Migros Ticaret AS

IST:MGROS.E

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Migros Third Quarter 2018 Financial Results Conference Call hosted by Özgür Tort. My name is Emma, and I'm your event manager. [Operator Instructions] I would like to advise all parties, this conference is being recorded for replay purposes. And now, I'd like to hand the call over to Özgür.

[Ömer Tort, executive]

Thank you very much. Good afternoon, ladies and gentlemen, and thank you for joining us today on our 9 months results conference. As usual, I would like to give you some update before our trading slides. I hope you all received the presentation. To start with, I believe it's the good news that we have finally managed to have the legal merger of Kipa entity which was an acquisition back in 2017. That has taken us a kind of a long-waited legal merger. However, it is somehow accomplished by the end of August, so we are quite glad to complete this transaction in all means. So that is going to allow us definitely to benefit from clear supply chain efficiencies and for the joint operation and other benefits, as we already expressed, would be on some part of tax burden, to reduce our tax outcomes and practically of course, the main aim will be to implement the full synergy plans accordingly in the coming months.

So in the basic expectations, of course, you are all aware, unfortunately, we had a turmoil continuing in a kind of a high volatile environment during August and September. As of today, I think we can be much more positive compared to what we experienced back in the summer months, and we are hopeful that the stable environment will help all the business industries toward the coming months as well. So in the overall sense, I would be starting with our trading upfront sides. I think, in overall terms before going to the details, we can express that across our banners and different formats, we are quite happy with the performance in terms of traffic and basket size growth of our format. And that was an important moment for us within the -- right after the summer season as the 20th anniversary of our online operations. We also launched, what we call, the fourth version of our consumer interface. That's an important development for our company for basic view of our online operations, but also at the same time, our digitalization effort at the store level. So these new infrastructures will definitely enable us with further improvements on personalized experience and some additional initiatives that will be also followed for the online commercial activities that Migros is significantly ahead of the industry averages in the local market.

I think the major issue at the moment in the country is to manage the inflation very carefully. And practically on the macro front, that is the #1 item that everybody is focusing, including business environment and the government as well. Naturally, inflation actually is eating up the purchasing power of the consumers which is quite an important challenge for the long run. So that is why, in this respect, we are definitely supportive of any structural, of course, anti-inflationary measures where the authorities will take actions, of course, as long as these measures does not disturb the trading environment and the overall policies which has been implemented within the retail environment. And we're seeing some kind of sign that both suppliers and retailers combined, we are all doing the similar efforts to make sure that this quite important hike of inflation is at least eased and to help us in the long run.

So with this in hand, I will now go through our regular presentation. And to start with on Page 2, as usual, we'll go through our sales evolution. As for the third quarter itself, we managed to deliver 24.4% top line growth on our results, which takes us around 22% of top line growth within the 9 months of the company's operation. It is worth to elaborate that we had a important and positive strong summer seasonal performance on some specific destinations in the country, where everybody should expect that tourism recovery in the Turkish industry was important for 2018. We also benefited from that, both from our operations in the summer destinations and in the overall large cities as well.

So basically, the major outcome of the top line growth is, of course, is very important for the coming months, and we are trying to manage the top line performance in the similar aspect, and I can say that October was giving similar signs of growth pace up until now on.

Continuing with our market shares reflection, reflecting this important top line growth for the company. We reached, in terms of the overall market shares, to levels of 7.1% of the total FMCG market, which is 16.9% of the total modern trade. And in both channels in the total and the specific for the modern channel itself, Migros managed to increase the market share about 10 basis points, that is an important development for the total market. And for the modern trade, it's even 20 basis points increase, which is an important deliverable, considering our important space reduction efforts to optimize, especially the Kipa hypermarkets during the years. And regarding to that, that pace of important market share gain is across to that space optimization efforts.

In the overall market, I believe it is worth to elaborate that organized trade growth is significant in the country and Migros is also one of the leading brands, together mainly with discount channel growing in the country. Whereas the other channels of the organized players, including local chains and some organized other trade efforts are below the average market growth, whereas Migros taking the clear market share in that front.

