Carrefour SA

PAR:CA

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to the Carrefour conference call. I now hand over to Mr. Matthieu Malige. Sir, go ahead.

[Matthieu Malige, Chief Financial Officer]

Good afternoon, and welcome to our 2017 fourth quarter sales conference call. I'm here with Mathilde Rodie and the rest of the IR team. It is still time for us to wish you a happy new year. We're very pleased to be with you today. We have been relatively silent over the past few months as the new management team delved deeply into the company ahead of the announcement of the Transformation Plan, which, as you know, will come next week. With that announcement behind us, we will start a more intense and regular dialogue with you and with investors. We are looking forward to having the opportunity in the future to share with you our plan and the group's progress in more detail.As always, we have issued a press release and a presentation prior to this call. I invite you to go to our website and download the presentation to which I will be referring during this call. After the presentation, we will be happy to take your questions.In summary, and before going into details, after an atypical third quarter, Carrefour sales momentum improved in Q4 versus Q3 and posted like-for-like growth in line with H1. I would note 2 points in particular. First of all, we saw better sales trends in France in all formats and improved commission momentum with success of Black Friday and Christmas season campaigns. Secondly, sales growth in Brazil was impacted by continued food deflation. As for the full year, 2017 proved to be a challenging year. Sales momentum slowed substantially in 2017 versus 2016. Recurring operating income and free cash flow are expected to show strong decrease versus 2016 on the basis of unaudited figures. Let's start on Slide 2 with the group's full year performance. Carrefour posted sales of EUR 88.2 billion in the period, up plus 3 points -- percent in total and up 2.7% at constant exchange rates. On a like-for-like basis, sales were up plus 1.6%, marking slowing sales momentum, particularly on food, which was impacted by a slowdown in inflation, notably in Brazil. Moving on to Slide 3. You can see that 2017 has been a difficult year. Before auditing procedures are conducted, we expect 2017 recurring operating income to stand close to EUR 2.00 billion, down minus 15% at constant -- at current exchange rates. This performance reflects strong commercial pressure notably in France for the year, rising distribution costs in our main markets, an increase in depreciation after a period of significant investments and a more difficult situation in Argentina. Our recurring operating income also includes sources of losses that continued to weigh on profitability, notably the ex-DIA network with losses of approximately EUR 150 million in 2017. Free cash flow, excluding exceptional items, should reach EUR 950 million versus EUR 1,039,000,000 in 2016, down 8%. Investments should reach EUR 2.145 billion, excluding Cargo. In H2, we have been more selective in CapEx allocation aligned with the group strategy and expected financial payback. Full details will be provided when we announce our full year results after market on February 28.Let's now look at our Q4 key takeaways on Slide 4. Our better fourth quarter sales performance was achieved in a challenging environment with heightened competitive pressure in France and other markets as well as food deflation in Brazil. In Europe, we observed contrasting trends from country to country with tough comparables in southern Europe and solid growth in other markets. China's strength was in line with the previous quarters, and Taiwan continues to experience solid growth.Now turning to Slide 5 with more details on the group's fourth quarter performance. Overall Q4 sales stood at EUR 23.3 billion, down minus 0.2% in total. On the like-for-like basis, sales were up 1.9%, reflecting an improved trend over the previous quarter. We maintained a steady pace of expansion in Q4 in terms of square footage. And we continue to see a positive impact from our acquisitions of Eroski in Spain and Billa in Romania. Please note that as of the first quarter of 2018, these acquisitions will start integrating our like-for-like as the cycle over a full year 12 months in our scope. Lastly, we had a particularly strong negative currency effect in Q4 of minus 2.5%, while the full year effect is a positive plus 0.3%. It is important to bear in mind that we are entering 2018 with a strongly unfavorable currency effect.Let's now look at our