is the main issue. We will stick [indiscernible] for it, but we can manage it. We can manage because, as I said, we have a low refrigeration exposure in our stores.

And your second question is about like-for-like traffic growth trend, it's 8% in the last -- actually, in the last quarter, it is 14%. And now, I must show -- our like-for-like page. Yes, this is 8% and it used to be 14%.

But this is more coming from the base. As you know, the last year, the second quarter was the COVID quarter. So there were lockdowns and [indiscernible] items. So right now, away from the COVID base. So third quarter is, there's really [indiscernible] COVID base in this quarter.

So now this 8% is more normalization in traffic growth. In October, as was is almost stable, around 7%, 8% traffic growth we have. But this is more normalization and actually through with the base effects of the COVID.

[Cemal Demirtas, analyst]

And Serkan-bey, as a follow-up. If you are sustaining the traffic and the inflation rate is still high -- it continues to be high. Could we expect some upside risk to your guidance? Top line growth guidance, 110% given the information you have for October and November.

Or you can just say that it's fair to just assume even if we didn't see December numbers.

[Serkan Savas, executive]

Actually -- thank you Cemal-bey. Actually for now, we don't revise but likely to be at the end of our -- upper end of our target range. But yes, why not to evaluate this coming month, maybe December.

So yes, the inflation is going up, maybe the sales will boost going forward, might boost our expectation. But just for few percent points, 1, 2 percent points, we don't prefer to revise our top line growth.

But in the coming months, in November it's also going well. And also, we will evaluate the first 15 days of maybe December. Then we make judgments.

But so far, we are now we keep our top line growth as is. But might not, yes, might not in the coming months.

And the next question is from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

Serkan-bey, thank you very much for the presentation. I have follow up on the working capital dynamics. Do you have any strategy to improve the inflows to extending the payable days or cutting the inventory because -- I mean, particularly for next year because inflation is likely to be lower than 2022?

So do you see any strategic change here that could led you to earn more cash?

[Serkan Savas, executive]

Actually, thank you, Hanzade-hanim. And actually, we don't prefer to stand on full of cash because in this environment, it is better to invest in our operations. But as you know, in the first quarter, we invested in our operations more. We heavily paid [indiscernible] we heavily actually piled up stocks in our case.

But today, our strategy is -- yes, we are still pursuing the strategy, but it is necessary. So for example, it's not our job to finance our suppliers. But if our suppliers, critical suppliers are able to find the products from abroad, and they need finance to actually secure our product availability, yes, why not.

We prefer to pay in advance to them. But we are actually now pursuing very -- actually a little bit modest strategy. We don't want to rush in this environment. And we are also trying to adjust our inventory days. Maybe you actually see our inventory days a little bit declined, but it's not enough yet.

But our job is we already have cash. And we have a dividend payment in January -- sorry, in December. So it's sufficient for the dividend payment. So we actually don't prefer to actually pile lots of cash. So after then, what we would do? There's nothing to invest in Turkey. So, of course we prefer to invest in our operation.

[Hanzade Kilickiran, analyst]

Okay. So that strategy could pay off only if you extend your gross margin in return of lower inflow. So is it going to -- because otherwise, it's better to keep cash if you are not going to improve your gross margin.

So do you think that next year, this could be a driver on the gross margin? I mean keeping the strategy, I mean, reduced because this year, we didn't see much impact from lower working capital inflows on the gross margin because of this change in the SKU because of the customer trade down. But do you think that next year, this could be kind of margin drivers?

[Serkan Savas, executive]

And it could be a margin driver, but inflation is very high. So will it be visible? Yes, sometimes it will be visible, but maybe in some product category it will be visible. But inflation is very, very high. So maybe it's a big change sometimes invisible, but make sure that in terms of operational sides, we always prefer to use our cash if it extends our gross margin.

In the previous quarters, maybe in the first quarter and second quarter, there is some kind of positive impact, but it is not visible because of the higher inflation.

