BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Transcript 2022-Q4

[Serkan Savas, executive]

Good evening, dear analysts and investors. We are pleased to welcome you to our year-end results for 2022. We hope you have all managed to download our investor presentation on our website. And now I invite you to have a look at our annual results better.

We will first look at our highlights for the year. Our top figures are, our net sales have in BIM more than doubled to TRY 147.7 billion, which is close to the upper end of our yearly guidance. And our EBITDA increased by 80% year-on-year, TRY 11.9 billion. And while EBITDA margin is at 8%, and CapEx was TRY 5.1 billion, which corresponds to 3.5% of our sales and which was above our guidance of TRY 3.2 billion. And the net income was TRY 8.2 billion, which corresponding to 5.5% margin. And deferred tax income boosted our net income in 2022, especially in the fourth quarter, as we will provide some details on the following pages about this.

We have added to our store network of 1,021 new stores across all our operations, and that brings us to 11,510 consolidated stores by the year-end. The high inflationary environment affected both customers and companies in 2022. Consumers trade down and they shift to private labels somewhat. And we have -- believe we have benefited from this environment with our high-quality private label range. And our FMCG market share for the year has increased substantially to 1.1%, reaching 16.8% in Turkish modern retail market.

Now let us have a look at the 2022 guidance versus the actuals. Due to rising inflation, we revised our sales growth guidance twice last year. At the end of the year, we have reached almost higher end of our latest sales growth guidance, which is 109%. On the other hand, our EBITDA margin was also, this time, at the lower end of our guidance, but still within range, despite rising costs in this high inflationary environment. And our annual CapEx guidance was 2.2% of sales, while the execution was slightly higher than this, which is 3.5%.

Now let us look at the operational performance, starting with like-for-like sales slide. Like-for-like annual sales increased by 92% from previous year. On our quarterly basis, increase was 106%. Our annual average internal inflation was 100%, and while it is 120% on the quarter leverage. In February 2023, internal inflation is progressing almost 100%, is flat. Like-for-like annual basket size increased to -- increased by 77% and on quarterly basis, 104%. Rising inflation bolstered our basket growth, whereas customers' deterioration in purchasing power had a negative effect on our spendings. Customer traffic increased by 9% on an annual basis, along with our rising market share. By quarterly basis, customer traffic was 1%.

On the store side, we have maintained the opening pace. We have opened 204 new BIM stores and 10 FILE stores in Turkey, and 17 stores in Morocco and 5 stores in Egypt in the fourth quarter. In total, we have 11,510 stores by the end of Q4, including Morocco and Egypt. In 12 months period, we have opened 919 BIM stores in Turkey, 42 FILE stores in Turkey, and please note that number of new design stores have reached to 3,600 approximately. We are increasing our new modern design stores day by day. And we believe in 5 years' time, almost all our stores will be in the new format. Number of mini stores, which have 100 to 150 square meter selling space and lower SKU range, reached to 165 as a store number in the end of fourth quarter 2022. Number of foreign operations stores has increased slightly with 49 new stores in Morocco and 11 new stores in Egypt last year.

Moving to CapEx slide. Our annual CapEx in 2022 was TRY 5.1 billion, which is corresponding to 3.5% of our sales, as I said before, and we have added 4 new warehouses in 2022, of which one of them for our rice packaging company, which is GDP subsidiary. On the quarterly level, CapEx was TRY 1.9 billion, which corresponds to 4.1% of our net sales. The CapEx of the stores increased because of the high inflation and the expenditures made the store-based equivalents. In addition, ongoing construction of our biscuits and chocolate factory increased our CapEx slightly. In March 2023, we have opened our Elazig warehouse, but is temporarily replaced of Malatya warehouse, which was damaged at the earthquake. For now, there are two warehouses under construction, and one is in Istanbul and the other is in Morocco, Marrakesh region. And also a factory warehouse or factory building is being built for biscuit and chocolate factory in Eskisehir.