performance by geography starting with France on Slide 6. Total sales stood at EUR 10.7 billion, down minus 0.5% in total, and up plus 1.5% on a like-for-like basis, marking an improvement over Q3. That quarter was characterized notably by deflation on fresh produce, which eased in Q4. Sales in the quarter continue to be impacted by a very competitive environment. Despite this context, we posted like-for-like growth in all our formats with positive commercial momentum for our year-end campaigns. Nonfood sales were boosted by a solid Black Friday campaign, while food was helped by good Christmas sales.I also remind you that the anniversary event in hypermarkets was shifted from Q3 last year to Q4 this year. In this context, our hypermarkets showed an improved performance this year with like -- this quarter, sorry, with like-for-like growth of plus 0.7%. In supermarkets, sales were up 1% like-for-like, in spite of a strong comparable base and competitive pressure. Convenience and other formats continued to show solid growth, with sales up 5.6% like-for-like.Moving on to Slide 7. Let's look at our performance in other European countries. In Europe, sales grew for the 10th consecutive quarter, up 3.4% in total, and 0.4% on a like-for-like basis, in line with Q3. We saw contrasting performances from country to country. Spain's like-for-like sales were down 0.6%. This reflected a strong comparable base both in food and nonfood and the uncertain political situation in Catalonia. On a reported basis, total sales were up by a solid 6%, driven by the integration of converted Eroski stores. Italy saw a drop of minus 1.1% in its like-for-like sales in a heightened competitive environment. Our performance in Italy also reflects high comparables over the past 2 years, during which we benefited from various action plans to redynamize our performance. For its spot, Belgium benefited from a good Black Friday commercial operation as well as a strong festive season, with like-for-like sales up 0.8% in the quarter. Our other European markets of Poland and Romania were very dynamic with sales up in both countries. Romania was particularly strong with like-for-like sales growth of plus 7.8% as well as continued expansion with the opening of 17 supermarkets and 1 hypermarket in the quarter.Let's now turn to Slide 8, which focuses on Latin America. The region saw continued sales growth in the quarter of plus 8.4% in total at constant exchange rates, and plus 5.9% like-for-like on challenging comparables that were boosted at the time by significant food inflation. The currency effect was far more pronounced in Q4 with a negative impact of minus 10.8%, reversing the positive effect we saw in H1.In Brazil, sales were up plus 4.9% at constant exchange rates and plus 1.4% like-for-like in an environment that was marked by continued food deflation, as you can see on the chart on the slide. Our growth in Brazil was also fueled by expansion as we continue to roll out our Express convenience format with 22 new stores opened. We also opened 3 new Atacadao stores in the quarter. We benefited from the growth of e-commerce in our sales mix in Brazil, which was further boosted in Q4 by the launch of an online food offering. Convenience and e-commerce combined amounted to 8% of Carrefour's retail total sales in Q4. Atacadao sales grew by 2.2% like-for-like in spite of the deflationary impact I just mentioned, driven by good volume growth. Carrefour retail sales were broadly flat, minus 0.1%. In Argentina, sales were up 23.2% like-for-like, a growth rate comparable to the level of inflation in the country. The consumption environment remained under pressure as the full effects of the economic recovery have not yet materialized.Moving to Slide 9. We conclude our regional overview with Asia. Overall, like-for-like sales were down 3% in the region, a similar trend to the previous quarter. In China, like-for-like sales were down 5.4% in Q4, in line with last quarter's trends. Once again, the environment was characterized by sharp competition, with seasonal events like 11/11 and 12/12 becoming increasingly important for retail. In Taiwan, we continued to register a solid performance. With like-for-like sales up 3.5%, we recorded our 12th consecutive quarter of growth cycling on 2 years of strong comparables. I thank you for your attention, and we will now be happy to answer your questions. Let me remind you that we'll have the opportunity to discuss strategic questions next week when we present our Transformation Plan. So today, we will focus on questions related to our Q4 and full year performance.

