Earnings Call: Q2 2021

Jul 29, 2021

Earnings release

Welcome to the Chedragu Conference for the results of the Q2 of 2021. With us are Mr. Antonio Chedragu Eguilla, CEO of Grupo Chedragu Mr. Carlos Smith Matas, CEO of Bodega Latina Mr. Humberto Tafoya Nunez, CFO of Grupo Chedraui and Mr. Arturo Velasquez, Head of Investor Relations of Grupo Chedraui. As a reminder, all forward looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in Grupo Chedraui's most recent annual report. At this time, I will now turn the conference over to Mr. Antonio Chedraui Iguia. Please go ahead. Thank you. Good morning, everyone. It is my pleasure to be with you today in this conference call regarding Grupo Chedraui's Q2 2021 results. We continue to operate under the COVID-nineteen pandemic, and I would like to highlight the resilience that Chedraui has shown to overcome the challenges and deliver another quarter of solid results. These results reflect our execution capabilities and the value proposition that the consumer recognizes in the different regions in which we operate. Today, we are in a better position in terms of sales, profitability and cash flow generation than before the pandemic. Now with our proven operational and financial discipline, we will focus on successfully integrating the acquisition of Smart and Final, reaffirming Cheger Aube's commitment to creating value for our shareholders. Now if you allow me, we will review the results for the quarter and starting with the relevant facts of the period. And then we will review the financial figures. 1st, same store sales growth of 7.8% in Mexico, far exceeding the 1.4% reported by ANCAPS. 7.8% consolidated EBITDA margin, resulting in a 32 basis points expansion year on year. Consolidated net income growth of 24% year on year and a 2 year growth of 100 percent net debt to EBITDA ratio of 0.41 in Q2 'twenty one and ARS 5,894 million generated in the last 12 months. Now we will continue with the financial results, starting with the top line. In the Q2 of this year, we registered consolidated sales of ARS 35,749,000,000, a year on year contraction of 1.8%. The consolidated result was negatively impacted by the exchange rate appreciation of 14.2% in the revenues of our U. S. Depletion. In Retail Mexico, we achieved a 7.8% same store sales growth, far exceeding the growth reported by Yamtad of 1.4% for the same period. Sales for this division reached ARS 21,383,000,000 with solid growth in the south and southwest, reflecting a rebound in tourism in those areas. I would like to highlight the great result we have achieved in the omnichannel operation, which has reached a 4.3% share of the country operations sales. This comes from a growth both in sales through our own platform and through 3rd parties. At total stores, sales grew 10.3%. In this quarter, we added 4 stores, raising net openings to 20 in the last 12 months, corresponding to a 2.3% increase in the sales floor for this particular division. For the Real Estate division, revenues grew 42.9% to ARS 215,000,000 for the Q2 of 2021. In relation to the leasable area, it increased 2.6% year on year. Gross profit and operating expenses. On the consolidated level, gross profit reached ARS 8,063,000,000 in the quarter. This represented a gross margin of 22.6%. Maintaining the same margin achieved in the same period of the previous year. This is due to increased contribution in categories such as clothing and general merchandise in Mexico and a lower participation of the business in the U. S. In general merchandise in Mexico and a lower participation of the business in the U. S. In relation to operating expenses, we continue to strictly control all business lines, thereby mitigating the impact of incremental expenses related to COVID-nineteen pandemic. Based on this, operating expenses in the period decreased 3.9%, accounting ARS 5262 1,000,000 and 14.7 percent of sales. EBITDA. In terms of consolidated EBITDA, in the Q2 of 2021, we reached ARS 2,802,000,000 equivalent to 2.4% growth. This represents a margin on sales of 7.8 percent and an expansion of 32 basis points year on year. In Mexico, we achieved an EBITDA of ARS1560 million, a growth of 12.6% compared to the same period of the previous year and a margin of 7.3%, improving the margin by 15 basis points. This result is in line with the full year target. In the real estate region, EBITDA grew 101.9 percent to reach ARS 154,000,000 in the quarter with a margin of 71.5%. This result was due to the progressive normalization in the operation of this particular division. Financial expenses. During the Q2 of 2021, the financial expenses accounted for ARS 680,000,000. That is a decrease of 14.2% compared to the same period of the previous year. This is due to the reduction in average debt in relation to the same period of the previous year and the outstanding regeneration of cash flow during the last 12 months. Net income. Consolidated net income for the quarter grew 24% compared to that achieved in the same period of 2020, reaching an amount of ARS 844,000,000 with a margin over sales of 2.4%. Comparing the result of this quarter with the same period of 2019, net income grew in the last 2 years 100%, demonstrated the company's ability to improve its profitability. Now