Earnings Call: Q1 2021

Apr 30, 2021

Welcome to the Chedraui Conference for the results of the Q1 of 2021. With us are Mr. Antonio Chedraui Eguilla, CEO of Grupo Chedraui Mr. Carlos Smith Mata, 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 Cebrawi's most recent annual report. At this time, I will now turn the conference over to Mr. Antonio Cederaou Iria. Please go ahead. Thank you. Good morning, everyone. It is my pleasure to be with you today in this conference call regarding Grupo Cerrari's Q1 2021 results. After a year of unprecedented circumstances, we continue to face challenges in 2021. But we do so with high confidence in our business model. If there is something that I want to highlight with today's results is the resilience that Repocereali has shown. We continue to focus our mission of offering our customers the product they want at the lowest possible price, while we continue to guarantee the safety of our customers, suppliers and employees. Based on our operational strength and financial discipline, we reaffirm our commitment to creating great value for our shareholders. If you allow me, we will review the results of the Q1 2021, starting with the relevant facts. Same store sales growth of 0.6% in Mexico, almost 500 basis points higher than the negative 4.3% reported by EMTAL. 7.5 percent consolidated EBITDA margin, an improvement of 23 basis points year on year. Consolidated net income growth of 36 percent net debt to EBITDA ratio of 0.5x CapEx invested in 2021 of ARS 638,000,000. I will continue with the financial results, starting with the top line. Q1 consolidated revenues amounted to ARS 35,000 196,000,000, which is a 0.9% contraction year on year. This is mainly explained by the fact that in March 2020, both the U. S. And Mexico experienced a sales surge due to the COVID pandemic. Also, this quarter contained 1 day less compared to the prior quarter due to the linked year effect. Consolidated EBITDA grew to 0.1% in the Q1 of 2021 to ARS 2,628,000,000. This represented a margin over sales of 7.5 percent and an expansion of 22 basis points year on year. In Mexico, we achieved 4.4 percent EBITDA growth to ARS 1538 million. EBITDA as a percent of sales was 7.3% and represents an improvement of 13 basis points. This result is due to the improvement in gross margin and efficient management of operating expenses. In the Real Estate division, the contraction in revenues affected the generation of EBITDA, which showed a reduction of 37.4 percent to ARS 117,000,000 and a margin on sales of 56.8%. On the financial expense side, during the Q1 of 2021, financial expenses decreased 20% to the prior comparative quarter to ARS 691,000,000. This is the result of the extraordinary generation of cash flow during the last 12 months, which reduced outstanding debt. Net income. Consolidated net income for the quarter grew 36% compared to that achieved in the same period of 2020, reaching an amount of ARS 736,000,000 with a margin over sales of 2.1%. Now Carlos is going to comment the results of FIM in our retail business unit in the U. S. Please, Carlos? Yes. Thank you, Antonio. Good morning, everyone. As Antonio mentioned, for the U. S, we faced a high comparative base due to the sales surge registered a year ago. As a result, total store sales decreased 5.3% to 13,992,000,000 vessels. On a same store sales basis, the reduction was 4.6% as 2 stores were closed in the last 12 months. Total sales of El Super decreased 3.9% in the Q1, while comp store sales at Fiesta fell 5.4%, both in dollar terms. For gross profit, we continue to make improvements in our purchasing processes, which drove gross margin gains at both our Super and Fiesta. The sustained expansion of our gross profit at Fiesta is consistent with our strategic plan. Regarding EBITDA, despite the contraction in sales, the result was 6.4% higher than comparative quarter and reached ARS183 1,000,000. This result was driven by continued strong performance at El Super and the ongoing improvements in the Fiesta business. At El Super, EBITDA decreased 2.6%, although as a percent of sales, it increased 10 basis points to 8%. At Fiesta, the EBITDA obtained was COP 230,000,000, which is significantly higher than the COP254,000,000 obtained in the prior comparative quarter. Similarly, EBITDA as a percent of sales increased 164 basis points to 5.7%. And that would be all regarding the business. Thank you. Thank you, Carlos. Financing and CapEx. Regarding financing, the outstanding cash flow generation achieved by the company allowed the net debt to EBITDA ratio to be reduced from 1.2x in the Q1 of 2020 to 0.5x this quarter. CapEx invested in the quarter amounted to ARS 638,000,000, equivalent to 1.8 percent of consolidated sales. Now if you allow me, we will move to the Q and A section, please. We will now start the Q and A session. Our first question is from Antonio Hernandez from Barclays. Please go ahead. Hi, good morning. Thanks for taking my question and congrats on the results. Question is regarding same store sales. You're going to be facing some dotcom comps. And so maybe if you could give us some information on what are your expectations ahead? And follow-up would be regarding the U. S. Competitive market. Are you seeing how are you seeing the opportunity also for growth there? How are you seeing competition? If you could guide us a little bit more of the consumer environment there also as the opening is taking place a little bit faster than in Mexico. It's Antonio. Well, same store sales in Mexico were better than what we expected. We were able to beat our competition. We were able to be positive with a very, very