[Operator]

[Operator Instructions] And we have our first question from Arnaud Joly from Societe Generale.

[Arnaud Joly, Equity Analyst]

I have 3 questions. So the first one, so you cut your full year guidance by around EUR 70 million. Where did you see a deterioration that is your expectations at the end of August? Is it mainly driven by Argentina, France and China? Second question, did you invest more in prices in France in Q4, and in particular during the Christmas period? And the last question on the former DIA stores, did you see any sales improvements in Q4 and in particular for the compact [ commercial ] stores?

[Matthieu Malige, Chief Financial Officer]

Well, thank you very much for these 3 question. On your first question relating to the full year performance, again, I think you understand the key message of tonight is that we had a strong Q4, but clearly, a disappointing 2017 on the basis of strong commercial pressure notably in France, an increase of our distribution costs in our main markets. We have also experienced higher depreciation through the year, mainly due to the investment policies of the past few years and clearly, a more difficult situation in Argentina. I think there's a few items, maybe to be more precise, that relates to the second half performance. I think clearly, a challenging Q3 in sales as we commented in our call in October, a strong deflation in Brazil throughout the second half. Clearly, the deflation is lasting longer and at more serial deflation levels that were impacted earlier in the year by most analysts. I think that the -- maybe the third point relating to the second half is the currency impact that turned negative in Q3. And that has had a substantial impact, as I commented, on our sales in the fourth quarter and also in the translation of the Brazilian profits into euros. Your second question relates to the commercial policies in France in Q4. I think we have been successful in Black Friday, as I commented. That was a commercial strategy of the team, to be present during this event and also to be efficient in the company. I think that's the 2 main items to have in mind in relation to the commercial dynamics in Q4 in France. Nothing else substantial, I think, to have in mind. As far as the ex-DIA stores, I think the main message is that the performance is minus EUR 150 million with a number of stores that fit well in their catchment areas and a number of stores which are difficulties, as you can see by the EBIT performance to address properly their customers in their catchment area. I think that's the main item to have in mind. I don't think there's anything specific on the ex-DIA stores relating to Q4.

[Operator]

So we have another question from Mr. Maxime Mallet from Deutsche Bank.

[Maxime Mallet, Research Analyst]

First one is with regard to -- you just mentioned the trend and that is a positive outcome from the Black Friday. In a sense, could you please give us some color about the different like-for-like in food and nonfood [ items ] in France? Also, in terms of sales trend in France, you have 5.6% like-for-like for all the formats. Is it specifically related to convenience stores? Or is there also some other components in this strong performance? And I have a question on DIA as well. How many of the ex-DIA stores were converted to a franchise model in 2017?

[Matthieu Malige, Chief Financial Officer]

Okay. Relating to the Black Friday and the food and nonfood performance in France in particular, I think that you see a much more positive trend in Q4 versus Q3. Clearly, this is generated both by food and nonfood. Although we are quite satisfied through the year, it's not specific to Black Friday by the performance of textile in France where a number of initiatives in order to address the commercial model, the assortment and the pricing strategy have had a positive effect. So I think there is nothing specific in Q4. I think an overall good dynamic. Please bear in mind regarding Black Friday that it can clearly have an impact on a given category. I think overall, this is commercial events that is gaining momentum year after year in the market. And that beyond generating sales on specific product categories, it is becoming an important moment for consumption. And that it is more a traffic matter for us. A lot of traffic in the stores, in the shopping malls is generated at that time of the year. In terms of other formats, clearly, they relate mainly to the convenience stores. There is a few other items, but they are very marginal. On your last question regarding the ex-DIA store, I transfer to Mathilde. Do you want to say a word?

[Mathilde Rodie]

Yes. So on the number of DIA stores that were converted to a franchisee, we said previously and we talked about that in October that we would be close to 50% at the end of the year, and we're not so far from this level at the end of the year. We continue the trend of transferring those stores from integrated to franchising.

[Maxime Mallet, Research Analyst]

Okay. And maybe just one very quick follow-up on that. So you pushed the stores toward franchising in 2017, and you have the same level of losses from the ex-DIA stores in 2016 versus 2017. So it's fair to assume that the one that stays in the integrating model wasn't quite significantly [ a little bit ] of losses they were doing in 2017?

[Matthieu Malige, Chief Financial Officer]

Well, I think we're getting into details here. I think overall, you understand that we're not satisfied with that performance. So there's a number of actions that have been taken by the team in order to improve these formats. I think that's the key point to have in mind for this year.