On the expansion front, in the third quarter itself, we opened 85 new stores which took us in total for the 9 months, 219 in the total figures. As for the 2018, we are now in 81 cities, which is all cities of the country, which is an important development of historical move of the company's overall penetration levels. That was already expressed during our half-year presentation, and we are now getting stronger in the existing parameters as well. All in all, Migros reached 2,090 stores in -- across banners of different formats and brands that we are managing.

To elaborate on the physical space growth, the reflection of this 219 stores of new expansion resulted around 5% space growth. This is worth to elaborate, as I expressed earlier, regarding the space optimization efforts, mainly at the Kipa hypermarket operations.

In terms of capital expenditure on Page 5, we have reached TRY 370 million of capital investments for the year 2018, for the first 9 months. This is roughly the similar amounts of sales coverages compared to last year's yearly figures. And it's also important to underline that another acquisition transaction which has taken place in Q2 and Q3 is also covered in this figure. At this moment, we have converted the acquisition transaction of 54 Uyum and Makro stores into Migros different banners, and these are all up in operation, and that is also covered within the expansion of capital expenditures.

Regarding our expectation towards the end of year, as we guided earlier, our total CapEx for the year would reach around TRY 440 million levels, including, as we said, the transactions of acquisition as well.

It is worth to elaborate that Uyum transaction is still continuing. There are some stores that we are on purpose continuing to negotiate with the existing landlords in terms of the rental expenditures. So if we manage to convince some of them for better rental expenditures for the Migros side, we will be continuing a few more of Uyum stores to be included within the portfolio. If not, this is going to be the figures up until now, which as you can imagine, we managed to open the ones which are the most targeted versions, which is also completed until now on.

Regarding our Kipa banners, as is also worth to elaborate, right after the merger transaction that has taken place back in the end of August, we started the conversion of the banners as well as we already guided, and this banner conversion is now taking place across the cities that Kipa operates. And up until now on, we manage more than -- we want -- I mean, we manage more than 70% of the conversions have been realized. And by the end of this month, which is November, we are planning to convert all Kipa banners into Migros in that front.

It is also worth to express that we will be keeping Kipa brand in the major shopping centers of Kipa since the shopping center perception and the brand recognition and well -- where we have consumer perception is very strong for Kipa banners in especially some districts where Kipa is strong. And we like to keep this brand as shopping centers, its own brand, where we will operate Kipa shopping centers within Migros banners as the supermarket or the hypermarket players together with the other tenants as a mix of the operation.

And finally, the efforts of Kipa space optimization to elaborate on, we have already converted about half of the targets, and this will be continuing, of course, for next year. We are now monitoring the impact of the Kipa space optimization on the hypermarket front. And regarding the results that we would be just monitored, we will be accordingly continuing the rightsizing efforts regarding the hypermarkets in 2019 as well.

To continue with our gross profit evolution. For the third quarter itself, we managed to increase our gross profit more than 27% and in total of the 9 months, which is a 27.5% increase versus last year. And it is worth to elaborate that the synergy that has been generated coming from the Kipa acquisition and of course, further improvements with our supply chain efforts together with our suppliers is also another important gain that we have managed, especially on the shrinkage levels that we target for the company's overall performance, and that helps the company's overall gross profitability evolution as well.

Following our gross profits, on Page 7, very briefly our EBITDA and EBITDA before rent evolution. It is an important gain that we generated in the third quarter itself as well. We managed to increase our EBITDA by about another 30% compared to last year third quarter. And all in all, our EBITDA growth for the 9-month results is now 35.3%, which has reached TRY 874 million of EBITDA generation for the first 9 months of the year. It is clear that our strong top line growth is mainly the major driver of EBITDA generation and which is also supported by especially efficiency gains that we are generating as guided at the Kipa operations and mainly at the central office, at the logistics and as well in the store front expenditures optimization that is helping the company's overall performance in different banners.

And seasonality, it's always worth to elaborate as third quarter results. Our margins are also, with the help of our strong seasonal performance, are at one of the highest results considering our back 2 years results, one of the important margin generation, which has been helped in the overall operating efficiencies. And following to that remark, I think EBITDA before rent is also worth to elaborate that has reached 11.5% in terms of our 9 months results.