difficult pace because we grew extremely well last year. Actually, just March, we were able to grow over 21% last year. So with those difficult comps, we were able to grow same store sales again in the quarter. So we project we would be even a little higher than what we predicted in the beginning in our guidance, probably closer to 4% sales for sales, which is higher than the 3.3% that we projected in the beginning. About the U. S. Competitive market, I would ask Agnes to please answer that question. Sure. Good morning, and thank you, Antonio. The U. S. Market from a competitive standpoint has remained relatively stable, I would say, going into the pandemic and coming out of it. So as you know, our from the All Super and Fiesta brand, they're the largest Hispanic food retailer in the United States. We have great market share in very competitive geographies such as Los Angeles, Southern California, etcetera. But we still believe that there are etcetera. But we still believe that there are opportunities for organic growth as well as opportunistic acquisitions that may come up down the road. So nothing really has changed, I would say, over the last 12 to 18 months in terms of the market setup. Perfect. And the follow-up would be with more reopen in the U. S. And of course, the Perth Group being an important piece of new strategy in these supermarkets? Are you seeing an uptick in prepared food sales or just staying relatively low versus pre pandemic flavor? No. Our Prepared Foods business is performing extremely, extremely well. We have beefed up our resources in that area. On the super side, it's both sides really are growing fantastically. And we're very excited about that. And as we continue to make improvements to the fleet at Fiesta with remodelings, etcetera, That is one of the departments that we are really, really focused on to improve the consumer experience. And the results that we're seeing are phenomenal. So as you know, we've got a 5 year plan to remodel that fleet. We're way we're on pace as we had designed to do, and prepared fleets is a huge component of what we're trying to improve on. Perfect. Thanks a lot and have a nice day. Thank you very much. Our next question is from Mr. Luis Ruela from GBM. Please go ahead. Hi, good morning, Antonio, Carlos. Congrats on the results and thanks for taking my question. The first, I think it's for Carlos. I mean, it was impressive to see both the U. S. Operations preserving margins despite the contraction in sales. So do you see room for margin improvement at Fiesta further into the year and then maybe long term? And also in a super this 8% margin, do you see this as a sustainable level ahead? That will be my first. Well, yes, I mean, thank you, Luis. As you can see, it's been several quarters now where you've noticed the Super brand performing at a very, very high level. We're very encouraged with the operation there. We've got great market share. Operations are very, very steady and we've been able to continue to grow. The 2 year stacks are impressive as well. And we're hoping that we can maintain and believe we can maintain the types of margins that we're seeing today. On the Fiesta side, look, it's what we were this is what we're supposed to be doing. This was part of our design. And we told everybody early on as we made the acquisition that this is the curve that we expect it to be on. So as I spoke briefly earlier, we continue with our remodeling plan. That is a super important component of continuing to improve the top line and improving our margins. So we believe that there's more room to grow in Fiesta, and we're excited about continuing our strategic plan that gets us there by year 5. So we're still 24 months away of getting there, but we're on track and we're excited about that. Thank you, Carlos. That was a good example. And if I may, Antonio, regarding Mexico, I mean, as consumers face difficult environment or at least a little bit of uncertainties a little bit there still. Can you tell us a bit more on the competitive environment that you're seeing in Mexico, especially with promotions and the behavior of the rest of the competitors? Thank you, Rizal. We've been, I think, very successful understanding what the consumer is looking for in the different formats that we operate in Mexico. All of them were able to grow on a difficult base. So we are seeing that the consumer, the higher end consumer keeps growing and spending more through e commerce. Our omni channel platforms are working really, really well, And we are seeing a very strong growth in that part. On the other hand, the low end consumer, we have been connecting with them through our pricing strategy. We are very strong in what we do, and we feel that we are able to meet their demands more than a promotional activity because I think they don't have the buying power or capacity to buy a larger quantity of the same products. We are working on our pricing strategy, which is very aggressive towards each product, and it has been functioning really, really well. We're also seeing a recovery in certain areas that were affected last year, more on the tourist side, both in the south as well as in the northwest. So that has been helping Chiragio as well. Our next question is from Mr. Nora Sebastian from Bank of America. Please go ahead. From me, Melissa Bayon from Bank of Hi. This is Melissa Bayou from Bank of America. I have a few follow-up questions for Carlos. I just want to get a little your thoughts on the normalization of traffic in U. S, sort of when and how the curve there? And then remittances to Mexico have been very strong. So are you seeing this