[Operator]

So we have another question from Cedric Lecasble from Raymond James.

[Cedric Lecasble, Financial Analyst]

A follow-up for me on France. You mentioned -- when you mentioned the performance of supermarkets, which was pretty much okay in Q4, you mentioned a strong competitive environment and maybe a tougher competitive environment. And you seemed truly happy with your 1% like-for-like in this context. Maybe you could give us a little more light on what happened in Q4, especially on competitive pressure.

[Matthieu Malige, Chief Financial Officer]

So regarding the supermarket performance in France in Q4, I think we are -- it was noted in Q3 that there was a negative like-for-like in the supermarket that was disappointing. We're satisfied to be back in positive territories. We're not satisfied with 1% of growth. Clearly, we think we should target greater sales dynamic. I don't think there's anything specific in Q4 relating to the commercial dynamics or the commercial initiatives of the team, just a commercial plan that has rolled out quite well and overall good operations. I don't think there is anything specific that we want to share with you during this quarter.

[Cedric Lecasble, Financial Analyst]

Just on the deflation in Q3 and the return to normal in Q4, the swing in food and vegetable deflation that we suffered in Q3, did you estimate it? And how much does it represent, regarding the 220 basis points sequential improvement, how much of that is due to fruit and veg?

[Matthieu Malige, Chief Financial Officer]

Well, I don't think we're in that level of details, Cedric. I think that there's been an impact also in Q3. You understand that the contribution in [ Q2 ], given the season of foods and vegetables and the fact that there are less seasonal foods and vegetables makes the impact lower. We've also seen lower deflation than we had experienced in Q3. I think that's the overall trend. Difficult to quantify it very precisely.

[Cedric Lecasble, Financial Analyst]

Lastly, if I may. Just to understand this strong performance in convenience in France. What was the impact of the converted DIA overall in '17 versus '16 in convenience, profitability on sales?

[Matthieu Malige, Chief Financial Officer]

Yes, let me take the first part of your question. Overall on the convenience format, we're satisfied. There is nothing specific in Q4 such as an acceleration of the transfer or whatever. I think the policies of transferring some stores from integrated to franchise runs smoothly month after month. There is no acceleration or any specific effect in Q4 that contributed to the like-for-like performance of the convenience.

[Operator]

We have another question from Mr. Bruno Monteyne from Bernstein.

[Bruno Monteyne, Senior Analyst]

Three questions for me, please. The first is going back to the first question of this call which was, in August, the profit was downgraded by 12%. Today, it's being downgraded by 15% year-on-year. And the question was really what has changed since August to explain the further 3% drop? Because clearly, the commercial pressure in France, distribution costs were known in August. So what has really changed in the last 3 months to explain the extra 3%? My second question is you, in the middle of the year, you invested in prices and in promotions, which reset the margins. Have you seen enough volume uplift or traffic uplift to justify those investments? Or is most of the quarter 4 improvement due to the different phasing of promotions? And my third question is as a new management team, would you be willing to reconsider how you define free cash flow? For most investors, free cash flow is a useful measure because it's very clean. It's cash, there's no judgment. When you start excluding exceptionals from free cash flow, investment in Cargo, it makes it a much less useful number for equity investors. Would you be willing to either justify why you do the exclusions or consider going to a more standard, clean free cash flow number?

[Matthieu Malige, Chief Financial Officer]