A brief summary on our deleveraging profile. Obviously, this quarter of the year was one of the important revaluation hike which has been experienced. And at the moment, our net debt figure is now TRY 3.3 billion, which is an equivalent of 3x the EBITDA. When we compare our 9-month figures, there is a 20 basis points increase versus the last year comparison which is mainly a driver of almost 66% devaluation compared to 1 year's period. Of course, I mean, considering today's existing conditions, we are glad to see the Turkish lira appreciation in the last month itself, which is helping the company's -- in the perspective since the company is capable of increasing the EBITDA now with the existing tariffs rates which is announced TRY 6.2 as of today for the euro. We managed -- we can say that the company has managed to deleverage the company compared to previous years in that front even at the levels of EUR 6.2 to Turkish lira currency levels. Obviously, it is worth to elaborate that we are not happy with the overall currency movements, and we are taking every measure in terms of refinancing or just repositioning out that profile. And in that front, as we have structurally [indiscernible], we've managed to issue in terms of Turkish lira, bonds for the company, which is another tool for the financial markets, which will be in Turkish lira exposures. And we are also working heavily with our real estate portfolio, whereas necessary and as guided, which is also a kind of another tool for deleveraging our operations. And we are also experiencing, of course, the real estate environment, which is not a great environment too for the asset transaction. However, in these circumstances even, we managed to transact in 3 different transaction on the real estate front, even in the first month of this quarter, which is Q4. And this has been taking place, and I am positive that with the slight improvement on the Turkish lira and hopefully coming months with interest rates, this field of real estate will generate further lucrative transactions for the company, which will also help us in terms of deleveraging our debt profile.

And this is mainly Page 9, as you can see the guidance figures regarding to debt. We are trying to upgrade, of course, all the guided figures with the recent performance that has been realized, and I'm glad to express that in mostly all dimensions on the top line growth, another 2% minimum, which is around 22% versus our guidance of 20%. On the top line growth and on EBITDA margin, more than 6% margins are now targeted for the total year compared to our previous guidance of 5.5% to 6% levels, which is an important gain for the company, both rapid transaction which is coming from the turnaround of Kipa, and at the same time, company's overall performance. And on the expansion front as well, we are now guiding for more than 230 stores compared to our initial guidance levels around 200 store level. So it's a -- we are, as management, glad to express that guidance levels are revised in all dimensions for the end of year. And different means of new company operations, especially cost vigilant management on the structural efforts where necessary, which will be taking place, especially on the Kipa front and some other specific areas like energy costs. We will be just taking some further measures to make sure that the efficiency metrics are helping us in the coming months and years. And structurally, as I also expressed, the 2 efforts of additional financial tools to include the Turkish lira exposures next to our currency exposure and some other transactions to help our overall balance sheet in terms of property damage, which is also the main management focus items for 2018 in the coming months to end for the year. And finally, the focus on our digitization efforts are taking every month more deeper and more focus in the company. And as I expressed at the beginning of the presentation, the online operations, which are growing very fast at the moment, even much higher than the company's overall average, another important area of focus for the management. And we're trying to come up with some even additional new tools and structural efforts to enlarge our overall position within the e-commerce area and also to support that through critical store levels to have further digital customer experience at the physical stores to make sure that our basic proposition of marketing advantage regarding the innovation and the additional service which has been, for years, Migros' overall position, is captured and even deeply increased in the eye of the consumers.

This is going to be pretty much the presentation for today. And as usual, now we will be glad to have your questions if there are any. Thank you very much.

[Operator]

[Operator Instructions] Okay. We have a question here from the line of [ Esi Mandati ] of [ Chirla ].

[Unknown Analyst]

I've got a question regarding your rent expenses and rent income after this regulation change regarding the FX fixing. So will there be a major effect in your EBITDA since you have rent in country or shopping mall contracts? And secondly, for your rent expenses, will that be a major change that we should concern about?

