Greetings. Welcome to Grupo Comercial Chedraui Q2 2023 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to Mr. Antonio Chedraui, CEO. Thank you. You may begin.
Good morning. It is a pleasure to be with you today to discuss Grupo Chedraui's results for the Q2 of 2023. I am pleased to report that our positive trends continued in the past quarter. Our commitment to delivering exceptional customer experience and executing our pricing strategy has allowed us to successfully achieve our objectives. During the Q2 , we witnessed remarkable growth in Mexico, surpassing the overall market performance and simultaneously enhancing profitability through effective operating leverage. In the U.S., our customer-centric approach has played a pivotal role in driving sustained revenue growth while improving profitability through synergies derived from the integration of our three banners. As we navigate through the remainder of 2023, we remain confident that our people and processes will continue to facilitate sustainable growth and create lasting value for our stakeholders.
Now, if you allow me, we will review the results for the Q2 2023, starting with the relevant events of the period, continuing with the performance of each region, and ending with a review of the financial figures. Please go to slide number 4. In Mexico, we're pleased to report strong performance in the Q1 of 2023, with same-store sales growing by an impressive 10.5%, which is well above ANTAD's growth of 8.1% for the period. From a geographic standpoint, we saw solid growth across all regions, and particularly strong results in the South and Southeast of Mexico. Our strategy has enabled us to meet the diverse needs of our customers in different regions and capture opportunities in different segments of the market.
Additionally, we expanded EBITDA margin by 44 basis points, resulting in an overall EBITDA increase of 24.3% year-over-year. This result reflects our commitment to operational efficiency, which allows us to leverage our existing cost structure while delivering value to our customers. Please go to the next slide. Turning to our performance in the U.S., we're pleased to report growth and expanding profitability in Q2 of 2023. Same-store sales growth of 3.2% was fueled by the performance of our Hispanic division, which continues to be a key growth driver. Our value, proposition, and shopping experience continue to resonate with our customers. On the profitability side, we made significant improvements, expanding EBITDA margin by 76 basis points, increasing from 8.2 to 9% in this period.
The integration of Smart & Final with our Hispanic division is driving operational efficiencies and further enhancing our ability to execute in this market. Please turn to slide 6. Despite a 12.4% negative exchange rate impact, our consolidated sales grew by 1.2% in pesos. Excluding this exchange rate impact, consolidated sales grew 8.9%. On the profitability side, we're pleased to report that our focus on operational excellence and cost management continued to yield results. Due to the EBITDA margin expansion in both operations, our consolidated EBITDA margin expanded by 63 basis points in the quarter, above the target we set for the year. Overall, EBITDA increased by 8.8%, reflecting the continued strength of our business model. Turning to our consolidated net income on slide 7, we're pleased to report strong results in this area.
Our net income grew 23.3% in the Q2 of the year, behind the solid organic results in Mexico and the U.S. We will continue with the results by region. Please turn to slide 8. Our operation in Mexico delivered a strong performance in the Q2 of the year. As highlighted, we achieved same-store sales growth of 10.5%, well above the market pace for the same period. Total sales grew by 17.8% to MXN 29,444 million, driven by the integration of the Arteli operation and the stores we opened in the last 12 months. In the beginning of the year, we continued to see resilient consumption from our customers, which reflects the ongoing appeal of our commercial offering and our ability to adapt to changing consumer needs.
While we continue to see faster growth in the South and Southeast, we are proud to report that in almost all regions in which we operate, we outperform our competitors. We are also proud to announce the successful launch of our Por Ti promotional campaign, which has garnered significant attention and positive response from our valued customers. This campaign emphasizes our commitment to offering the best value and savings for their everyday needs. We're also delighted to share that our efforts have been recognized by the current administration, acknowledging Chedraui as the most affordable option for the main basket of essential products. This recognition not only validates our ongoing commitment to providing accessible pricing, but also inspires us to continuously strive from excellence in delivering affordable and high-quality products to our customers.
We remain dedicated to upholding our reputation as the preferred choice for cost-conscious shoppers while maintaining our unwavering focus on customer experience. In this quarter, we opened seven new Supercito stores and we're in line with our objective of opening 60 new stores in 2023, and achieving a 3.6% sales floor growth by the year-end. These investments reflect our commitment to driving growth and capturing market share in key regions of the country. Please go to the next slide. We're pleased with the strong financial performance in our Mexican operation, which delivered a 24.3% increase in EBITDA to MXN 2,485 million for the quarter. This result was driven by a combination of factors, primarily due to the integration of Arteli and the operating leverage.
