Carrefour SA

PAR:CA

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Carrefour First Quarter 2018 Conference Call. I now hand over to Mr. Matthieu Malige, Chief Financial Officer. Sir, please go ahead.

[Matthieu Malige, Chief Financial Officer]

Good afternoon, and welcome to our 2018 first quarter sales call. I'm here with Mathilde Rodie and the rest of the IR team. As always, we have issued a press release and a presentation prior to this call. I will make some introductory remarks and then we will then be happy to take your questions.In summary, our first quarter performance reflects the following points: firstly, we experienced overall softer market dynamics in Europe, notably due to unfavorable weather conditions, which particularly impacted nonfood and hypermarkets; second, food deflation continued in Brazil; and the competitive environment has been persistently tough in our main markets. In Q1, our sales stood at EUR 20.8 billion, up 2.6% at constant exchange rates. This was offset however by a higher-than-anticipated negative currency impact of minus 5%, largely due to continued depreciation of the Brazilian real versus the euro. Adjusted for a favorable 1.3% calendar effect, thanks to an earlier Easter this year, our Q1 sales are up 0.4% like-for-like, reflecting the various factors I mentioned earlier.Looking at our performance by geography. France sales were up 0.9% in total, and down 0.1% like-for-like in a less dynamic market than in previous quarter and in an increasingly competitive environment. Supermarkets rebounded in Q1 with plus 1.6% like-for-like growth. This confirms their attractiveness. Convenience and other formats proved once again their resilience with 3% like-for-like growth. On the other hand, unfavorable weather conditions and operational disruptions notably affected nonfood and the hypermarket format. Hypers posted minus 2.3% like-for-like in Q1.In Europe, we also saw softer markets on the back of unfavorable weather conditions. Competition has remained fierce in our European markets. Total sales in Europe at constant exchange rates were up 2.8%, while like-for-like sales were down 0.8%. In Spain, our total growth was up by 4.4%, driven by good performance of the stores acquired from Eroski. Like-for-like sales stood at minus 0.6%, a similar trend to Q4 despite weaker markets in particular in nonfood.Italy saw a like-for-like sales drop of 3.2% in much softer markets and in an environment marked by tougher competition. It's worth noting that we have been cycling over strong comparables versus the past 2 years as Italy was boosted in past quarters by 24-hour store openings and the clusterization of supermarkets. Belgium was impacted by operational disruptions. Excluding this impact, sales were broadly in line with market trends. Poland's total sales were up 5.7% at constant exchange rates, driven by a favorable Easter campaign. Like-for-like ex calendar sales were slightly down at minus 0.8%. Finally, Romania posted 10 -- plus 10.6% growth at constant change rates and 7.7% growth like-for-like reflecting continued positive commercial momentum. Let's now move to Latin America. Latin America grew 9.1% at constant exchange rates and 4.5% on a like-for-like basis despite continued food deflation in Brazil. This quarter was marked by a very unfavorable currency impact of 21%, largely driven by continued depreciation of the Brazilian real versus the euro. Brazil sales, which were published last night, were up 6% in total at constant currencies. They benefited from the opening of 4 Atacadão stores. On a like-for-like basis, sales were up 0.4%. At Banco CSF, total billings were up by a strong 37% in the quarter. In parallel, Banco CSF's credit portfolio rose by 24%. Argentina, for its part, saw gradual volume increases and like-for-like sales growth of 21%. In Asia, sales were down 4.5% at constant exchange rates and 3.9% like-for-like, marking a continuation of previous trends. Asia was also impacted by an unfavorable currency effect of minus 6.4%. China's like-for-like sales are down 6.6% in an environment marked by the growing weight of the e-commerce channel, in particular during Chinese New Year. Trends in food sales remained in line with those of H2, while nonfood sales were disappointing. For its part, Taiwan continued to post solid sales growth with its 13th consecutive quarter of like-for-like growth. These are, ladies and gentlemen, the main comments we can make on our Q1 sales.This quarter further demonstrates, if it were needed, that Carrefour 2022 is the right strategy for