BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to BIM 2017 Year-End Results Conference Call. I will now hand you over to Mr. Haluk Dortluoglu. Dear Mr. Haluk, please go ahead.

[Haluk Dortluoglu, executive]

Dear analysts and investors, we are very pleased to welcome you to our year-end results in 2017 now. We hope you all have managed to download our recent investor presentation from our website.

Now if it is okay, we can start with the first slide with the headlines for 2017. We achieved most of our targets in our 2017 results. Our net sales were TRY 24.8 billion, with an annual growth rate of 23.5%. And we have reached the EBITDA margin of 5.2%, which means 30% growth compared to last year. With regards to CapEx, we went over our expectations slightly for 2017, and the CapEx stood at TRY 609 million, which is roughly 2.5% of sales. We generated TRY 824 million free cash flow, which -- before financing activities and dividend payments last year. The net income was TRY 863 million, which is 29% higher than last year. We continue to open new stores. At the end of the year, we had 6,765 consolidated stores, with 598 new store openings across all our operations.

Let me move to the figures of annual/quarterly net sales and gross profit there. We are pleased to announce that it's higher than our revised target of -- as you might remember, within 20% to 23% was our revised EBITDA target, which -- sales target, sorry, which we stood at 23.5%, slightly higher than this. Looking at our quarterly sales, we are happy to see significant year-on-year growth rate from same quarter last year, which stood at 26.1%. This has been our best quarter in the last 5 years, we can say. The gross profit is nicely increasing, too. In the last quarter, we earned TRY 1.1 billion, which is 25% more than same quarter last year. And thanks to the positive traffic and improved macro conditions, let's say, more liquidity in the market, our sales trend in the fourth quarter was best in 2017, and the numbers from the first 2 months of 2018 are promising.

About annual/quarterly EBITDA and EBIT slide, we are happy to be on the higher end of our EBITDA margin, and we ended the year with 5.2% EBITDA this year. Annual EBITDA increased 30%, reaching to TRY 1,296,000,000, and annual EBIT at 1,039,000,000 with a margin of 4.2%. And similarly, quarterly EBITDA increased 25% [ over ] same quarter last year and resulting to TRY 324 million, and quarterly EBIT increased by 28% during fourth quarter, corresponds to TRY 258 million. In addition, that explain in -- the fourth quarter EBITDA margin of 4.9%, slightly lower compared to the third quarter. The main reason for the decline in -- is our investments in reducing prices, let's say, investing into the lower prices in the last quarter. So we have lowered some of the product prices, and this was reflected in the gross margin there. But now we expect slightly higher in the first quarter coming in 2018.

Let me move to annual and quarterly net income slide. The high net income growth trend continues with our annual net income of TRY 863 million, which is 29% year-on-year increase with a 3.5% margin. Our quarterly net income increased 15% compared to previous year to TRY 222 million with a net margin of 3.4% margin.

Let me -- now this year we have a new slide, which -- about the free cash flow. It is -- free cash flow increased to TRY 823 million (sic) [ TRY 824 million ] in 2017, up by 27% compared to last year, mostly attributable to higher cash flow operating activities and working capital, consistent with our low-CapEx business model. Free cash flow to net sales ratio was 3.3% in 2017 compared to 3.2% in 2016, which is almost flat.

About like-for-like sales increase. In 2017, like-for-like sales increase was 13.7%, which is higher than BIM average annual internal inflation, which is 11.8%. Our like-for-like basket size increased by 11.4%, and our like-for-like customer traffic by 2.1%, which means that on the average we have reached 703 customers per store per day.

Customer traffic has been stabilized following our -- the current economic environment in Turkey. Regarding to like-for-like growth in foreign operations, Egypt had a 13% growth, while there was no change in Morocco. But also note that this increase in Egypt largely attributable to high inflation in Egypt market. Although FILE average is [indiscernible] to disclose for like-for-like calculation, but we can say that the trend in FILE stores is promising.