We also continued to focus in improving operational efficiency and cost management, as evidenced by the 44 basis points EBITDA margin expansion, which exceeded our annual target. Our real estate division also showed a solid performance in the quarter, with revenue increasing 16.4% year-on-year to 327 million pesos. This growth reflects the continued recovery of the post-pandemic market. Additionally, we saw a 13.9% increase in EBITDA, demonstrating our ability to capture opportunities and create value in the real estate sector. Next, Carlos will comment on the performance of Chedraui USA. Please, Carlos, go ahead.
Thank you, Antonio. If you may, please turn to slide 10. The Chedraui USA operation continued to perform well in the Q2 , with same-store sales growth of 3.2% in dollar terms, with strong performance at the Hispanic division. This quarter, Smart & Final sales were impacted by weakness with our business customers due to poor weather in California. The impact of a 12.4% currency fluctuation on the exchange rate weighed heavily on the Q2 , resulting in a 9.7% decrease in sales when converted to pesos. Despite the negative foreign exchange impact, Chedraui USA delivered solid performance in the quarter, with EBITDA reaching MXN 3,116 million, 1.3% lower than previous year, representing 9% of sales and a margin expansion of 76 basis points.
EBITDA at the Hispanic division represented 8.7% of sales, 72 basis points higher than previous year, due to improvements in Fiesta's gross margin and operating leverage at El Super. Smart & Final continued to capture synergies from the integration of our three banners and contributed to the overall profitability of Chedraui USA, which achieved a 79 basis point margin expansion, resulting in a 9.2% EBITDA margin. We remain committed to driving profitable growth and delivering value to our customers in the U.S. and to further expand our presence in this important market. Just as in Mexico, the U.S. operation remains confident in the team's ability to execute on our strategy to achieve our financial and strategic objectives. That concludes our report on the U.S. operation.
Thank you, Carlos. We turn to the consolidated financial results on slide 12. In the Q2 of the year, we recorded consolidated sales of MXN 64,577 million, equivalent to growth of 1.2% year-over-year. Excluding the exchange rate impact, we achieved 8.9% sales growth. Gross profit increased 2.8% with a 35 basis point expansion in gross margin, while operating expenses decreased 0.7%. Due to this, consolidated EBITDA grew 8.8% to MXN 5,817 million and represented 9% of sales. During this quarter, financial expenses decreased 5.9% to MXN 1,183 million, behind lower debt in the period and the interest earned from a favorable cash position in Mexico.
Moving on the consolidated net income for the quarter, the result increased 23.3% versus the prior comparative period, reaching an amount of MXN 1,862 million and representing 2.9% of sales. Please move to slide 13. The financial leverage decreased from 0.54x in the same period of 2022 to 0.12x in this quarter. This highlights the company's ability to generate free cash flow and is particularly remarkable considering the acquisition of Arteli in Mexico, which closed in December. Finally, the year-to-date CapEx invested amounted to MXN 3,091 million, which is equivalent to 2.4% of sales. On slide 14, you can see the breakdown of the debt at the end of the period. The company recorded net debt of MXN 2,606 million.
All debt is in U.S. dollars and is primarily associated with the acquisition of Smart & Final in 2021. Finally, on slide 15, there is a short summary of our ESG transparency efforts in the first half of the year. Recently, we released our 2022 sustainability report in both English and Spanish, which is now available in our corporate website. At the same time, we actively participated in 3 relevant ESG assessments: S&P Global's CSA, CDP's questionnaires, and the new Amafortas questionnaire. We maintain our commitment to improve our ESG efforts and transparency with our stakeholders. Now, if you allow me, we will move to the question and answer section.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment while we pull for questions. Our first question is from Robert Ford with Bank of America. Please proceed.