Carrefour and that it is urgent to implement it. I would like to share with you that even as our teams are keenly focused on the day-to-day business, a profound transformation momentum has taken shape since the announcement on January 23 of the Carrefour 2022 transformation plan. To illustrate this, I would now like to present a few examples of key projects that were launched in the course of the quarter. First of all, we implemented the first measures to deploy a simplified and open organization. Carrefour announced numerous partnerships this quarter such as Quitoque for meal-kits deliveries, Showroomprivé in private online sales, La Poste for last-mile delivery and Sapient to transform the e-commerce offer. The strategic partnership with Tencent in China has also been concluded to redynamize our operations in the country. This partnership has seen rapid realizations, including the launch of a mobile application on WeChat, which improved visibility of Carrefour's online offer in the country. The process to transform the organization's headquarters in France and Belgium was launched and is progressing well. Discussions with the Argentinian government also started a few days ago. Second, in order to achieve productivity and competitiveness gains, Carrefour has initiated very positive momentum in the improvement of direct and indirect purchasing. Discussions on the exits of 273 ex-DIA stores from the group's scope have been launched and are progressing. We have engaged a strong dynamic of CapEx reduction through increased selectivity and productivity. Third, we are rolling out our omnichannel offer. Carrefour opened new stores in its growth formats with 76 openings in convenience and 4 in cash & carry. In France, we accelerated drive openings and launched D+1 home delivery in 10 new cities. Moreover, Carrefour opened last Monday in Lyon and Saint-Etienne its first pedestrian drives and begins operations today of its second order preparation platform in the Paris region. We also launched the payment app Carrefour Pay. Lastly, the development of carrefour.fr, our single e-commerce entry point, is making good progress with a go live expected in the fourth quarter.In line with our ambition to lead the food transition for all, we posted significant achievements in the quarter. We launched the first blockchain in the poultry product line to ensure traceability. This blockchain technology will be rolled out to 8 more animal and vegetable quality lines in the course of the year. Also, Carrefour extended its range of products containing no antibiotics to eggs, salmon, veal and pork in Belgium, Poland and recently, Spain. Finally, Carrefour signed a partnership with the World Wildlife Fund to accelerate conversion and development of organic products in France in order to guarantee price, volume with a 3- to 5-year commitment. Specific in-store labeling indicates which organic products are under conversion. As you can see, we are hard at work executing on the Carrefour 2022 transformation plan, and there will be more to come in the next quarter.To conclude, on a more financial level, we confirm the outlook that was communicated on February 28. The group's results will reflect 2 key elements. First of all, the evolution of exchange rates and notably that of the Brazilian real. The real's spot rate yesterday stood at BRL 4.21 to the euro compared to a leverage rate for 2017 of BRL 3.61 to the euro. Therefore, Carrefour starts 2018 with a very negative ForEx effect. This is a factor that must be taken into account when considering 2018 results. Secondly, our over leverage investments of the past years will lead to a further increase in depreciation despite the financial discipline of Carrefour 2022. CapEx are still targeted at EUR 2 billion in 2018. As you may have seen, we have issued, a few minutes ago, another press release regarding Carrefour board composition. More specifically, the release states that the board will propose to our next AGM the renewal of 5 directors and the appointment of 4 new directors: Amélie Oudéa-Castéra, Aurore Domont, Stéphane Israël and Stéphane Courbit. Their experience and diverse profiles and notably digital and entrepreneurial skills will be valuable assets to support the implementation of the group's transformation plan, Carrefour 2022. Through these appointments, the Board of Directors is continuing its renewal, which began last year, in 2017, welcoming more female members as well as younger and more digital profiles.I thank you for your attention, and we'll now be happy to answer your questions.