Let me move to about -- product categories slide. As you know, our private-label percentage have been stabilized to something between 65% to 70%. We can see that our private-label share now is 67.4%. It has been stable for the last 2 years. And looking at our foreign operations, on FILE, you can see that FILE has a substantial private-label percentage which is 35%. And we are trying to maintain our shares in Morocco at 29% and in Egypt 10%. Low private-label share in Egypt is mainly due to the import restrictions there, which makes it difficult to import any private label or branded products from Turkey. And our total number of products in BIM format, as you know, now is around 700, while we have 4,500, roughly, number of products in FILE format.

Let me move to CapEx slide. In 2017, we had a CapEx-to-sales ratio of 2.5%. The numbers represent around TRY 609 million CapEx, as I have said, stated below, which is slightly higher than our target, which was TRY 500 million. And the reasons for this increase is, one, we didn't open any warehouse in fourth quarter; however, we are [indiscernible] ongoing warehouse contractions -- constructions in Turkey now [indiscernible] Istanbul. And we expect those warehouses to be opening in the first half of the year. And the maintenance total CapEx has been slightly higher than we predicted last year, same is true for FILE.

When we look at the breakdown for CapEx, 41% for -- CapEx belongs to the new store openings and store acquisitions and 26% of the total CapEx for new warehouse constructions and land acquisitions, and 17% of the CapEx for store maintenance and renovation and 16% CapEx to warehouse maintenance and renovation.

[indiscernible] we have the fourth quarter 2017 CapEx is also consistent with the year-end. In the fourth quarter, we had 2.4% of sales amounting to TRY 160 million CapEx. Additionally, we want to inform you that our -- we had a revaluation process for land and buildings owned by BIM and FILE this year and also the foreign operations.

As you know from our yesterday announcement, you might know that we have revalued our land and building tangibles per market prices per International Accounting Standard 16, and we had around TRY 600 million increase in tangibles. And those were reflected in the equity side. As a result of the revaluation, our total land and building portfolio reached to TRY 1.8 billion as end of 2017.

Earnings and dividends slide. Our earnings per share ratio stood at TRY 2.85 in 2017, which is 29% higher than previous year. We have distributed 68% dividend from 2016 profit during the year. And yet we will have general assembly in April, and no decision has been taken yet for dividend distribution. But as you know, we except a similar payable -- dividend payout also for this year as the previous years.

About costs. If you look at -- let's have a look at percentage of sales on each SG&A category. As chart shows, you can see that we have maintained all costs almost on the same level compared to previous year, 2016. Personnel and rent costs make up the main -- most of our CapEx, and we are happy that they have stayed on same level. Our employee cost is 6.3% of sales and rent cost is 2.5% of sales. These are the main 2 cost items.

With regards to different cost items, we have launched this year some TV commercials, which is in other expenses. And this has increased our -- slightly our advertising expense during this and which might continue also on the coming period. Last year, this was roughly TRY 7 million in the TV advertisement additional expenses there.

About store growth. With regards to number of stores developments, I'm in now Page 15. In 2017, we opened around 600 new stores in total, which is almost in line with our target. This corresponds to 10% store growth year-on-year, 10% physical growth, and we are keeping 10% store growth in 2018 as well as a projection. On quarterly basis, we have opened 90 stores in the last quarter. As seen in the pie chart, 647 of this 6,765 stores are from our overseas operations in total. So we ended the year with 382 stores in Morocco and 265 stores in Egypt.

Let me look to the foreign operations and FILE highlights generally. Looking at foreign operations, as mentioned in the previous call, Morocco operations had realized a positive EBITDA in the third quarter but not throughout the year. But due to the provisional year losses, we had generated 4 quarters an EBITDA loss. As in -- as of 2017, we -- in 2018, let's say, we expect a positive EBITDA and positive cash generation from Moroccan operations as a summary.