Carlos is going to implement the U. S. Retail business. Please, Carlos, go ahead. Thank you. Thank you, Antonio. Good morning, everyone. This quarter, we faced 2 noteworthy situations in the United States. On one hand, a very high comparative base due to the peak consumption that was triggered by the severe pandemic and the associated government aid that was distributed in the Q2 of last year. On the other hand, the reported results were impacted by an adverse exchange rate effect of 14.2% when converting to pesos. With that said, same store sales in dollars dropped 1.5% in the quarter with total sales decreasing 2.2%. Comparing the revenues of this quarter with those of the same quarter of 2019, sales have grown 6.8%, highlighting the solid position in which we find ourselves compared to the situation prior to the pandemic. In pesos, revenues reached $14,151,000,000 a 16.1% decrease for the U. S. Division. Regarding EBITDA, given the sales contraction in pesos, year over year EBITDA decreased 14.7 percent to ARS1088 million, resulting in a 7.7% margin over sales. However, this represents a year over year margin expansion of 13 basis points. This is due to the continued strength of the El Super operation and the continued improvements in the integration of the Fiesta business. This quarter's result was also impacted by approximately Ps. 60,000,000 associated with mandated COVID-nineteen hero pay bonuses, which are expected to be a one time expense, thus enabling further margin expansion in the future. For All Super, we achieved EBITDA of ARS 724,000,000, representing 8.8% of sales. And at Fiesta, EBITDA reached ARS 363 1,000,000, representing a margin expansion of 37 basis points to 6.2% of sales. Additionally, I'm very pleased to report that we've finalized the acquisition of Smart and Final yesterday. Smart and Final operates 254 stores in California, Arizona and Nevada as well as 16 stores in Northwest Mexico through a joint venture. Last year, Smart and Final generated sales of approximately US4.1 billion dollars with adjusted EBITDA of US167 $1,000,000 We expect that the pro form a net debt to EBITDA ratio for the whole group after the consolidation of the operation will be around 1.1 times. We will Smart and Final results will be consolidated and reported in Q3. Antonio, thank you. That's it for the U. S. Operation. Thank you, Carlos. All financing and CapEx, regarding financing, the outstanding cash flow generation achieved by the company has allowed the net debt to EBITDA ratio to be reduced from 1.1x in the Q2 of 2020, that is last year, to 0.4x this quarter. CapEx invested amounted to ARS 1192,000,000, equivalent to 1.7 percent of consolidated sales. Before going to Q and A section, I would like to give some final remarks. Our efforts to meet the needs of our customers have resulted in formidable results for the company. In the last 2 years, consolidated revenues has grown organically in double digit numbers, while the EBITDA margin expanded 80 basis points in the same period. This has allowed us to look for value in the market, and I strongly believe we found it in its margin final. We are delighted to be able to take our value proposition to new customers and geographies while learning from the competitive advantage that the Smart and Final format has created over the years. While maintaining a healthy balance sheet, the consolidation of the operation reaffirms our position as the 2nd largest retailer in Mexico in terms of revenue. Now if you allow me, we will go to Q and A session. Thank you. We will now start the Q and A session. The first question is from Mr. Luis Wheeler from JBM. Please go ahead. Hi, Antonio, Carlos, Alberto, how are you? Thanks for taking my question. So just following up on your closing remarks, it is clear that free cash flow generation has been a priority and results are very evident in terms of leverage for the company. So how do you think about the sustainability of this level, so free cash flow generation in the future? Do you think there's even further opportunities to improve, mainly working capital ahead? That will be the question. Thank you, Luis. Even though we've reached great cash flow numbers at this moment, we believe there are still opportunities in Mexico as well as in our Fiesta division. And we think we will also be able to find possible opportunities in smart and final as well. So I think, yes, there will still be opportunities to even increase the cash flow generation that we're producing at the moment. Even though, as you already mentioned, we have reached great cash flow generation levels with our operations in Mexico and the U. S. All right. Thank you and congrats on the results again. Thank you very much for your questions. Our next question is from Mr. Victor Cardenas from Scotiabank. Please go ahead. Thank you. Good morning, Antonio, Humberto, Carlos and Arturo, and congratulations on the results, and thank you for taking my questions. My question goes to the reporting structure. How will the reporting look in Q3 now that we will be integrating Smart and Final? Additionally, how will the organizational structure look in the U. S? Because we have the Fiesta operation mostly operating from Texas. We have Super operating from