dynamism and consumption in the Mexican communities that you serve? And then just lastly on Fiesta in terms of remodeling, how far along are you in that process? You touched on that as one of the bigger opportunities. But as you execute on the strategic plan, what are some of the other remaining sources of upside that you see? Thank you. Yes. Thanks, Melissa. So the first question was about traffic. I missed your second question. Let me address that and then I'm going to jump in your second one. So on the traffic side, now we have not we're beginning to see positive traffic versus 2020. That was our expectation. So that has been met. However, we're very, very diligent right now about monitoring our results versus 2019, right? And traffic has not yet come back versus 2019 levels. We believe firmly that as folks get vaccinated and get a little bit more comfortable about going on about their normal lives and going outside, we've recently received CDC mandates about being able to eliminate masks outside. So I think as we get back into a normal day to day, we're going to start seeing normalized traffic patterns again. As you know, we have our Wednesday specials for produce at both brands. Those promotions was very effective because there were a lot of people in our stores on Wednesdays. We had to spread those out in 2020 through Wednesdays Thursdays. We're back to Wednesdays now and beginning to see good results there. So I'm encouraged about the trend, but we're not where we want to be in terms of 2018. The second question you had was about our consumers. Can you repeat the question, please? Sure. I was just trying to when you look at the remittances to Mexico from the U. S, they've been quite strong. And I'm just wondering if this is something as well that is reflected in spending among the Mexican community that you're serving? Right. Well, so a lot the stimulus money that came in had a different pattern in terms of its behavior. At the beginning, the first set of stimulus dollars that came in, in 2020 were very directly they just went into the supermarket trade. People were building up their pantries. There's certainly a lot of unknowns about how much time it was going to be hold up. As folks lost their employment, credit card debt shot up. And what we're seeing with the second and third stimulus charge is that folks are using that to catch up on credit card bills, on back rent, etcetera. So those funds and included in that are remittances to Mexico that they didn't do before. So that's a trend that we anticipated. Now I think that's going to get normalized and the excess funds we believe will start shifting back into normal day to day habits such as supermarkets and that's going to benefit us. We have a view into the businesses because we are a very important originator, if you have relationships with Ria at our stores, and they've been very strong, as you mentioned. So anyway, that's about that. And the third question I think you had was in terms of our CapEx at Fiesta. Yes, we had a plan to invest an additional $10,000,000 per year on incremental CapEx. Our results, as you can see, have been very, very strong lately. So in conjunction with Antonio and the leadership at Chagall, we are deciding to accelerate some of that CapEx so that we can move as fast as we can in getting the fleet up to date. Remember, this is a fleet that originated in 1972. Fiesta has had very, very little CapEx into the buildings over time. So we're trying to do it as fast as we can. And the results have been very positive in terms of once the remodels are complete, we're seeing great traffic at some of these remodeled stores and very positive results, and we encourage them to get faster. How much of the store that is left to be remodeled? I mean, let's see. I would say probably 35%. Okay, great. Thank you. Thank you very much for your question. Our next question is from Mr. Carlos Mendoza from Mexico Value Partners. Please go ahead. Hello, good morning. Thank you for taking my question. Regarding capital allocation, last call, you mentioned that with net debt levels getting close to 0 by the end of the year, you are looking at further potential opportunities for consolidation. Could you further comment on what kind of opportunities are you looking for? And if you're seeing more opportunities in the U. S. Or in Mexico? Thank you, Carlos, for your question. Well, as I've mentioned before, we're always open to consolidation opportunities in Mexico as well as in the U. S. First of all, the opportunities that come to the table should be targets that can adjust to the type of business that we operate where we can really add value, and they should come at the right price. We don't overpay any consolidation opportunities. We have not done it in the past, and we will not do it now. So those would be the two factors that will allow us to decide whether we invest into a new company or not. But we are very open for that. We have the balance to do, and we think opportunities will come to the table in the near future. Thank you very much. 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. Thank you, Ro. I just want to thank everyone for joining this conference call. I really myself and the Chirality will be available for you in the next quarter. We are very enthusiastic about the sales trend that we see in Mexico as well as in the U. S. So we hope to be able to bring you good news, even better than we just showed in this past quarter for the 2nd Q of this 2021 results. Thank you. Stay safe. We'll talk to you soon. Thank you again. Thank you for participating in today's conference call. You may now disconnect.