On the other hand, Egypt operation has also somewhat progressed. We have opened 50 stores in Egypt, reaching our target for the year. Year-end, we reached 265 stores. In 2018, we have projected as 40 stores openings in Egypt, but we should be -- we know that the conditions in Egypt are difficult, and the macros and import and export restrictions are tough, so we are more cautious in the Egyptian operation. So for the year, in 2018, in Egypt, we will be more increasing -- focusing our increase on efficiency of the existing stores.

In relation to our foreign operations, we would flag that, after extensive review, we have decided not to expand to Iran, be it for the time being. We have faced legal obstacle mainly, such as retailers are now not allowed by the new law to open less than 400-square-meter stores. Foreign capital retailers are not allowed to open less than 400-square-meter store, which is directly targeting us. And finding store locations of our site is very challenging now. So for the moment, we have suspended the Iranian project. And for the time being, we are not looking to -- in other markets to our operations in the short or medium term.

As for our FILE operation, it has been proven to be successful, we can say. And we are happy to announce that we have -- we had ended the year with 44 stores and adding 23 new stores for the year. As of today, we have 47 stores there. And [ excellent ] store opening will continue in 2018, which we have projected to add 30 more stores there.

We started to open new stores in different cities other than Istanbul, which is Bursa, Izmit, Sakarya and Zonguldak now, but still the main focus in [ mass market ] regions and in and around Istanbul. We also opened -- plan to open our second warehouse in -- of FILE end of year, maybe 2018, in the Anatolia side of Istanbul. FILE is -- FILE ended the year with a negative EBITDA, but we can say that in the last month, it's very close to EBITDA breakeven. We can -- and the results shown in the last quarters are very promising in the FILE operations.

When we look at contributions coming from overseas, overseas operations grew by 27% in Turkish lira terms and reached to TRY 1 billion threshold. There was TRY 225 million increase in -- between 2016 and 2017 in consolidated sales. We see this trend to continue. In case of consolidated EBITDA, contribution ratio looks less favorable, but we can see the improvement there also. As already mentioned, the Moroccan operations have less loss now compared to Egypt and are close to EBITDA breakeven [indiscernible]. Morocco recorded EBITDA margin of minus 1% in 2017 compared to 2.5% minus previous year. And in Egypt, we ended the year with minus 12% EBITDA.

When we look at the final slide of ours, target versus actuals and 2018 guidance, our revised sales growth target was 20% to 23%, and we exceeded this by achieving 23.5% sales growth. We have also exceeded our EBITDA margin target, which is 5%, by reaching 5.2% EBITDA margin. And we have opened 598 stores on consolidated basis. So at the end of the year, we almost reached our target. Out of this almost 600 stores, 495 were from the Turkish BIM operation.

Looking at the year ahead, our sales growth target is now having double-digit sales growth, which is higher than 20%. And we are aiming to keep EBITDA margin at 5% as usual. Our CapEx target for the 2018 is TRY 750 million, which is higher than the previous years due to the increase in store openings in 2018, and we are planning to open 730 new stores in total, which 600 of the new stores are planned for BIM Turkey. And as much as it looks like we are increasing the new store openings in 2018, we are actually keeping the store growth at same pace, which is 10%, and that pace is compared to 2017.

So this is all for our year-end presentation from our side. And we will be waiting for your questions, if you have any. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from [indiscernible] from [indiscernible].

[Unknown Analyst]

I have couple of questions. The first one is what is the level of your internal inflation for the last quarter? You talk about the annual internal inflation, but specifically for the fourth quarter. Could you make some comments about the contribution of meat sales in total? Did they play any role behind your successful top line growth? And you talk about slight improvement in margins for the first quarter of 2018. Could you please clarify when you talk about improvement, you talk -- compare with the last quarter of 2017 or first quarter of 2018?