[Ömer Tort, executive]

Thank you for the question. As expressed, we have 2 dimension, both rental expense and rental income. On the rental expense front, I believe we have already disclosed that about 1/3 of our contracts are based on hard currencies compared to our large portfolio of stores. And in that front, of course, it is not just because of the law, but as anticipated, we have been doing several negotiations throughout the years for the hard currency based contracts, which I can say that we were already doing several savings at that front. And with the new law implemented, the fixing the currency at the levels which has been expressed in the market, we will be also expecting some further savings but it is not going to be very significant. As I said, we were already having further advantages coming from the market conditions, even at the hard currency contracts. But all in all, there would be a positive impact for our Q4, especially on the rental expenditures. Coming from the rental income side, regarding our shopping mall revenues, I think we can express very clearly that we have very few contracts left in hard currencies in the back years. Migros already converted and Kipa was also in the same front, converted the majority of the contracts over into Turkish lira. So the impact of currency-driven legislation will not going to have a material impact on the rental income side.

[Operator]

[Operator Instructions] Okay, we've just had a question come through from the line [ Gokum Goka ] of [ Yatari ].

[Unknown Analyst]

[Foreign Language] Did I understand correctly that you will have a transaction in fourth quarter of 2018 for Kipa assets? Or you just mentioned about your intentions?

[Ömer Tort, executive]

So if I'm not mistaken, the question is about Kipa assets, right? I mean, just to clarify.

[Unknown Analyst]

Yes. Your last comment, what I understood that we should expect that transaction in the last quarters, if I don't misunderstand, just to confirm it.

[Ömer Tort, executive]

The comment of mine was related in the fourth quarter already, we transacted 3 different location under our banners, and that has been already taken place. So it is on Page 9, that TRY 56 million value of property already been sold and it's already been cashed in into our account at the fourth quarters. And we are continuing, as guided earlier at the beginning of the year, to continue divesting some of the properties that we already structured and defined. And as I was trying to express, considering the market conditions with the currency level and relatively better environment on the macro front, I am mostly positive as that real estate market will have a better condition in order to have further transaction to happen, but this is, of course, an expectation only at the moment.

[Operator]

There's no further questions at this time. Oh, we've just had a question come through now, sorry, from the line of Berna Kurbay of BGC Partners.

[Berna Kurbay, analyst]

I have a few questions. The first one is about the operating performance. We see an improvement in the EBITDA margin in the third quarter versus the previous quarters. At the same time, the net interest on operations which was recorded below the operating profit line has increased as well in a relatively significant manner, at around 2.6% of revenue now. So how should we think about this going forward? I realize that you have upped your EBITDA margin guidance, but some of that seems to be taken down below the operating profit line. And I was wondering how you would guide us for that for the future. That's my first question. My second question is on the CapEx side. You've mentioned that you've been transforming both Uyum stores and also Kipa stores to reflect to Migros stores. And is this a meaningful portion of your CapEx spending? So going into 2019, should we expect a more modest CapEx level? And what should be the composition of the -- what will be the composition of CapEx in 2019? And finally, on the debt front, you have held another TL bond issue. And if I remember correctly, there was some short-term working capital related debt at Kipa. Do you think you will need to refinance this TL debt? Do you need to roll it or is going to be closed because now that Kipa and Migros has merged and well, you are generating some synergies on the supply chain, the working capital conditions there are better? Or is this TL funding mainly because you want to have ammunition for the upcoming euro-denominated debt repayments in 2019?

[Ömer Tort, executive]