[Operator]

[Operator Instructions] We have a first question from Mr. Cedric Lecasble from Raymond James.

[Cedric Lecasble, Financial Analyst]

I have 3 questions, if I may. So first one on the disruptions you mentioned in France and Belgium. Could you quantify the disruptions in Q1? So second one on the achievements on purchasing, overheads and the launch of trying to find solutions for the DIA stores. Can you tell us maybe what we can expect maybe in terms of phasing between 2018, 2019? And what share of cost savings and from purchasing from DIA, et cetera, and from overhead? Could you help us a little bit phase these cost savings in our models? And the last one, regarding now greater visibility on the plan on cost savings for the EUR 2 billion target, could you maybe help us break down these trends by big category of costs if it's possible at this stage?

[Matthieu Malige, Chief Financial Officer]

Cedric, thank you for your questions. Well, as far as the disruptions are concerned, well, you understood we're not quantifying them. They include both the social disruptions and also operational disruptions which followed the snow events that we had earlier in the quarter, which had an impact on accessibility to a number of stores and also, which had an impact on the logistic chain in a number of geographies. As far as your second question regarding the transformations, you have seen, indeed, that significant progress has been made, notably on the discussions for the 2 projects in France regarding the reduction of head office and the project to exclude from the scope of the group 273 ex-DIA stores. So we have made rapid progress and that's really the source of satisfaction. Once -- on the -- let's start maybe with the ex-DIA stores. We have launched a process to find potential buyers, as you know, for these stores. We're still in the process of having discussions with potential buyers, so it's too early to see exactly where this is going to end up. I think it's fair to assume that there's no big change there, that most of the stores will be outside of the scope of the group by the end of the year, over the last months of the year. And therefore, it's fair to assume that we will have a full year benefit of not having these stores in the scope of the group in 2019. I remind you that these stores, we are losing about EUR 150 million at EBIT level. As far as the reduction of the French headquarter is concerned, here, we have made progress in the discussions with the unions, so it's likely that the process will develop in the course of the next month, here also with some departures in the course of the last month of the year, and therefore, a benefit in 2019. As far as the EUR 2 billion targets is concerned, we've not been very specific on the buckets. However, a number of people have made some estimates whereby you think that a small half will be coming from the direct purchasing. We mentioned that the contribution of staff reduction will be very limited in terms of percentage, and logistics will be double-digit percentage and the rest will come from indirect cost. I think that's the big numbers. You've made some assumptions, which are in line with what I just said.

[Operator]

Next question from Mr. Arnaud Joly from Societe Generale.

[Arnaud Joly, Equity Analyst]

I have 3 questions, 2 questions on France. The first one, March and the period 3 was a proof of French hypermarkets. So will you keep a strict financial discipline, I mean a good phasing, different cost cutting and price investment? Or can we expect a kind of acceleration in price investments in the short term? The second question, regarding the ex-DIA stores and in particular the 273 stores that will be closed or disposed. Any deterioration in sales trends in Q1? And behind this question, I'm just wondering if we can see higher EBIT losses in '18? And the last question regarding the partnerships in China. Can you provide more detail, in particular, what stake should be taken by Tencent?

[Matthieu Malige, Chief Financial Officer]

Thank you, Arnaud. On France, I think that there's an important point that we're making tonight is that we are confirming that we are making good progress in that we have initiated a positive momentum on the gains on direct and indirect purchasing. As far as you rightly say, we want to execute our plan 2022 with very strict financial discipline, and therefore, it's really these cost savings that fuel these investments in the competitiveness of our banners and our investments in the digital transformation of the group. As far as the price investments and when they happen and how they happen, well, you understand it's a very sensitive topic. That's why we'll not elaborate in more details on that. But the important point is that we have a positive momentum on cost savings.

[Arnaud Joly, Equity Analyst]

And maybe, Matthieu, one follow-up. Compared to your initial expectations, would you say that your progress in direct and indirect purchasing, is it, I would say, quicker than you what you initially expected? Or is it in line with your initial targets -- internal targets?

[Matthieu Malige, Chief Financial Officer]

Well, I'm not going to enter into that. I think the important message is that about a few months ago, we launched the plan that a positive dynamics of transformation has very quickly been implemented and this is a very -- it's a sign of satisfaction. On your second question, relating to the [ ex-DIA ] stores, I think, it's too early to make an estimate on what will be the loss for 2018, so no -- nothing more specific there. As far as China, and as you have rightly understood, there's really 2 aspects in our partnership. The first one is operational partnership with Tencent. This one was finalized in the course of January, and therefore, it has now been -- has now started its implementation. And I commented earlier that we're making good process, and we already have some deliverables there. Then the second aspect of the partnership is the more M&A and equity stake aspect of the plan with Tencent and Yonghui. As you know, there are discussions that are still ongoing in order to finalize these agreements, therefore, it's too early to make any more specific comments on the relative contribution of each player.