[Haluk Dortluoglu, executive]

Actually, margin increases -- I mean, because compared to the third quarter and fourth quarter, there is a slight decline in gross margin. Now there's a slight recovery on the -- in 2018 first month, that's what I mean. No major difference. But comparison is the last quarter, which is fourth quarter '17. Our fourth quarter inflation, internal inflation is 13%, 1-3. And about meat sales, yes, after this [ meat ] process imported -- government-imported meat sales system, ours in the meat side have increased, maybe we have doubled the sales of ours in the meat side. But that's a marginal -- a small increase in the total, we can say. If we had no sales support or if we didn't have any imported meat sales, this 23.5% would be still more than 23%, but slightly lower than this 23.5%. No major change in the top line growth will be affected by this.

[Operator]

Our next question comes from Maryia Berasneva from Morgan Stanley.

[Maryia Berasneva, analyst]

My first question is on the competitive pressure. Could you please comment firstly on where does your pricing stand versus the competition? You normally quote -- give us some sense of pricing versus Migros, A101, Sok, et cetera? And secondly, do you have any sense for the store openings by your competitors, and whether they are taking the foot off the pedal? They're continuing with 700 to 1,000, broadly, store openings a year. And how do you think that will impact margins long term, if all the hard discounters in the market are continuing aggressive store openings?

[Haluk Dortluoglu, executive]

Thank you. In terms of price index comparison, from the -- for the comparison to discounters, there's not a major change. We can say Sok and A101 is -- from our perspective is 1% or 2% higher than BIM index. So we are almost similar. But Migros is now more than 10%, let's say, in the last month. December was 14% higher than BIM. And Carrefour is still higher, maybe 30%, 35% higher than BIM average prices. And about the competitive landscape, yes, that our competitors are opening more stores, but we also know that their sales performances are much lower than BIM. Their cost efficiencies are much lower than ours. So we are clearly differentiating in the implementation of the hard-discount format in Turkish market, we can say. And I think we will be keeping this different positioning in Turkish market. And this will keep our strong positioning in the market in the future as well. Other than this, we will only focus our own operations rather than looking and benchmarking the others on the coming period. That's all I can say now.

[Maryia Berasneva, analyst]

Okay. And also if you could comment on cost pressures that you see in 2018 from -- do you see any cost pressures from wages or rents? You've mentioned advertising. But if you could comment on other lines, that would be very helpful.

[Haluk Dortluoglu, executive]

In terms of wage, if you take the inflation, CPI was around 12%, but minimum wage increase was 14.2%. And if you add up all the averages, it's slightly higher than this. Yes, we are having some pressures, let's say, somewhat small pressure coming from the wage hikes on this side. Also in terms of rent costs, we might be having some pressure on the rent cost increases due to the inflation side. But note that despite that in retail and especially food retail, the trend is positive in terms of sales growth side. The real estate sector is not that promising in Turkey now. So the real estate prices and the rent prices are not growing as they used to be 2 years ago, 3 years ago. And I believe that, that will be somewhat -- we have -- bringing somewhat cost advantage to us on the coming years. So there will not be a major cost pressure from the rent side. But yes, we are [ leading ] from the wage side.

[Operator]

Our next question comes from Mete Ozbek from Unlu & Co.

[Mete Ozbek, analyst]

I have few questions actually. First of all, you have guided CapEx of TRY 750 million, which is kind of slightly higher than I would expect. So if you can elaborate a little on what should we expect in terms of breakdown as you provide with the 2016 and say '17 CapEx figures for your guidance? And also, when I look at your CapEx breakdown, it seems that your warehouse maintenance CapEx is actually slightly higher than it was in the past couple of years. So did you go over a major change in your existing warehouses? Should we expect continuation in that way? Or was it a kind of a one-off, such increase in your maintenance CapEx for warehouses? And also I have a technical question, if I may. After the revaluation of your tangible assets, should we expect the change in your depreciation trends starting from 2018 onwards considering that your tangible asset size has increased dramatically?