I thank you for the questions. Looks like we will answer them one by one. The relevant item on our profit loss statement regarding the interest charges, it is clearly driven by the interest rates at the market today. And compared to previous years, clearly, there is a significant increase on the interest rates and there is an element on our purchasing terms, as you can notice on our tables. And that interest rate has been kind of a structural effort study for years that has been done, and this is the reflection of increased interest rates. And where -- if you can just adjust any type of this number, I think the EBITDA performance of the company regardless of interest rates is even performing better than last year. And as I expressed, that is mainly the recoveries and turnarounds that we are realizing at the Kipa stores. So both interest charge or without interest charge, this is still the relevant item. So in that front, we are positive that we're going to have a good result in terms of our management expectation for the year 2019. For next year, of course, we are definitely working with our budget study and the inflation assumptions. And regarding the currency assumptions are -- honestly, it is tough to from today, assume whether it's going to be the trends we realize. So this is going to be a careful year as everybody anticipates, and that is going to be, again, another important year for additional turnaround store renovations regarding Kipa and at the same time, for Uyum partly. So in that front, we are expecting better results from Kipa operations for next year. But on the other front, of course, there will be an important cost pressure coming mainly from energy costs and from still somehow currency-related expense items which may hurt the company's overall expense position, which we are definitely working nowadays for -- to plan for how to tackle this main issue. Regarding the capital expenditures, I can assume that for next year, since we have done this year important renovations and additional investments on the existing storefront coming from Kipa and Uyum and also the additional acquisition transaction related with Uyum, one should expect relatively less capital expenditure for next year. But still, it's an early comment that we are -- we will be working to come up, and as anticipated, we will guide the markets with clear figures at the beginning of the year once we are done with our planning cycle. Regarding the Turkish lira bond issuance, it is clearly an effort that Migros introduces to have a new financial tool to enlarge our financial market exposures. And we believe that this market in the coming months will be even -- look for additional opportunities. And we would be mainly focusing to generate Turkish lira-based new financial tools, which is going to be the main aim. And once the funds are realized, of course, it is going to be a clear message where the majority of the funds will be just analyzed. One, we should be definitely expressing that if there are short-term expensive loans, we have to be just trying to closing down this type of unefficient loan structures, this is going to be the first aim. And at the same time, we're going to be exchanging the hard currency-denominated loans into Turkish lira as much as possible. So it is not going to be the same basket to transfer the Turkish lira bonds to different financing tool, but it is going to be a tool where the finance team will manage this very carefully to make sure that it is going to be the best benefit for the operations.

[Operator]

No further questions at this time [Operator Instructions] Okay, there's a line here -- a question here from the line of Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

My question is regarding Kipa or just what was the top line growth in Kipa or the Migros growth excluding Kipa in third quarter? That's the first question. And the second question is, you mentioned that the trends in October is similar to third quarter. Considering the high price inflation, isn't it fair to assume a little bit higher growth in fourth quarter?

[Ömer Tort, executive]

I thank you. Regarding Kipa figures, company's third quarter results are pretty much similar across banners, so there is no significant difference from one banner to another. But on the other side, we have to express that there is no more Kipa definition. And as we were planning and managing this accordingly, we have been already doing similar commercial changes at the Kipa front. At this moment, in the fourth quarter, it is only the banner change which is taking place, which means that the operation-wise Kipa stores were already being -- in terms of assortment pricing, promotions, were already being converted into Migros practices. So that is why there's no real difference from 1 store to another in terms of banners, and I can say that they're performing pretty much similar to Migros to Kipa. But it is definitely worth to underline one more time, Kipa was mainly a hypermarket operation and we are rightsizing the majority of the hypermarkets, which means that in terms of space, we're going to have less space. But of course, in terms of sales per square meters, we are definitely increasing our efficiencies, both in terms of sales and cost efficiencies. The price inflation is, of course, the major question today. And unfortunately, there is no clear answer to your question. Of course, one should argue that higher inflation should result higher top line, but on the other hand, consumers are becoming very selective. And as everybody would anticipate, the trends at the moment is being towards what we call consumer confidence is not at the levels that we all expect. So in that front, I'm not experiencing and I don't expect as well, the higher inflation will be higher the top line growth will be. We have to be all very careful about how to implement the product mixes, pricing and promotions regarding to the reactions of the consumers. However, I mean, as a proportion of when we compare Q2 to Q3 and Q3 to Q4, there is an important element of inflation, and we already see that in the pricing of the products.

[Cemal Demirtas, analyst]

Excuse me, as a follow-up, did you see any appearance increase in the traffic during that turmoil when there was a major concern related to currency? How did the consumer reacted to your stores? Do you see -- in these difficult times, do you see higher shopping habits historically? What was your perception over the last several months regarding the consumption patterns from your perspective?