In terms of -- we summarize in the next page our sustainability efforts. We have been investing on solar power plants for 2 years and currently installed power on our roof of our warehouses. And this reached to 15 megawatts, and we plan to increase this number to 40 megawatts until the end of this year. We estimate annualized electricity production from our sustainable sources will roughly correspond to 10% of our consumption at the end of the year.

We continuously work for efficiency improvements on packaging. As a result of our efforts, we prevented 519 tons of plastic and 146 tons of paper in 2022. As you already know, we have a target to reduce our greenhouse gas intensity by 20% by 2026 versus 2019, so in 7 years. And we are working hard to outperform our target, which is 3 years left for this. Customer satisfaction is one of the key metrics for our sustainable growth in the future, and I am proud to declare that we have the highest net promoter score within food retailers in Turkey.

We recently published our diversity and inclusion policy where we have set a target of women member or members in the Board in coming years. The share of women employees increased to 44% in 2022 versus 42% in previous years. So we have an increase on the women percentage of employees. As a result of our sustainability efforts, we are included in the several local and international sustainable indexes, and we recently were included to FTSE4Good Emerging and FTSE Emerging ESG indexes. And we are also a member of BIST Sustainability and BIST Sustainability 25 indexes. And going forward, we aim to be included in the Dow Jones Sustainability Index as well.

And now moving on to look at our financial performance. Starting with sales progression, as shown at the beginning, we have reached our upper end of our latest sales target for the full year, resulting in TRY 148 billion for the whole year or 109% on year-on-year growth. On quarterly basis, sales grew were 120% in Q4 and reaching TRY 45 billion.

Gross profit and gross margin provision. Our annual gross profit has increased by 99% year-on-year, and our annual gross margin reached 18.1%. On a quarterly basis, gross profit has increased to TRY 8.3 billion with 18.4% gross margin, which corresponds to an improvement compared with the previous quarters.

Then looking at the revenue breakdown by format and geography. Now BIM Turkey forms 90% of total sales while FILE shares in consolidated revenues increased to 4% now, 4.2%, and the remaining 6% is coming from our foreign operations. In Turkey, we can see that our private label share has slightly increased to 65% due to the improvement in the last year. In our foreign operations and FILE, we can say that there's a steady privately label share in FILE, which is 33%. And in 2022, private label share slightly declined to 24% in Morocco, whereas it has increased to 15% in Egypt.

On the next slide, we provide evolution of operating expenses on quarterly basis. Despite the negative impact of utility expenses for the quarter, particularly electricity operating leverage, expect half OpEx to sales ratio to be lower in the Q4 versus the previous year same quarter. And if you look at the annual OpEx letter and the same metric, we see the personnel expenses had no negative impact on margins in 2022 as a new business, despite double minimum wage increases happened in the beginning of the year.

Facility expenses and fuel were two negative factors for profitability throughout the year. So we are mainly being affected by the utility expenses and fuel but overall and with the savings of the other cost figures, we can compensate this. As a follow-up on the OpEx issue, the next slide shows quarterly and annual trends in the quarter of minimum wage hikes, OpEx to sales ratio temporarily rises. However, operating leverage aspect works afterwards as inflation boost our top line as well.

Now let's have a look at annual and quarterly EBITDA and EBIT figures. The annual EBITDA was TRY 11.9 billion, with 80% year-on-year increase and annual EBIT was TRY 9.3 billion, 94% year-on-year increase. Q4 EBITDA was TRY 3.850 billion, and a margin of 8.5%. Following 3 consecutive quarters of contradiction -- contraction in EBITDA margin, it is improved by quarter Q4, thanks to operating leverage aspect as well as our actions taken to improve the gross margin. Quarterly EBIT was TRY 3.1 billion, and the margin of 6.8%.