[Haluk Dortluoglu, executive]

Okay, thank you very much. About the breakdown of CapEx for the 2018, roughly speaking, I can say, new store CapEx TRY 300 million, and new warehouse and land CapEx TRY 200 million, and old store CapEx TRY 150 million, and old warehouse maintenance CapEx is TRY 100 million. That would add up to TRY 750 million in the year for general projection for 2018. In the new warehouse CapEx, I don't recall a specific reason for increase on those because that's -- now we have a bigger base in terms of warehouses. We have more than 50 warehouse now, and we have more older warehouses. So -- and the warehouses sometimes need more maintenance on that. So the old warehouse CapEx, sorry, which ended the year with TRY 96 million. And this also now includes the truck acquisitions and truck renewals [ for hauls ].

[Mete Ozbek, analyst]

Okay. With respect to depreciation going forward?

[Haluk Dortluoglu, executive]

Sorry, can you repeat the question?

[Mete Ozbek, analyst]

The depreciation, should we expect a change in your depreciation expense trends considering that you have revalued your tangible assets this year?

[Haluk Dortluoglu, executive]

No, no. No major change in the devaluation because some part is coming from land, and there's no land depreciation. And other parts will be not changing -- making a major change in the depreciation cost.

[Operator]

Our next question comes from Esen Raifoglu from INTEGRAS.

[Esen Raifoglu, analyst]

Can you please comment on your FILE revenues, at what level of consolidated or domestic sales they were in 2017? Also I didn't quite catch your comments on ad spending. Whether we should expect similar percentage to sales in 2018 as well because of increased TV spending? And thirdly, there seems to be an unusual decrease in your number of personnel quarter-on-quarter. Is there a specific reason for that?

[Haluk Dortluoglu, executive]

Personnel number? Personnel number, quarterly decrease in the personnel number. Okay. Instead of giving the total overall P&L figures for FILE, I can give you just guidance that we ended the year with somewhat TRY 33,000 per store per day sales.

[Esen Raifoglu, analyst]

That's the average for the year?

[Haluk Dortluoglu, executive]

The average for the year. And now in the 2018, we have started slightly higher than this number. So you can make a general projection with this number, I think. And about TV advertisements, actually, if you look at overall figure, TRY 7 million is not affecting the figures mainly because TV costs -- TV advertising costs have declined in Turkey substantially. If you would like to give the same advertising company 5 years ago, this number would be something like TRY 20-plus million. But if you -- what will be the next year's or 2018 expectation addition for TV ad is you can take TRY 10 million but will not be affecting the total figures substantially.

[Esen Raifoglu, analyst]

Okay. And that was recorded in regular advertising costs, correct?

[Haluk Dortluoglu, executive]

Correct. Correct.

[Esen Raifoglu, analyst]

Okay. And if I may follow up on FILE, given the trend that you're seeing in EBITDA, would you expect to break even before your original expectations?

[Haluk Dortluoglu, executive]

Actually -- I think in some months I can say, we have breakeven already in some months. This is -- in February, it seems we have broke even there. But it is almost -- our projection was when we reach 60, 70 stores there -- and we are almost there, I can say. Now we have 47 stores there. And by -- if you consider the monthly breakevens as a breakeven, yes, we have done this thing earlier than our expectation.

[Esen Raifoglu, analyst]

Okay.

[Haluk Dortluoglu, executive]

Employee numbers, we don't have a major reason, let's say, for the comparison employee numbers at hand, at least for now. We can get back to you if there is something really substantial there. We have noted your question.

[Operator]

Our next question comes from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

My first question is related to revaluation. What was the reason behind that? Because we see that change in several few companies. It's a big change in the balance sheet. I know that it doesn't affect the income statement, but what was the reason to do that? The first question. And the second question is, related to traffics, this improvement in the traffic, how does it go in the first 2 months or in January and February? How does the weather conditions affect? And that's it.

[Haluk Dortluoglu, executive]

Actually, as you know, that's mandatory by capital market boards in Turkey to revalue the assets in some period. This was 3 years in our case before. But we already -- we've only done this year. Instead of doing it in end of 2018, we did it in end of 2017. So we just make it instead of 3 years in 2 years. That's a mandatory thing to show the real -- near to lower figures. But that is -- and this was our option to do it 1 year earlier than [indiscernible]. That's not the reason. The only other -- the reason is the correct disclosure of financial performance and the financial reality. And other question was?