California. Smart and final, presumably we will be operating from California, Arizona or Nevada. So how would that look as well? And if you could also provide some color pertaining to some synergies that we may expect in the coming years. Thank you, Victor. I think Carlos, you can answer this question better than I can. Carlos? Sorry. Thank you, Victor. Yes, for purposes of reporting in Q3, what you will see is a consolidated financial statement from Bodega Latina Corporation. And Bodega Latina will consolidate El Super results, Fiesta results as well as Smart and Final results. And those results end up consolidating into Gurupo Comercia Cebral, right? From an organizational structure, the stores, regardless of what market they are in, they operate as divisions. So you will see our Hispanic store division, which will be the Fiesta and El Super stores, operating with 1 merchandising and 1 operations team and eventually the Smart and Final, which will be our traditional club division operating with its own merchandising and operations team. Reporting to what we will see is a consolidated corporate structure that down the road will provide services to those 2 divisions from an IT perspective, from a legal perspective, from an administration and finance perspective, real estate. And that's where we're really going to see the one of the levels of synergies that we expect are going to be material. On the short term, though, I think we'll see some important synergies as we address cost of goods and matching vendors, services that are common to both organizations, and we'll be attacking those aggressively right now. Got it. But in particular, for example, is there going to be so back to your first question back to your first answer, I understand that it would be instead of seeing, for example, sales for Fiesta for El Super, we're going to see just one single line for U. S. For Bodega Latina. Is that what we're going to be seeing, Carlos? Well, today, you're seeing EBITDA results for each division, and I expect that we'll continue to show you more of that. Got it. Let me just add, Victor, that we found and that was probably another reason why we decided to invest into Smart and Final. We found a great executive team, a great operation team put together in Smart and Final that we would like to maintain and try to add value to that team with the centralized structure that Carlos has spoken about, probably in some areas. But basically, we will try to maintain the team and maintain what they are doing and just add value where we think we could, but keep doing what they are doing, which is already great and it's a lot of value that they are producing to that company, Victor. Understood. Thank you all for the answer and congratulations on the results. Thank you very much for your questions. Our next question is from Camille from UBS. Please go ahead. Hi, good morning. This is Camilo on behalf of Rodrigo Alcantara. Thanks for taking my questions. I have two questions on the consumer demand, if I may. Could you give us a sense of how same store sales was by region, like North, South and Tanners? And the second one is about what can you tell us about the competitive environment given the inflationary risks? That would those would be my questions. Thank you. Thank you, Tamika. I think the first question is about our sales growth by region from what I understood. Well, we had a sales growth, same store sales growth in Mexico of 7.8%. And there are regions impacted by the inbound and tourism, as I said, with a very impressive growth. Northwest, we were able to grow a little over 20%, Southeast, over 15% and Southwest, 15.8%. In the rest of the regions, growth was marginal. We ended up with this 7.8%, which I think was very, very good. And we also had a very, I would say, difficult pace to reach because if you look at the 2 year expansion, we were able to maintain sales growth, same store sales of double digit compared to 2019 numbers. We were able to grow a little over 11% at Cheuvreux in Mexico. I guess that was the first question. And I would appreciate if you can repeat, Camilla, the second question. What can you tell us about competitive environment given the inflationary risks for the quarter? Well, competitive environment has increased. La Comer, Soriana, I understand they are having a successful Julio Regalado and Temporada Naranja in this coming quarter. And Cripa Walmex has reacted with a very aggressive campaign, particularly in the bodegaverao format. So they have been very aggressive in June July, and we believe this will continue. But we have been able to maintain our competitiveness through our own strategy. In July, we're seeing sales expansion very similar to what we have reached already in the quarter in the past quarter. So we think we're going to be able to maintain our sales expansion to the same level that we have already reached in the quarter. Thank you very much for your questions. That was the last question. I will now hand over to Mr. Antonio Chedragu Iguia for final comments. I just want to thank everyone for joining, and I hope to be talking to you at the end of this quarter. And please stay safe. Thank you. Goodbye. Thank you for participating in today's conference call. You may now disconnect.