Moving to net income slide. Our annual net income was TRY 8.2 billion, which is much higher compared to last year, 178%, and corresponding annual net income margin is 5.5%. In addition to a low base of the last year due to the one-off provision for the competition fine, deferred tax boosted net income this year. Excluding deferred tax income, our net income would be TRY 7.3 billion in 2022. On the quarterly basis, net income was TRY 3.4 billion versus TRY 639 million in Q4 last year. We benefit from this TRY 837 million deferred tax income in Q4 this 2022, whereas one-off provision of TRY 718 million fine had a negative impact at the bottom line for the last year, so there is a major base effect.

So moving on to quarterly free cash flow. On this slide, we wanted to show more detailed picture of the cash flow movements in Q4. Cash generation from operations more than offset cash outflows from dividend, CapEx and rents. Rent expenses to sales ratio is close to historic lows at the moment now. And in Q4 2022, rent expense to sales ratio was 1.5%, while it was 2.2% same quarter last year. Please also note that there's a slight improvement in net working capital since the last point.

Now let's look at the FILE results. We have opened 42 new FILE stores in 2022, and the number of FILE stores exceeded 200, reaching 202 stores. We plan to open the fourth warehouse nearby Izmir, and the process is ongoing. With the new warehouse, we will be able to accelerate our expansion in Western part of Turkey in medium-term, let's say. And for the year 2023, we plan to open at least 40 new stores for FILE. FILE's online sales has reached 4% for the last year. And in the last quarter, that's almost 5%. And we plan to open our -- FILE's planning to open now dark stores, a few. So one dark store is already converted from existing all store. And there will be a fully planned and designed new dark store, which is -- which will be opened in March this year.

If you look at the foreign operations, Morocco is continuing to contribute to our net income now. We have opened 49 new stores last year in Morocco, and our total number of stores reached 627 in this market. Fourth warehouse of BIM MAROC will be opened in Marrakesh in June possibly. And we are also working to find new warehouses in the -- as a fifth warehouse in the north of the country.

In Egypt, we started to open new stores. We opened 11 new stores in 2022, and the number of stores in this country reached 311. To operational improvement going on in Egypt, we have experienced operational profitability in Egypt lately, especially in the last 3 months, I can say. We have a positive, let's say, profits in Egyptian operation. And we believe this accelerating performance in Egypt will continue in 2023. The impact of the earthquakes -- sorry, foreign operations, another slide for foreign operations. The foreign -- the revenue contribution of foreign operations was TRY 8.7 billion, which is 6% of our total sales, while EBITDA contribution was TRY 529 million in 2022, which is 4.5% of the total -- of our total EBITDA.

Now the impact of the earthquakes. Unfortunately, as you all know, we had a terrible disaster in Turkey recently. The twin earthquakes impacted an important part of Turkey. And in this slide, we try to provide some clarifications on how BIM is impacted from the situation. First of all, we have lost 27 of our colleagues in the earthquakes in the region. Many stores in the region were affected from the earthquakes, but we have an estimate of 250 of them, which will permanently be closed possibly.

We have plans to compensate the loss of stores in the region. Therefore, we expect no major impact on our revenue growth in the year for 2023. However, the inventories in these stores will have a one-off negative effect on our margins. And we also decided to provide an extra relief to our employees in the region in the short term, giving our full support and so that they feel being with them and with their families now in these difficult times. All in all, we estimate the impact of the earthquake on our 2023 EBITDA margin to be at 25 bps. And we have opened a new warehouse in Elazig, and all operations of Malatya warehouse, which were damaged now is replaced by Elazig warehouse, and all the operations is going on.

Now the guidance for 2023. Despite the high base of 2022, another inflationary year is likely in 2023, therefore, we estimate a 75% top line growth in 2023. In our estimates, we assume to maintain our new store opening trend in -- for the year. And constant minimum wage increase and one-off impact of the earthquake, we prefer to be on the safe side on profitability at this stage.