Thank you. Good day, Antonio, Carlos. Congratulations on the quarter. Carlos, is business traffic at Smart & Final bouncing back in July? Can you discuss the procurement synergies, mix, private label, or other factors that are behind the gross margin improvement in the U.S.? How are you thinking about gross margins over the balance of the year? When it comes to food inflation, the difference between the U.S. and Mexico is massive. Antonio, I was wondering what you attribute that to and how you're thinking about food inflation playing out in Mexico over the coming months, and how that might be impacting your same-store expectations and co-cost structure efforts as food inflation converges with the broader CPI. Thank you.
Hi, Bob. This is Carlos. Yes, certainly, as you, as you well know, we had a very, very wet first six months, particularly in California, that tends to impact Smart & Final a little bit more than the El Super banner. January and February are typically the lowest volume months for Smart & Final historically, and that has to do with poor weather. As you know, Smart & Final is very event-driven. So those categories tend to slow down with bad weather. When that bad weather extended into June, we certainly saw an impact there. Happy to say that we bounced back nicely. The other component was that, as you know, the calendar shift had a little bit of a-...
shift the Fourth of July sales into July, so that brought down comps in June a little bit, but we're trending back up in July. I think we're gonna have a nice set of results at both of the California banners in July. In terms of gross margin and expansion, I think, you know, across all banners, the team has done a terrific job with lowering cost of goods. We're living in a slow, you know, the inflationary environment is slowing down a bit. Center store remains a little stubborn, and it's, you know, harder to pass on cost increases in those areas given the economic backdrop.
I think our team has done a great, great job of shifting gears a little bit and getting more value merchandising in place at our stores that seem to be resonating with our customers, and obviously, it's part of our strategy, right? At Smart & Final, certainly, leaning in heavily on our very, very strong private label program. I think we're well positioned here moving forward. I don't, I don't expect. I really don't expect having to invest much in gross margin. I think we're in a, in good shape with our price gaps with competition, but we certainly have the firepower and ability to do so if necessary.
Thank you, Carlos. Bob, about the inflation in Mexico, well, we have been experiencing still a reasonably high food inflation in Mexico, but we have been able to grow, it, and it's reducing. It came from double digits to our internal food inflation is around 7%, and we have been able to grow over that inflation rate, and we expect that to keep going. We believe that our commercial proposition is very attractive to our customers, and we are able to capture more customers. Actually, in the quarter, we grew transactions around 7%, same stores, and I think we can continue doing so. Our value proposition is very attractive.
We have been recognized for the best cost of essential basket in Mexico, and we'll keep doing so. That's our basic strategy, and we'll keep doing it. We believe that even if inflation starts to come down, as we see already in certain categories, our sales are still going because of the value proposition. Our pricing strategy, I think, is very effective, and it has proven so even in low inflationary environments.
Thank you very much, and, and again, congratulations on the quarter.
Thank you, Bob.
Our next question is from Luis Willard with GBM. Please proceed.
Hi, Tonio, Carlos, and team. Good morning, thanks for taking my question. Tonio, I mean, EBITDA margin expansion has been very consistent over the last, I don't know, more than a year or, or maybe a couple of years. And it appears that you continue to find savings or tricks in the operation that still result in better margins, both in Mexico and the US. My question is, when you think of long term, first, how dependent those margins are to the current pricing level that, that you see, like excess pricing? Another way of asking this is, if, if pricing or promotions get a bit more aggressive in the future, do, do you see any downside risk to, to the current margins? Thank you.
Well, I think there's always a risk if the market starts going crazy about the pricing strategies. At the moment, even with aggressive pricing from our competitions, because we see that some of our competitors are becoming more aggressive, we are very well set to maintain and to sustain those price gaps, sustaining our margins and even being able to increase them. We projected, for example, in Mexico, an expansion between 10-15 basis points of EBITDA margins expansion, I mean, and we see that we're going to be above that, probably around the mid 20 basis points, 20, 23, 25, as we are doing so in the US.
Remember that in the US as well, we still have opportunities of increasing our participation in our sales mix of produce and perishables, where there is a lot more gross margin for us. While we maintain and increase those sales mixes within our strategy, we will always be able to potentially increase our EBITDA margin as we have done so. We think we're gonna be able not only to sustain, but to increase the EBITDA margins, both in Mexico and the US, and even a little bit higher than what our guidance projected at the beginning of the year.
All right. Thank you, Carlos.
You're very welcome, Luis.
Our next question is from Antonio Hernandez with Barclays. Please proceed.