[Cemal Demirtas, analyst]

About the traffic, about the traffic. How does it go now? It was positive in fourth quarter. And how does it go currently in the first quarter?

[Haluk Dortluoglu, executive]

It's going okay. Yes, it's going okay. We can't say we had a, let's say, winter-wise, tough months in the last 2 months, let's say. So no major positive or negative, let's say, effect on the climate terms because previous year, we had a stronger winter in Turkey. This year, we had almost no snow in Istanbul, let's say. But there's no substantial change. It's going well, but that's all I can say now.

[Operator]

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

[Berna Kurbay, analyst]

I've got 2. The first one is about the gross margin. In 2017, full year gross margin is 17.1%, but in the last quarter, your gross margin dropped to 16.7%. You already mentioned that so far this year the margins are slightly higher compared to the fourth quarter. For the full year, just looking at price conditions with respect to inflation and also the consumer sentiment, do you think a 17% gross margin for the full year would be achievable? Or do you have at least flexibility over there in terms of the consumer activity? That's my first question. And my second question is about FILE and the CapEx guidance for the year. You already mentioned that FILE is performing quite well as far as I understand, and you're not -- no longer looking at Iran or another international market. So should we expect a little bit more focus on FILE? And is this part of the reason for the increase in your capital expenditures?

[Haluk Dortluoglu, executive]

Well, in terms of CapEx side, if we start with your last question, of this TRY 300 million CapEx for the new stores and in total TRY 750 million, only TRY 90 million, TRY 95 million is related to FILE. Yes, FILE we have higher CapEx. That's true. But still that's not the reason of our -- still it's not the main part of our CapEx there. But in FILE, we have more employees and more square meters, and that requires more CapEx. In terms of Iranian investment and the opting for FILE, that's not true. We are not opting out of Iran because we have somewhat good improving FILE here in Turkey, no. This was 2 completely separate options for us. And we chose not to go to Iran now and suspend it. And because already it's now for -- by law and because of there's a recent law in force in Iran, which restricts investment less than 400-square-meter stores, which is our expected investment size as projected, so it makes it impossible for investment now, at least for the time being. I think that's -- about the gross margin, as I said, we have declined gross margins in fourth quarter by investing into lower prices. That's for the future. And keeping a 17% gross margin for the whole year in 2018, I don't think that's difficult for us. There's no reason I think that we can't miss this -- keep this 17%, roughly, gross margin [ as such ].

[Operator]

We have one more question. It comes from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

My question is related to your internal inflation. It stands at around 13%. But when we look at the processed food inflation in Turkey, it's around 12.2%. So how do you compare your price index with that processed food index? Because you invest in prices already. So what could be the comparison with your numbers and the processed food inflation, how comparable are they?

[Haluk Dortluoglu, executive]

Actually, it's not fully comparable. It's just guidance, and it's for reference, generally speaking. We make another special study for once to make a better comparison with our internal inflation and CPI and processed food. So to keeping the same baskets in same sizes with our thing, but that makes it very, very complicated in that terms. And this -- but we have done this for once. And this indicated, of course, different baskets that the CPI within this basket was 20% in Turkey and our internal CPI ended with 16%. So like-for-like, more like-for-like comparison with the processed CPI of Turkey. And our internal inflation was -- substantially, we were lower than the overall CPI. But this is a special study to show us where we stand on the more like-for-like comparison. But of course, if you look at the general thing, the general processed food inflation is 12.2%. And our internal inflation for 12 months is 11.8% for the year 2017.

[Operator]

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

[Haluk Dortluoglu, executive]

Thank you all for joining our year-end conference call. And we expect to continue the year as we started, in positive manner. And we hope to see you on the coming quarters' conference calls. Thank you very much. Bye.

[Operator]

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