Early retirement, there's the important topic of early retirement scheme, which will possibly be most of them realized in March. This will put some pressure on the cash flow and margins for the year 2023 as more than 2,000 employees will possibly benefit from this scheme, but it will be a one-off. And we expect roughly TRY 500 million cash outflow in 2023 due to the early retirement scheme of the government-declared early retirement scheme. However, the impact on income stable as well as margins will be limited as the majority of the severance and notice pay expenses already were provisioned before. Income statement impact would be around TRY 50 million at most.

And accordingly, we estimate a 7% to 7.5% EBITDA margin for the whole year. And we estimate our CapEx to sales ratio to be at 3.5%, which is above the historic averages. This is mainly due to the increased construction costs in Turkey and unchanged store opening pace and recovery of the earthquakes zone and also investments for our biscuits and chocolate factory.

As the strategy overview, in 2023, we will give priority to the earthquake zone, and we will be opening new stores to help access to basic needs of people and have economic recovery of the region. In 2023, we plan to increase our SKU to 900 instead of 850 now. So there is an increase in our SKUs in the stores. And our new store usually is bigger than our old stores compared to 10 years ago, so this gives us more room to increase our SKUs further.

High quality of private labels is an important factor, as usual, of our sustainable market share improvement, and we will keep our quality focus, keep our quality focus in the future as well. Es Global is our biscuits and chocolate company. It will start production in the end of the fourth quarter this year. And this specialty will contribute to our quality focus and differentiate our positioning in the market, especially in the private label products. We have been testing mini stores for a while, and we decided to increase the expansion of mini stores going forward. So you will possibly be seeing in Turkey more and more Mini BIM stores.

We have further plans to improve our ESG practices. We plan to further transparency Tier 3 GHG emission, greenhouse emission enhancement, integrating reporting kind of and other new projects. And we will continue to invest on sustainable energy sources. We estimate that annualized electricity production from sustainable sources will roughly correspond to 10% of our consumption at the end of the year 2023.

Now I think we're all, and now we can go for the questions, if you have any. You can raise your hands if you have a questions, please.

[Unknown Analyst]

Congratulations for the good results. My first question is about traffic sites. We see slower traffic like-for-like growth in fourth quarter. And it looks like you lost some market share compared to some other listed peers. When we look at the growth in the top line, you have TRY 120 million and the others say TRY 135 million. I would like to understand the market conditions, how things are going forward and the competition? And maybe in the first quarter, what are the indications about the traffic sites because the base period was strong, so after 1.1%, could we assume a positive? Or is there a risk of going back to negative traffic? That's my long but first question.

And the second question is rather technical question. You made some asset revaluation, and we see a significant increase on the asset size. And of course, on the liability side, you have in the revaluation funds. I would like to understand how the accounting of the depreciation will change going forward? In fourth quarter, we see increase, but because of one-off revaluation, could we assume even a higher depreciation levels for 2023?

[Serkan Savas, executive]

Okay. Thank you very much. In terms of the accounting, the revaluation is recorded at the equity, not as profit as you know. But the deferred tax income coming from the increased base is, of course, recorded on the fourth quarter as an income, as I have said at this.

And about the traffic, yes, Europe is -- we have a decline in the last quarter. And especially in the fourth -- in the first quarter this year, because there's a high base effect in the Q1 2022, there was an 11% growth in the traffic, so there might be -- because base is high, there might be some kind of flat continuing on the Q1 this year. And as you know, there are other effects around in Turkey, but we believe these things, the perception-wise kind of things is temporary, and we will -- it will try -- start to pick up on coming quarters.

[Unknown Analyst]

So Haluk, if we assume a flat kind of traffic, and you mentioned that your price inflation is around 100%, then could we just assume around 100% growth in the first quarter year-over-year? Or it's a wrong assumption?

[Serkan Savas, executive]

90% to 95%. Hanzade, the floor is yours.