Hi, Antonio Carlos, thanks for, for taking my question from Research. Just a quick one on, on the real estate division, if you could, provide a little bit more color there in terms of expectations in both, both at, at the top line and, and margin wise. Thanks.
Thank you, Antonio. Well, real estate, we're happy to announce that we are growing over pre-pandemic numbers. It has recovered completely, and we are in the high 90s of occupation of all the square meters that we have in our operation. We see that this recovery will be sustained in the future, and our numbers just keep becoming better and better. We thought that it would take more time to reach the pre-pandemic numbers, but we already surpassed them. We're happy with our real estate division, and it shows positive trend in the coming months.
Perfect. In terms of profitability?
It, it has been very profitable. We're, we're, we're maintaining our margins. I think it all depends on the, on the occupation, because we have been able to, to efficiently operate with a very cost-conscious structure. As long as we sustain the occupancy that we have at the moment, we'll be able to sustain our profitability on the real estate division.
Okay, perfect. Thank you for the clarity.
Thank you, Antonio.
Our next question is from Alvaro Garcia with BTG Pactual. Please proceed.
Hi, Antonio Carlos, thanks for, thanks for the space for questions. My, my first question is on capital allocation. Just that you've obviously generated a boatload of cash and delevered, you know, quicker than expected. You know, how should we think about, you know, maybe cash distribution to shareholders? Would you consider a buyback? How should we think about, you know, sort of target leverage levels? How are you thinking about that going forward?
Well, we, we are generating a lot of cash. This year, our CapEx is gonna be around 3% of our sales. We believe it's going to be a little under the MXN 9,000 million for the year. We expect that by the end of the year, we'll end up on a consolidated basis with, with a positive cap operation of probably over MXN 2,000 million. If we don't find growth opportunities, I mean, consolidation opportunities that will allow us to grow faster, that these opportunities come at the right price and to be operated by our formats, we would probably consider in expanding the dividends that we have done in the past.
At the moment, we are sharing dividends around 15% of the net income generated in the prior year. That could be increased because, yes, we are ending with more cash than what we projected. We are operating with a very efficient management in inventories, both in Mexico and the US, and that it's producing the cash I'm talking about. The idea would be increasing dividends if we're not able to use that cash to grow.
That's very clear.
The minimum dividend would be the 15% that we projected of the net income.
Okay. Just one, one, one more on Mexico. In the release, you mentioned better gross margin in Mexico as well, and I know you, you, you had remarks on sort of US gross margin, but in Mexico, especially relative to other competitors that have seen some sort of investment in gross margin. You know, why is it that you're seeing that expansion, given how sort of competitive the market is at the moment?
I think it's a virtuous, a virtuous cycle, because we're managing our inventory better. The markdowns we're seeing, we're seeing that they are coming down throughout the whole first semester. That's one of the main reasons that is producing savings in our gross margin. That, that, that helps a lot to sustain and to be able to pay for our aggressive pricing strategy.
Would it be fair to assume maybe a little mixed benefit as well from maybe more Selectos relative to last year? Or is it more your, your previous answer?
It, it, it does help. The gross margin in, in Selectos is higher, yes. We're seeing margin benefits in all of our formats, including, including the low-income stores, as well as the Supercitos that they operate with a higher gross margin than the bigger stores as well.
Great. Thank you very much, Antonio.
No, thank you. Thank you, Alvaro.
Our next question is from Rodrigo Alcantara with UBS. Please proceed.
Hi, good morning. Thanks for taking my question. Antonio, just perhaps on the M&A front, I mean, we already know, right? You are very, very cautious and conservative on M&A, as in the past, with the transaction of Comercial Mexicana stores, right? You know, congrats on that. My question would be, you know, thinking about M&A purchasing, that you won't be exploring like any other subverticals, meaning perhaps you won't be interesting to buy hard discounters, for instance? I mean, what sort of M&A do you envisage for the case of Mexico? Would it be like formats complementary to the ones that you have? What kind of M&A can we expect from you guys in Mexico?
The other one would be kind of like a follow-up on, on, on your previous comment on managing inventory better. Just, just to understand, I mean, what, what are you doing different? Is this, you know, technology-driven that is allowing you to, to manage inventory better, practices, even perhaps some changes on, on, on management? Just, just to understand, what it's allowing you, you know, to precisely manage better the, the inventory now as opposed to, to the past? Thank you very much for, for your time.