[Ömer Tort, executive]

The reaction of the consumer is pretty much very clear. They are very careful about their spending, especially the product categories and the brands that they are picking. So in that reflection, all retailers are focusing now at the moment to the basket sizes, to make sure that the wallet shares is being captured. And Migros is doing this for the last 5 years back-to-back in terms of positive growth in real terms in several dimensions. And for the traffic as well, I can say that we haven't seen any drop on the traffic. The opposite, we have, even in the same stores, higher traffic at the moment compared to last year, but we should be just assuming this, at the same time, they are coming from new customer segments, thanks to our efforts of proposition on the commercial front. But at the same time, shopper levels are doing more frequent shopping with a relatively smaller basket size. So in that sense, it's a mixture, but all in all, Migros' traffic in the same stores is positive across formats.

[Operator]

No questions in the queue at this time. We just had a question through now from the line of Berna Kurbay of BGC Partners.

[Berna Kurbay, analyst]

I just wanted to have a follow-up question on the Kipa integration. Just in response to the previous question, you mentioned that the assortments pricing and promotions at the Kipa stores are now aligned with the practices of Migros. So in terms of the next steps that you're going to take, is it now only come down to you downsizing the remainder of the Kipa hypermarkets? I mean, aside from that, pretty much all the synergies at the supply chain level, the integration of Kipa into Migros' operation, is it now complete? And could you please remind us of the hypermarket downsizing trends once again, please, what you've done so far and what's now left?

[Ömer Tort, executive]

We thank you. Downsizing efforts are the major stream where we are matching the market's requirements with the physical outcome of the acquisition transaction. This is going to continue. I was trying to explain this during the presentation. Up until now, if I'm not mistaken, we have rightsized about 13 hypermarkets of Kipa. And as you can anticipate, we have to monitor the results once the downsizing and rightsizing is taking place. And we have to just also some -- getting some learnings where we are just having additional efficiencies and where we might be moving some basket size definitely. So in that sense, in that front, this is why we are now in the second phase. And starting from next year, we will be doing the continuation of the downsizing efforts on the Kipa hypermarkets. Up until now on, good news, there is no store closures decision that we have taken. It's a very good news for us that all the Kipa hypermarkets will continue their operations, which means that stores are operating in the perspective that we are expecting. However, we have to be very careful about the rightsizing efforts and the new layout and the shopper experience once it is done. So it is not as simple as we can say downsizing from 8,000 to 4,000 can do it by all means. So we have to make sure that commercially, we have structured and new efforts and the new store format is also as structured and planned as we aim for the coming competitive environment requirements. And as you can anticipate, there are some important product categories like electronics, kitchenwares, textile, home appliance, as these categories are the ones which are rightsized. And we are increasing our penetration in those stores in the fresh line on more FMCG products. And the first outcomes of our rightsizing efforts is definitely very positive in the category where Migros is very experienced on fresh lines and in FMCG. However, we have to be very careful about the non-food categories, as I expressed. So this is why we are taking these efforts, and I'm expecting some positive improvements in that front as well. Regarding the supply chain, we are now working on an effort to close down one of our distribution center in the [ Eastern ] region which is an outcome, a clear outcome for the company to realize some supply chain efficiencies. So which means that it will take place in the next year and that is going to be one of the important gains for the company's overall operation. And at the same time, even if it is the product categories and pricing-wise, we have implemented Migros practices, there are still steps that we have to take in terms of product availability, promotion efficiency and food store activities efficiency that we have to all aim continuing getting -- producing just with the Migros both commercial terms and store operations experience. So in summary, yes, the integration is taking place very rapidly, but not yet fully. The whole synergies and all the others activities that we aim is completed. So it is going to be just another year definitely where we have to be aiming further efficiencies to come from Kipa stores.

[Berna Kurbay, analyst]

And would it be fair to say that this is in line with your original plans in terms of the timing?

[Ömer Tort, executive]

Timing-wise, yes because we've said it would take about a couple of years in order to downsize to the right layouts. So 13 has been realized, and there's another 15 stores to be rightsized. So we are only half of it.

[Operator]

Okay, no questions in the queue at this time.

[Ömer Tort, executive]

Well, I believe there are no further questions, so I would like to thank you all for being together with us today, and we hope to see you for the full year results in the coming months. Thank you very much.

[Operator]

Thank you. That concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.