[Operator]

Next question from Mr. Maxime Mallet from Deutsche Bank.

[Maxime Mallet, Research Analyst]

The first one would be with regard to your comment on notably the expectation for this year, the negative impact from ForEx plus the G&A increase, I see that the [ closest ] rate now is at EUR 1.99 billion for the full year EBIT for the group. So are you confident you can reach that? Or you believe that sales is going to be more declined for this year? The second one is, from what we see, you're talking about like central -- well, working on your central, notably matching the pricing investments with the gains. What we see from the most recent survey is that over the past few months there hasn't been any price investments made on your sites. So is it fair to assume that you haven't had any gains yet given that you haven't seen the same price on the other side? Also, with regard to Q2, it seems like the comparison basis will get [indiscernible] so do you expect like ForEx to be weaker in Q2 versus Q1? And the last question I had was you are mentioning a weaker nonfood performance in France, notably at hypers. Could you maybe give us some more color with regard to food versus nonfood like-for-like evolution?

[Matthieu Malige, Chief Financial Officer]

Thank you, Maxime. As far as the 2018 is concerned, well, I'm obviously not going to comment on the consensus. We just continue and are consistent in our communication. We have significant negative ForEx effect coming from Brazil, and we also anticipate an increase of depreciation. We just draw your attention on these aspects. Here, maybe it's fair to say that when we last met on February 28, the real-euro parity stood at BRL 4.00, and yesterday, it was about BRL 4.21. So in the course of just 5 weeks, we've had a deterioration of the parity. On your second question relating to the price investment or more generally, investments, more competitiveness, I would not make any comments as to when and where we are investing. This is very sensitive, as you understand. On just, again, repeating what I said to Arnaud, we have a positive dynamic, which is engaged on costs. On the second quarter, you were mentioning that we have tougher comparables. Well, we'll see. I think we've had a very specific Q1, notably with the number of impacts coming from weather and from the deflation on food in Brazil. I think it's hard to anticipate what will be the trends in our markets in Q2. In France, on the food, nonfood, indeed, we have better resilience and a better performance on the food side. The negative weather conditions, which were hot in January, cold in February and difficult weather in March have had more of an impact on nonfood, and therefore, more on hypermarkets than formats of supermarkets and proximity. So that's the trend.

[Maxime Mallet, Research Analyst]

Any more quantitative data on this food, nonfood performance in France?

[Matthieu Malige, Chief Financial Officer]

No, we're not specifying that.

[Operator]

Next question from Mr. Sreedhar Mahamkali from Macquarie.

[Sreedhar Mahamkali, Analyst]

Just 3 questions from me as well. Firstly, if you look at your plan and the detailed comments you made, which were very helpful, but when you look at underlying trends in France, and in particular, in hypermarkets, do you see anything in terms of customer metrics that give you confidence of the sales trends ex calendar, ex weather, and shifts of promotional events and things like that? Will -- are improving and will improve? Are there any leading indicators you're looking at that give you that confidence? That's the first question. And secondly, in terms of Spain, are you able to give us any sense in terms of food, nonfood split even directionally that will help? And finally, sorry to come back to this consensus point but my question is the fact that you're flagging these headwinds again, is it right to conclude that you think these are not fully reflected in consensus? Is that a fair conclusion or not?

[Matthieu Malige, Chief Financial Officer]

Thank you very much. On the sales trend on the hypermarkets, I think it's really not a quarter to extrapolate in a way or another. As I say, I think, we have very specific market conditions in Q1, so I don't think there's any point in extrapolating things. In Spain, yes, we can share directions. I said in my comment that we have minus 0.6% like-for-like in Spain, which is the same trend as we had in Q4. And due to similar weather impacts, nonfood has been more penalized in Q1 than food. I think directionally, that gives you some information. As far as the consensus is concerned, we're just trying to be consistent, and I think it's an obligation we have in our financial communication so that we are consistent with the messages that we flag. So I think there's nothing new in what we say tonight. We'll just flag that the points that we had raised earlier have had some evolution due to the evolution of the markets. I think that's the only point.