Oh, you're welcome, Rodrigo. Now, I will start with the M&A. As you already mentioned, we are very cautious on the M&As that we have done in the past, and we have shown that we are more cautious with the ones that we didn't do, because they did not come at the right price. Before doing an M&A, first, we, we always like to be sure that they are pretty much in line with the abilities and the capabilities that we have to operate with. That we don't have to invent any new systems, technology, or processes to operate successfully, the companies or stores that we buy. That is very important for us, and we're very disciplined on that matter.
Any M&A would have to come adding value to the formats that we already operate, and it would have to come at the right price. On the inventory side, I think it's basically two main issues that allow us to manage inventory better every time. First, is technology. We are very technified on buying, not only replenishment, but also the items that become what we call seasonal, that every year we learn, the system learns of what we bought right, and the mistakes we did in the type of products that we bought for every store and the price range that we offer to our customers. The system every year learns, and we become more efficient on the buying.
Maintaining on the technology side, we take automatic, automated markdowns, starting from the first 30 days of the products that are already in the sales floor. That has enabled us to reduce inventories that become complicated to sell and where you have to take bigger markdowns. The second-... part, which is important and that is not technology, is our pricing strategy. Our pricing strategy allows us to sell our products faster, and we are very cautious on the pricing. As I already mentioned, we have been recognized for that, not only by our customers, but even by the Mexican administration, for example, and we are very cautious on this.
If you add the technology that we use to buy better and to take the appropriate markdowns faster, on one side, and on the other one, the pricing strategy, that allows us to keep, to maintain, very efficient inventories within the company.
That, that was very clear. Thank you very much, Antonio.
You're welcome, Rodrigo.
As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from Fernando Herrera with Compass. Please proceed.
Hi, guys. Can you hear me?
Yes, very well, Fernando.
Okay, perfect. Well, I have some troubles on my line, so I don't know if this has been already answered, but, I just want to know what trends are you seeing in the U.S. in terms of consumption? My second question is related to the margin expansion. I mean, it has been great, and I just want to understand if you're still seeing some room to keep improving EBITDA margin.
Carlos, maybe you can answer the, the U.S.
Yes.
The EBITDA margin in the U.S. as well.
Okay. Absolutely. Fernando, good day. Yes, I think the backdrop of the economic environment in the U.S. is well known. We're coming. Inflation is slowing down, slowed down in Q2 versus Q1. There is less government assistance out there post-pandemic. We're seeing a lot of careful spending from our customers. They're looking for value, they're looking for affordable options, and it's an environment that we've experienced before, so we believe that our three formats are very, very well positioned to capture increased customer count due to folks trading down and looking for those value items. Inflation in the center stores, I mentioned earlier, is still a bit stubborn, but we continue to maintain our price gaps, as Antonio has mentioned, and that bodes well for our three formats moving forward.
Also, as, reinforcing what Antonio said earlier, we still are not satisfied with the progress that we've made in expanding our perishable sales mix at a couple of our banners. That helps with margin expansion, and we're also not yet satisfied with materializing on all the synergies related to cost of goods. We are laser-focused on both of those initiatives across all three banners and expect, those results to help us continue to work on expanding, our margin.
Okay. Perfect, guys. Thanks.
You're, you're welcome, Fernando.
As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is a follow-up from Luis Willard with GBM. Please proceed.
Hi again. I'm sorry. Thanks for taking the question.
No.
Just wanted to clarify something. I think in a previous question, I think it was Alvaro's. You were discussing about CapEx for the year, and you mentioned MXN 9 billion. I think I missed if you referred to CapEx or the free cash flow that you were expecting for the year, or what was that MXN 9 billion? I'm sorry, I didn't get that. Just want to clarify.
under MXN 9 billion in CapEx. That's what we project, and 3% of sales.
Right. Got it. Thank you.
You're, you're very welcome.
We have reached the end of our question and answer session. I would like to turn the conference back over to Antonio for closing comments.
Well, I just want to thank everyone for joining. We hope to be talking to you in the next quarter. We still see a very interesting sales growth in July, and we hope that we can keep showing these good numbers for the rest of the year. Thank you very much. Keep safe, and hope to be talking to you at the closing of the next quarter. Thank you.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.