Thank you very much. As -- coming back to your first question relating to the first question of our discussion tonight. I think I hinted on 3 elements that one should have in mind which have -- had an impact on the dynamics of the group in the second half. I think the first one, just to re-mention them quickly, is the challenging sales dynamic in Q3. Second one is the food deflation in Brazil, which, again, has been at a more severe level than most analysts anticipated earlier in the year and which has lasted longer than these analysts thought. And the third point is relating to the currency impact where clearly, there has been a strong evolution in the second half of the year in the euro versus real, Brazilian real parities, which has been unfavorable and which obviously impact our sales and the conversion of our profits in Brazil. As to your question, your second questions relating to promotions and whether we're satisfied with the way it's been implemented, what I suggest is that this is a discussion we reserve for next week, where obviously we will be discussing about the commercial strategy of the group. As far as the free cash flow, there's been discussions in the past on the basis of free cash flow, excluding exceptional items and Cargo. We wanted today to share with you our first view on this number, as we think it's important for you to understand the overall picture that comes out of this full year 2017. I think that -- so again, it's a very preliminary number, very high level number. We will have the opportunity to meet again at the end of February where we will have audited figures. And we will make an in-depth analysis of what are the underlying items behind cash flow and what are the impact of the cargo and the exceptionals and so on. I think more generally, I think I understand why there is a dialogue around this number. Just coming back on the Cargo CapEx, it is CapEx that are booked by the group, but which are then financed by third-party investors on the line. And that's the accounting rules, and unfortunately, there's nothing I can do about it. So I understand it makes sense to exclude them as in fact, they are financed by third-party investors. And then as far as the nonrecurring items, I think we will give you some details in February. And I understand the rationale for sharing numbers on -- excluding exceptional items so you analysts and investors can understand what is the medium-term dynamics in terms of cash flow, excluding some specific items.

[Operator]

We have another question from Mr. Andrew Gwynn from Exane.

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

Just in the interest of time, I'll keep it to one. But if you think about Q4 versus 9-month run rate, clearly, Q4 was materially better. What do you think is sort of going right? I mean, obviously, it seems to be Black Friday and so forth. But is there a broader set of initiatives that you think are hitting the mark versus what's happening in the previous 9 months and, say, things that you might carry forward?

[Matthieu Malige, Chief Financial Officer]

I think we have a different reading. I think we -- let me maybe say that again. I maybe was too short in my introductory word. I think we have a Q4 that comes back to the dynamic of the first half. And it's more the third quarter, which, in our mind, is atypical for a number of items that -- which were shared at the time. So I don't think there's anything, again, specific in Q4. I think it's more of the third quarter, which was atypical.

[Operator]

So we have another question from Mr. Sreedhar Mahamkali from Macquarie.

[Sreedhar Mahamkali, Analyst]

Sorry, I literally missed the last point of your answer to Andrew's question. Do you believe Q4 like-for-like is actually a good run rate? Is -- the exit run rate is a good run rate represents the real underlying trends? Or is it that flatted by the promotional shift? Are you able to quantify anniversary impact in Q4? That's the first question. Second one is you've highlighted a number of headwinds in 2017. And then further, you noted specifically a couple of things as reasons behind the further downgrade today. But as you look at 2018 consensus, do you believe that reflects the negative effects, which you've noted, and the severe deflation in Brazil? That's the second question. And thirdly, just again trying to understand the pricing position. Are you able to give any sense, potential price metric perception or otherwise? Three questions.

[Matthieu Malige, Chief Financial Officer]

Thank you very much. So let me rephrase the answer. The question was that there is an acceleration in Q4 when you look at the trend versus the 9 months. My comment is that we -- when I look at the fourth quarter performance, it is 1.9% like-for-like and H1 is 2.1%. So my comment is that the fourth quarter has the same dynamics as the first half. And it's more the third quarter, which was quite atypical and disappointing versus the performance of the other 3 quarters of the year. As to your question on the -- second question on the full year numbers. So let me just be clear on the fact that tonight's communication, as far as Q4 sales is concerned, is ahead of the consensus is better off. The consensus and full year EBIT is in line with the consensus. As far as 2018, it's not something we're going to discuss tonight, probably a question that can be asked next week when you have visibility on the overall plan. As far as your question on the pricing, positioning and the perception, I think it's really a strategy question, a very interesting one clearly that I would like to reserve for our discussion next week.

[Sreedhar Mahamkali, Analyst]

Matthieu, can I quickly follow up? The promotional shift, was there a number? Are you able to quantify that in Q4, please?