[Sreedhar Mahamkali, Analyst]

Quickly, just in terms of helping us, I appreciate your point, it's not a quoted explicitly, and I also noted you are not willing to quantify the disruption forthright, et cetera, but just there was a promotion shift from March to April in franchise markets. Is that something you could help us with in terms of how much that has impacted in the quarter?

[Matthieu Malige, Chief Financial Officer]

Yes, I think it's a fair point. I think it's difficult to assess the calendar effects notably when they relate to change in some promotional events. And so there are some commercial events such as the Easter weekend that we take into account, and then there may be other specific more commercial aspects that we don't include. So knowing exactly what is attributable to the Easter campaign or not, we try to do our best, that's how we compute the calendar effect. It's not a precise science, so you may have some shifts from one quarter to another.

[Operator]

Next question from Mme. Fabienne Caron from Kepler.

[Fabienne Caron, Head of Food Retail Sector]

Two questions for me. The first one, sorry, Matthieu, to come back on consensus. Can you tell us, which consensus you have in term of EBIT for '18? And do you believe taking into account the spot today and the increase of depreciation, which I suspect is EUR 100 million, has the consensus you have really capture the EUR 180 million headwind? And do you feel comfortable? I think it's very important. I understand that you want to be consistent but I think for us, it's important sometimes to put more detail because we've got this feeling you're not comfortable with consensus, that's why I wanted to get it clear. The second question is regarding the unions in France. Are you happy with the way the negotiation are going on? And the reason why I'm asking the question is that I was puzzled to see that the general strike started because you decided to divide by 10 the premiums you gave to French employees. That's why I'm wondering if you are happy with the way you deal with the unions in France.

[Matthieu Malige, Chief Financial Officer]

Thank you, Fabienne. Well, with the -- on the consensus, we have decided not to comment on the consensus. So I'm not going to do it tonight.

[Fabienne Caron, Head of Food Retail Sector]

Can you tell us the one you see, when you ask, [indiscernible] which consensus do you see? Or shall we take Bloomberg?

[Matthieu Malige, Chief Financial Officer]

I am not going to comment on the consensus, Fabienne. On your second point, relating to the unions and the perturbations in France. I think that we understand that Carrefour 2022 is a deep transformation for Carrefour, which is imposed to us by the evolution of our markets and our industry. We -- I understand that this transformation that needs to take place at a rapid pace can raise some question, be a source of concern for some of our employees. This is why we have, from the start, engaging through a social dialogue that we want to be constructive with the unions. It's -- and we understand and we hear the concerns. I think we are now at a point where you have read the comments following the EUR 150 voucher that has been decided. And we are now at a point where I think we can move forward. As far as the truth, we can move forward with the discussion on the profit sharing and I think that's [ pretty clear ]. We have made some progress and the discussions on the voluntary departure plan at the headquarter as well as the exits of the ex-DIA store. These negotiations are being finalized, and so I think we have made good progress in just a few weeks in the transformation projects. So I think the good news is that there is a positive dynamics of change of transformation inside Carrefour. And then on these transformation, we are now able to move forward.

[Operator]

Next question from Mr. Nicolas Champ from Barclays.

[Nicolas Champ, Director]

Three questions from me. Coming back to the performance of the French hypermarkets in Q1, could you provide some color regarding the traffic and the basket evolution? Quantify this metric, or again give some indication regarding the sequential evolution in Q1 versus the previous quarter. The second question regarding the French market. I mean, some of your competitors have recently announced they are buying partnership. Don't you feel that you may lose some competitiveness in this increasingly consolidated market? And will you contemplate to also form a buying partnership with someone else, I mean, on top of your existing buying agreement with Cora of course? And third question regarding Poland. How do you explain your negative like-for-like sales performance while food inflation was still a positive in the country in Q1? And have you seen any impact of the implementation of the Sunday ban happening in Poland since the beginning of March?