And this is one of the reason in this quarter, our gross margin is a little bit declined because we have little bit slightly cut our advanced payments, unnecessary payments, but make sure that we are still using our cash in some -- actually, case by case, we are actually evaluating this. Not all cases.

Because our job is not supporting the suppliers. Our job is not just financing the suppliers. If they give a very good rate, good fee and secure our product availability for a long time, yes, why not. We provide this, and this is the main strategy. There's no change in this strategy.

And next question is from Ilya Ogorodnikov from Bank of America Merrill Lynch.

[Ilya Ogorodnikov, analyst]

I have a quick question about regulatory backdrop. Another investigation by the shortages over the tailored and producer pricing. So how do you estimate the risk of further fines for the company? And can you also update us on the court IPO regarding the fine that BIM has already paid earlier this year?

[Serkan Savas, executive]

Actually -- thank you, Ilya. Actually, we -- I think you mean the second investigation of the competition board. There is no risk. I can definitely say that there's no risk to our knowledge because the second investigation is related to suppliers, not directly to retailers.

Yes, retailers are technically included in this investigation is because it's a part of the first investigation. But as you know, we already fined from the same reasons. And we actually filed a case and it's still going on. So we believe that we will, it will take some time. But for the second investigation, we don't see any risk and can find some guidance.

[Operator Instructions] But I think there is no further questions. So I would like to wrap up the -- sorry, just 1 question from [indiscernible].

[Unknown Analyst]

[Foreign Language]. My question is about the slowdown in the store operating growth. It's now more notable, I see. The rent growth is 9% year-on-year. Will below 10% growth be permanent? Or is this temporary?

[Serkan Savas, executive]

There is no -- it's not like it's all in line with our expectation, with our budget. Yes, we didn't close any openings in our guidance. But at the end of the year, we're likely to be around 1,000 store openings or something like that, around [ metropolis ] which is also in line with expectations. 9%, 10%, sometimes changing. But it's a base growth of course, it just come down from 10% to 9%, something like that. But around 1,000 store openings and 1,000 store openings is also our expectations. There's no [indiscernible].

[Unknown Analyst]

Another question, I will ask about the cash conversion cycle. The cash conversion cycle ratio of net sales dropped to around 2%. Can we expect it rises back to its old average of around 3% or 4% for next year?

[Serkan Savas, executive]

Actually it's a very dynamic environment of the high inflation. So of course, we are actually working on -- actually we prefer to create cash, more cash and invest in our operations. But at today level, it's also -- we are generating more cash today. We have TRY 3.2 billion cash at the end of the third quarter. So we are happy with that.

So do we need more for us? Of course, for -- we prefer to invest in our operations, in our stores, in our product assortment. As I said that we have sometimes challenging actually in finding some kind of products for some sugar. Sugar is problematic in the few months. We are actually challenging to find the product label of the sugar products.

So whenever we find the sugar, the product SKU, we pay in advance. So actually, from now on, I cannot actually say anything for the next year, very dynamic organization. And next year budget is also very difficult right now in this environment.

Once the inflation -- once the food inflation there is lots of uncertainties right now. But actually, in general sense, we don't prefer any debts. So cash positive business will continue going forward.

And we do our best in terms of using our cash for our gross margin expansion going forward. And maybe you heard actually something about our management change, actually, as of 1st of January, we have management change our procurement heads will be joining to our -- the Board advisers, and we have a new procurement head. So we would actually better also with the new management.

So of course, next year, we don't pose a risk about the cash conversion.

I think there's no question. I would like to wrap up our session, our meeting. Thanks for joining the meeting as I said that Q4 is going better in terms of both the gross margin and OpEx management side.

So you are following the BIM. So we have a capability to the cash recovery in the last high inflation environment. We -- sometimes we face these kind of weaknesses, but immediate recovery is always -- we achieved. So thanks for joining us, and hopefully -- hope to see you in the next conference call. Thank you.