[Matthieu Malige, Chief Financial Officer]

Honestly, I'm not getting into the details of that. You know there is a commercial dynamics, which may differ overall. What I said is that in Q4, we have a commercial proposition, which is not materially different from what it has been through the year. There has been a good plan for the Black Friday and it has been well appreciated by our customers. I mean, beyond managing this commercial operation properly, I don't think there's anything really substantial that we wanted to share with you and which, I think, you should have in mind in understanding the Q4 performance.

[Operator]

So we have another question from Mr. Xavier Le Mené from Bank of America Merrill Lynch.

[Xavier Le Mené]

Two questions, if I may. The first one back to Sreedhar's question. Can you give us a bit more color on the competitive landscape, at least in Q4, because it seemed that inflation was back, especially in December, food inflation. So would you qualify, if you were to compare Q4 versus Q4 -- Q3, sorry, the competition as a bit easier than it was or stronger? And also, I know you don't want to comment as such, the pricing, but do you think that you were more competitive in Q4 than you were in Q3, so in France? So that's my first question. The second one, can you update us a bit on the recovery plan in China? Because so far, we have not seen much progress with the like-for-like. So what is happening there?

[Matthieu Malige, Chief Financial Officer]

Thank you. As far as the competitive landscape in Q4, I don't think there's any material change versus the various dynamics that we all follow quarter after quarter. It's really a quarter that is in the line and in the trend of what happens in the market. I think the various strengths and weaknesses of the various players have not been changed substantially in the fourth quarter. As far as the recovery plan in China, obviously a number of initiatives are taking place. They include some store remodeling. They include an adaptation of the store portfolio to focus on the most profitable stores. They include some supply chain effort in order to structure our own supply chain. They include some productivity efforts in all the areas of the company. So we are not digging into details today as to the profitability of China. This is something that we'll be very happy to discuss when we disclose the profitability numbers for the full year in China. And that will obviously give you some color as to what has been going on there in terms of restructuring during 2017.

[Operator]

So we have a last question from Andrew Porteous from HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

Two, if I may. Just wanted to come back on Sreedhar's point, really. Because I think you talked at the Q3 update that the term wasn't that negative, but there was a shift in promotional spend that would benefit Q4. Could you just talk about whether how that's achieving an underlying improvement in your like-for-like? So whether that's just been the impact of shifting the anniversary month into Q4. And then the second point was on the rise in distribution costs you're talking about. Could you just explain what you're seeing there and how that's impacting you?

[Matthieu Malige, Chief Financial Officer]

On the shift of anniversary, so it's mainly a hypermarket point. I think it's a point that is more relevant of the Q3 analysis than the Q4 analysis because the impact of the switch in the anniversary income present with the size and the total sales of a Q3 is more important. It is still more diluted on the fourth quarter where, obviously, the volume of turnover is much bigger. So I don't think it is something material. It contributes, but I think it's limited. I think the main items to have in mind in terms of the commercial performance for the fourth quarter is this Black Friday and the Christmas season, notably December, where the promotions and the various catalogs and events have been well followed with the right pricing and the right commercial strategy overall. As far as the distribution costs, again, we wanted to share with you today some information relating to the full year in order for you to understand even if we cannot go into full details, given the still ongoing auditing procedures, to have an understanding of the dynamics in play, which contributes to the strong decline in EBIT of the group for the full year. So indeed, I mention this distribution cost. There is a dynamic of distribution cost increase in a number of our geographies. A number of them are driven by inflation. There's a number of countries where we have high levels of inflation. There are some countries where it is generated by expansion and new stores, and also some countries where there's been some specific investments, that would be commercial investments or headcount investments in order to improve service. But overall, when you try to analyze why the recurring operating income is decreasing, there is a contribution from distribution cost, which increase at a greater pace than the sales through the year. So I think it's an item that one should have in mind when trying to get a good understanding of this full year performance.Well, thank you very much. Let me thank you for your attention. We'll be, of course, looking again next week when we present on our Transformation Plan on Tuesday, January 23. And obviously, the Investor Relations team is available after this call to answer any additional questions.Thank you very much, and good evening.

[Operator]

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