[Matthieu Malige, Chief Financial Officer]

Thank you, Nicolas. On the French hyper, it's mainly coming from nonfood, as I said, so therefore nonfood is a strong traffic generator. And then we've had some specific operational disruptions that I referred to earlier, which clearly impacted traffic. So again, for these specific reasons, I think our traffic in our hypers has been impacted in Q1. In terms of buying partnerships, maybe you're referring to the press release that there's some discussions were started between [indiscernible] and Casino and that there were new discussions starting with Casino and Auchan. We are not going to enter into the details of that alliance. We think that these alliance have been in the market for quite some years, both in France and at international level. We have decided and we announced that on January 23 that the fact that we are present in a number of countries and notably in Europe, we should use that in order to leverage and benefit from these European size in our negotiations. Coordination has already started among our European countries for the 2018 negotiations and we're looking forward to being able to move forward with more coordination and combination among our countries. As far as Poland, so just to finish on that. I think it's something we have integrated in our analysis that we have an answer to these sourcing alliances and that we're progressing well in putting opportunities together. In Poland, there are specific items to have in mind in the course of the quarter. The first one is that we have high historicals, notably, due to nonfood promotions in the past. So we're cycling over these high historicals. It was mainly promotions out of which we were not having the right level of margin, so we have lowered this level of promotions. And then there's a specific item you need to have in mind in Poland is the Sunday ban with the new law that started at the beginning of March where you can only open 2 Sundays a month. So that has started to impact our operations like the markets in this Q1.

[Operator]

Next question from Mr. Andrew Gwynn from Exane.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

I've only got one question actually. I guess this quarter is a little bit disappointing. The share price has obviously been quite soft. And you can probably tell that many people are maybe a bit frustrated on the call here but when do you think we, as outside observers, can expect to see improvement?

[Matthieu Malige, Chief Financial Officer]

Thank you, Andrew. Well, we -- I think we have mentioned a very high number of projects, which are taking shape. They have the objective to improve Carrefour to gain in cost competitiveness and to invest in the competitiveness of our banners. It's a heavy transformation. It's just -- we're just a few weeks into the plan, and we have initiated good dynamics. So we need to take these actions forward, invest into the competitiveness of our banner, make progress. We have a number of things coming up in 2018 given the positive dynamics, so we'll hopefully be able to sharing more details of the progresses that we make during our next communication.

[Operator]

Last question from Xavier Le Mené from Bank of America Merrill Lynch. We're going to go to the next and last question, Mr. Andrew Porteous from HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

Just a quick question for me, and sorry to belabor the point on overall guidance. But potentially reading your guidance comment, if what you're trying to say that about sort of the depreciation in the real and higher depreciation amortization, your operating income would be broadly unchanged in 2018 versus 2017, at say, EUR 2 billion?

[Matthieu Malige, Chief Financial Officer]

Well, no. I think we're not saying that. We're saying that there are trends in the market that you can observe and that we are commenting regularly. And these ones, we comment regularly and there is public information available, so we let observers do their estimates. Then there are more technical aspects, which maybe are more difficult to anticipate and perceive as an outsider. And we're drawing attention to you on these ones for you to have a comprehensive vision on the various aspects that are impacting our business. I think the only objective of raising these 2 specific points.

[Andrew Ian Porteous, Analyst, European Retail]

Okay, I appreciate that. In that case, asking a different way, are there any parts of the transformation plan that could start to positively benefit your 2018 operating income? Because it feels from what you've been talking about and the way you've been talking about the timing of these projects dropping through the most of the improvement in terms of sales and margins from investment or cost savings probably comes 2019 and beyond. Is that fair?

[Matthieu Malige, Chief Financial Officer]

Well, there are specific projects that indeed I will refer to them, notably the transformation projects that will impact more 2019. Now there are -- there's a positive dynamics, I think you've understood that from our call. I think it's a little too early in the year to see how that will develop but I think that the positive sign is that just a few weeks into the plan, we have a positive dynamic. May I remind you that it's a growth plan that we want to invest in order to improve the trends in our business, and so we'll do that and that's why it's positive that we have a positive dynamic, notably on the direct and indirect costs.Well, thank you very much. If there are no further questions, let me thank you for your attention. The IR team is, of course, available after this call to answer any additional questions. Our next release will be our H1 results on July 26. I thank you again, and good evening. Bye-bye.

[Operator]

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