[Hanzade Kilickiran, analyst]

I want to make a follow-up on the margin pressure that you are forecasting for this year. I mean can you please go over the details a bit in detail because you are already looking for around 70% to 80% revenue growth, which is actually close to the minimum wage increase, so staff costs cannot create a major, I think, cost pressure, margin pressure in 2023. What could be -- and 25 bps will come from the earthquake, that is clear. But are you very conservative in the margin estimates? I mean, I couldn't really find the rest of the margin pressure here.

[Serkan Savas, executive]

I mean you're talking about gross margin?

[Hanzade Kilickiran, analyst]

No. EBITDA margin, you are looking for around 50 to 100 bps headwind in 2023. And you mentioned that 25 bps is related to the earthquake, which is related to the inventory. That's fine. So you are looking for extra 25 to 75 bps margin headwind in 2023. So I mean, where is this margin pressure coming because your labor cost is, I mean, behaving nicely. And your top line growth is parallel to the minimum wage increase, so that shouldn't create a margin pressure, I presume. So I'm trying to understand what could be the other drivers behind the margin headwind.

[Serkan Savas, executive]

Okay. It increased 55% as a minimum wage hike. But as you know, also in the July, there was an increase last year, the minimum wage hike, so this has a compound effect. So we expect this minimum wage hike might affect us in the first 6 months. Plus, there is a low base in the first 6 months of the year last year. So this may have a pressure on the cost side. But as you know, we are trying to always be conservative on our projections and try our performance to be better than this. So if there is some, let's say, gains from the utility, gains from the personnel expenses or that the inflation will be higher than expected, things will be different.

[Hanzade Kilickiran, analyst]

Okay. And this TRY 50 million P&L impact from the early retirement scheme is also going to be reflected in the OpEx, right?

[Serkan Savas, executive]

Sure. Sure. Any question? If you have a question, you can go for it.

[Unknown Analyst]

About the dividend side, what are your plans on that? Could we expect a regular dividends terms?

[Serkan Savas, executive]

Because of this earthquake and the, let's say, early retirement scheme things, we have -- we need to clarify our cash position. But what I can tell you -- so there are some uncertainties around, but I can tell you that we will be making dividend as high as possible as we did all -- in our whole history. So there will be dividends, and possibly in two installments. And we will do our highest dividend payment possible according to our possible cash flow. I think there's a question from [ Rajat ]. Rajat?

[Unknown Analyst]

Just wanted to ask you, what are the inflation expectations that are embedded in your guidance, number one. And then two, could you just help us understand, obviously, the gross margin was a material improvement in Q4? It seems like you can almost solve whatever gross margin you want, but what are the actions that you took to improve that.

[Serkan Savas, executive]

60%, roughly 50%, 60% is the -- which the expectation in the gross margin -- sorry, in the inflation. This is the general expectation in the market, generally speaking. And what we did in the last quarter for -- to work on the gross margin is -- was that your question?

[Unknown Analyst]

Yes, yes.

[Serkan Savas, executive]

Okay. Of course, let's say, if the year-end negotiations and the year-end net income plus a better negotiation conditions to increase our gross margin, that's what we did, generally speaking.

[Unknown Analyst]

Okay. So mainly sort of on the supply chain and working with your suppliers.

[Serkan Savas, executive]

Yes. Especially working better -- in better terms with suppliers.

Question? Or there's no more question? There's no hand raising. There is no further hand raising. We will be closing the session, and thank you all for joining us today. So we hope to meet you in our coming quarterly conference calls. And thank you all for joining us today.

So we have -- we started the year with some sorrow in Turkey, tens of thousands of people have been lost, and their families are suffering. I hope this be the last incident that we have lived in Turkey and it will not happen again. And we want to look for the future more optimistic as a country, and we will -- as BIM, we will do our best to, let's say, reconstruction or being with the people, with our people, with the people of the region, how to improve their life as soon as possible and compensate sorrows they have lived through. So thank you very much for all for joining us in our conference call today.